(a) In general. For purposes of section 4941, the term self-dealing
means any direct or indirect transaction described in Sec. 53.4941(d)-2.
For purposes of this section, it is immaterial whether the transaction
results in a benefit or a detriment to the private foundation. The term
"self-dealing" does not, however, include a transaction between a
private foundation and a disqualified person where the disqualified
person status arises only as a result of such transaction. For example,
the bargain sale of property to a private foundation is not a direct act
of self-dealing if the seller becomes a disqualified person only by
reason of his becoming a substantial contributor as a result of the
bargain element of the sale. For the effect of sections 4942, 4943,
4944, and 4945 upon an act of self-dealing which also results in the
imposition of tax under one or more of such sections, see the
regulations under those sections.
(b) Indirect self-dealing--
(1) Certain business transactions. The
term "indirect self-dealing" shall not include any transaction
described in Sec. 53.4941(d)-2 between a disqualified person and an
organization controlled by a private foundation (within the meaning of
paragraph (6)(5) of this section) if:
(i) The transaction results from a business relationship which was
established before such transaction constituted an act of self-dealing
(without regard to this paragraph),
(ii) The transaction was at least as favorable to the organization
controlled by the foundation as an arm's-length transaction with an
unrelated person, and
(iii) Either:
(a) The organization controlled by the foundation could have engaged
in the transaction with someone other than a disqualified person only at
a severe economic hardship to such organization, or
(b) Because of the unique nature of the product or services provided
by the organization controlled by the foundation, the disqualified
person could not have engaged in the transaction with anyone else, or
could have done so only by incurring severe economic hardship. See
example (2) of subparagraph (8) of this paragraph.
(2) Grants to intermediaries. The term "indirect self-dealing"
shall not include a transaction engaged in with a government official by
an intermediary organization which is a recipient of a grant from a
private foundation and which is not controlled by such foundation
(within the meaning of paragraph (6) (5) of this section) if the private
foundation does not earmark the use of the grant for any named
government official and there does not exist an agreement, oral or
written, whereby the grantor foundation may cause the selection of the
government official by the intermediary organization. A grant by a
private foundation is earmarked if such grant is made pursuant to an
agreement, either oral or written, that the grant will be used by any
named individual. Thus, a grant by a private foundation shall not
constitute an indirect act of self-dealing even though such foundation
had reason to believe that certain government officials
would derive benefits from such grant so long as the intermediary
organization exercises control, in fact, over the selection process and
actually makes the selection completely independently of the private
foundation. See example (3) of subparagraph (8) of this paragraph.
(3) Transactions during the administration of an estate or revocable
trust. The term "indirect self-dealing" shall not include a
transaction with respect to a private foundation's interest or
expectancy in property (whether or not encumbered) held by an estate (or
revocable trust, including a trust which has become irrevocable on a
grantor's death), regardless of when title to the property vests under
local law, if:
(i) The administrator or executor of an estate or trustee of a revocable trust either:
(a) Possesses a power of sale with respect to the property,
(b) Has the power to reallocate the property to another beneficiary, or
(c) Is required to sell the property under the terms of any option
subject to which the property was acquired by the estate (or revocable trust);
(ii) Such transaction is approved by the probate court having
jurisdiction over the estate (or by another court having jurisdiction
over the estate (or trust) or over the private foundation);
(iii) Such transaction occurs before the estate is considered
terminated for Federal income tax purposes pursuant to paragraph (a) of
Sec. 1.641(b)-3 of this chapter (or in the case of a revocable trust,
before it is considered subject to sec. 4947);
(iv) The estate (or trust) receives an amount which equals or
exceeds the fair market value of the foundation's interest or expectancy
in such property at the time of the transaction, taking into account the
terms of any option subject to which the property was acquired by the
estate (or trust); and
(v) With respect to transactions occurring after April 16, 1973, the
transaction either:
(a) Results in the foundation receiving an interest or expectancy at
least as liquid as the one it gave up,
(b) Results in the foundation receiving an asset related to the
active carrying out of its exempt purposes, or
(c) Is required under the terms of any option which is binding on
the estate (or trust).
(4) Transactions with certain organizations. A transaction between a
private foundation and an organization which is not controlled by the
foundation (within the meaning of subparagraph (5) of this paragraph),
and which is not described in section 4946(a)(1) (E), (F), or (G)
because persons described in section 4946(a)(1) (A), (B), (C), or (D)
own no more than 35 percent of the total combined voting power or
profits or beneficial interest of such organization, shall not be
treated as an indirect act of self-dealing between the foundation and
such disqualified persons solely because of the ownership interest of
such persons in such organization.
(5) Control. For purposes of this paragraph, an organization is
controlled by a private foundation if the foundation or one or more of
its foundation managers (acting only in such capacity) may, only by
aggregating their votes or positions of authority, require the
organization to engage in a transaction which if engaged in with the
private foundation would constitute self-dealing. Similarly, for
purposes of this paragraph, an organization is controlled by a private
foundation in the case of such a transaction between the organization
and a disqualified person, if such disqualified person, together with
one or more persons who are disqualified persons by reason of such a
person's relationship (within the meaning of section 4946(a)(1) (C)
through (G)) to such disqualified person, may, only by aggregating their
votes or positions of authority with that of the foundation, require the
organization to engage in such a transaction. The "controlled"
organization need not be a private foundation; for example, it may be
any type of exempt or nonexempt organization including a school,
hospital, operating foundation, or social welfare organization. For
purposes of this paragraph, an organization will be considered to be
controlled by a private foundation or by a private foundation and
disqualified persons referred to in the second sentence of this
subparagraph if such persons are able, in fact, to control the
organization (even if their aggregate voting power is less than 50
percent of the total voting power of the organization's governing body)
or if one or more of such persons has the right to exercise veto power
over the actions of such organization relevant to any potential acts of
self-dealing. A private foundation shall not be regarded as having
control over an organization merely because it exercises expenditure
responsibility (as defined in section 4945 (d)(4) and (h)) with respect
to contributions to such organization. See example (6) of subparagraph
(8) of this paragraph.
(6) Certain transactions involving limited amounts. The term
"indirect self-dealing" shall not include any transaction between a
disqualified person and an organization controlled by a private
foundation (within the meaning of subparagraph (5) of this paragraph) or
between two disqualified persons where the foundation's assets may be
affected by the transaction if:
(i) The transaction arises in the normal and customary course of a
retail business engaged in with the general public,
(ii) In the case of a transaction between a disqualified person and
an organization controlled by a private foundation, the transaction is
at least as favorable to the organization controlled by the foundation
as an arm's-length transaction with an unrelated person, and
(iii) The total of the amounts involved in such transactions with
respect to any one such disqualified person in any one taxable year does
not exceed $5,000.
See example (7) of subparagraph (8) of this paragraph.
(7) Applicability of statutory exceptions to indirect self-dealing.
The term "indirect self-dealing" shall not include a transaction
involving one or more disqualified persons to which a private foundation
is not a party, in any case in which the private foundation, by reason
of section 4941(d)(2), could itself engage in such a transaction. Thus,
for example, even if a private foundation has control (within the
meaning of subparagraph (5) of this paragraph) of a corporation, the
corporation may pay to a disqualified person, except a government
official, reasonable compensation for personal services.
(8) Examples. The provisions of this paragraph may be illustrated by
the following examples:
Example (1). Private foundation P owns the controlling interest of
the voting stock of corporation X, and as a result of such interest,
elects a majority of the board of directors of X. Two of the foundation
managers, A and B, who are also directors of corporation X, form
corporation Y for the purpose of building and managing a country club. A
and B receive a total of 40 percent of Y's stock, making Y a
disqualified person with respect to P under section 4946(a)(1)(E). In
order to finance the construction and operation of the country club, Y
requested and received a loan in the amount of $4 million from X. The
making of the loan by X to Y shall constitute an indirect act of self-
dealing between P and Y.
Example (2). Private foundation W owns the controlling interest of
the voting stock of corporation X, a manufacturer of certain electronic
computers. Corporation Y, a disqualified person with respect to W, owns
the patent for, and manufactures, one of the essential component parts
used in the computers. X has been making regular purchases of the
patented component from Y since 1965, subject to the same terms as all
other purchasers of such component parts. X could not buy similar
components from another source. Consequently, X would suffer severe
economic hardship if it could not continue to purchase these components
from Y, since it would then be forced to develop a computer which could
be constructed with other components. Under these circumstances, the
continued purchase by X from Y of these components shall not be an
indirect act of self-dealing between W and Y.
Example (3). Private foundation Y made a grant to M University, an
organization described in section 170(b)(1)(A)(ii), for the purpose of
conducting a seminar to study methods for improving the administration
of the judicial system. M is not controlled by Y within the meaning of
subparagraph (5) of this paragraph. In conducting the seminar, M made
payments to certain government officials. By the nature of the grant, Y
had reason to believe that government officials would be compensated for
participation in the seminar. M, however, had completely independent
control over the selection of such participants. Thus, such grant by Y
shall not constitute an indirect act of self-dealing with respect to the
government officials.
Example (4). A, a substantial contributor to P, a private
foundation, bequeathed one-half of his estate to his spouse and one-half
of his estate to P. Included in A's estate is a one-third interest in
AB, a partnership. The other two-thirds interest in AB is owned by B, a
disqualified person with respect to P. The one-third interest in AB was subject to an option agreement when it
was acquired by the estate. The executor of A's estate sells the one-
third interest in AB to B pursuant to such option agreement at the price
fixed in such option agreement in a sale which meets the requirements of
subparagraph (3) of this paragraph. Under these circumstances, the sale
does not constitute an indirect act of self-dealing between B and P.
Example (5). A bequeathed $100,000 to his wife and a piece of
unimproved real estate of equivalent value to private foundation Z, of
which A was the creator and a foundation manager. Under the laws of
State Y, to which the estate is subject, title to the real estate vests
in the foundation upon A's death. However, the executor has the power
under State law to reallocate the property to another beneficiary.
During a reasonable period for administration of the estate, the
executor exercises this power and distributes the $100,000 cash to the
foundation and the real estate to A's wife. The probate court having
jurisdiction over the estate approves the executor's action. Under these
circumstances, the executor's action does not constitute an indirect act
of self-dealing between the foundation and A's wife.
Example (6). Private foundation P owns 20 percent of the voting
stock of corporation W. A, a substantial contributor with respect to P,
owns 16 percent of the voting stock of corporation W. B, A's son, owns
15 percent of the voting stock of corporation W. The terms of the voting
stock are such that P, A, and B could vote their stock in a block to
elect a majority of the board of directors of W. W is treated as
controlled by P (within the meaning of subparagraph (5) of this
paragraph) for purposes of this example A and B also own 50 percent of
the stock of corporation Y, making Y a disqualified person with respect
to P under section 4946(a)(1)(E). W makes a loan to Y of $1 million. The
making of this loan by W to Y shall constitute an indirect act of self-
dealing between P and Y.
Example (7). A, a disqualified person with respect to private
foundation P, enters into a contract with corporation M, which is also a
disqualified person with respect to P. P owns 20 percent of M's stock,
and controls M within the meaning of subparagraph (5) of this paragraph.
M is in the retail department store business. Purchases by A of goods
sold by M in the normal and customary course of business at retail or
higher prices are not indirect acts of self-dealing so long as the total
of the amounts involved in all of such purchases by A in any one year
does not exceed $5,000.
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