(a) Sale or exchange of property--
(1) In general. The sale or
exchange of property between a private foundation and a disqualified
person shall constitute an act of self-dealing. For example, the sale of
incidental supplies by a disqualified person to a private foundation
shall be an act of self-dealing regardless of the amount paid to the
disqualified person for the incidental supplies. Similarly, the sale of
stock or other securities by a disqualified person to a private
foundation in a "bargain sale" shall be an act of self-dealing
regardless of the amount paid for such stock or other securities. An
installment sale may be subject to the provisions of both section
4941(d)(1)(A) and section 4941(d)(1)(B).
(2) Mortgaged property. For purposes of subparagraph (1) of this
paragraph, the transfer of real or personal property by a disqualified
person to a private foundation shall be treated as a sale or exchange if
the foundation assumes a mortgage or similar lien which was placed on
the property prior to the transfer, or takes subject to a mortgage or
similar lien which a disqualified person placed on the property within
the 10-year period ending on the date of transfer. For purposes of this
subparagraph, the term "similar lien" shall include, but is not
limited to, deeds of trust and vendors' liens, but shall not include any
other lien if such lien is insignificant in relation to the fair market
value of the property transferred.
(1) In general. Except as provided in subparagraphs (2)
and (3) of this paragraph, the leasing of property between a
disqualified person and a private foundation shall constitute an act of self-dealing.
(2) Certain leases without charge. The leasing of property by a
disqualified person to a private foundation shall not be an act of self-dealing if the lease is without charge.
For purposes of this subparagraph, a lease shall be considered to be without charge even
though the private foundation pays for janitorial services, utilities,
or other maintenance costs it incurs for the use of
the property, so long as the payment is not made directly or indirectly
to a disqualified person.
(3) Certain leases of office space. For taxable years beginning
after December 31, 1979, the leasing of office space by a disqualified
person to a private foundation shall not be an act of self-dealing if:
(i) The leased space is in a building in which there are other
tenants who are not disqualified persons,
(ii) The lease is pursuant to a binding lease which was in effect on
October 9, 1969, or pursuant to renewals of such a lease,
(iii) The execution of the lease was not a prohibited transaction
(within the meaning of section 503(b) or the corresponding provisions of
prior law) at the time of such execution, and
(iv) The terms of the lease (or any renewal) reflect an arm's length
transaction.
A lease or renewal of such lease is described in this subparagraph (3)
only if it satisfies the requirements of Sec. 53.4941(d)-4(c) (1) and
(2), applied without regard to the December 31, 1979 deadline described
therein.
(1) In general. Except as provided in subparagraphs (2),
(3), and (4) of this paragraph, the lending of money or other extension
of credit between a private foundation and a disqualified person shall
constitute an act of self-dealing. Thus, for example, an act of self-
dealing occurs where a third party purchases property and assumes a
mortgage, the mortgagee of which is a private foundation, and
subsequently the third party transfers the property to a disqualified
person who either assumes liability under the mortgage or takes the
property subject to the mortgage. Similarly, except in the case of the
receipt and holding of a note pursuant to a transaction described in
Sec. 53.4941(d)-1(b)(3), an act of self-dealing occurs where a note, the
obligor of which is a disqualified person, is transferred by a third
party to a private foundation which becomes the creditor under the note.
(2) Loans without interest. Subparagraph (1) of this paragraph shall
not apply to the lending of money or other extension of credit by a
disqualified person to a private foundation if the loan or other
extension of credit is without interest or other charge.
(3) Certain evidences of future gifts. The making of a promise,
pledge, or similar arrangement to a private foundation by a disqualified
person, whether evidenced by an oral or written agreement, a promissory
note, or other instrument of indebtedness, to the extent motivated by
charitable intent and unsupported by consideration, is not an extension
of credit (within the meaning of this paragraph) before the date of
maturity.
(4) General banking functions. Under section 4941(d)(2)(E) the
performance by a bank or trust company which is a disqualified person of
trust functions and certain general banking services for a private
foundation is not an act of self-dealing, where the banking services are
reasonable and necessary to carrying out the exempt purposes of the
private foundation, if the compensation paid to the bank or trust
company, taking into account the fair interest rate for the use of the
funds by the bank or trust company, for such services is not excessive.
The general banking services allowed by this subparagraph are:
(i) Checking accounts, as long as the bank does not charge interest
on any overwithdrawals,
(ii) Savings accounts, as long as the foundation may withdraw its
funds on no more than 30-days notice without subjecting itself to a loss
of interest on its money for the time during which the money was on
deposit, and
(iii) Safekeeping activities.
See example (3) Sec. 53.4941(d)-3(c)(2).
(d) Furnishing goods, services, or facilities--
(1) In general. Except as provided in subparagraph (2) or (3) of this paragraph (or
Sec. 53.4941(d)-3(b)), the furnishing of goods, services, or facilities
between a private foundation and a disqualified person shall constitute
an act of self-dealing. This subparagraph shall apply, for example, to
the furnishing of goods, services, or facilities such as office space,
automobiles, auditoriums, secretarial help, meals, libraries,
publications, laboratories, or parking lots. Thus, for example, if a
foundation furnishes personal living quarters to a disqualified person
(other than a foundation manager or employee) without
charge, such furnishing shall be an act of self-dealing.
(2) Furnishing of goods, services, or facilities to foundation
managers and employees. The furnishing of goods, services, or facilities
such as those described in subparagraph (1) of this paragraph to a
foundation manager in recognition of his services as a foundation
manager, or to another employee (including an individual who would be an
employee but for the fact that he receives no compensation for his
services) in recognition of his services in such capacity, is not an act
of self-dealing if the value of such furnishing (whether or not
includible as compensation in his gross income) is reasonable and
necessary to the performance of his tasks in carrying out the exempt
purposes of the foundation and, taken in conjunction with any other
payment of compensation or payment or reimbursement of expenses to him
by the foundation, is not excessive. For example, if a foundation
furnishes meals and lodging which are reasonable and necessary (but not
excessive) to a foundation manager by reason of his being a foundation
manager, then, without regard to whether such meals and lodging are
excludable from gross income under section 119 as furnished for the
convenience of the employer, such furnishing is not an act of self-
dealing. For the effect of section 4945(d)(5) upon an expenditure for
unreasonable administrative expenses, see Sec. 53.4945-6(b)(2).
(3) Furnishing of goods, services, or facilities by a disqualified
person without charge. The furnishing of goods, services, or facilities
by a disqualified person to a private foundation shall not be an act of
self-dealing if they are furnished without charge. Thus, for example,
the furnishing of goods such as pencils, stationery, or other incidental
supplies, or the furnishing of facilities such as a building, by a
disqualified person to a foundation shall be allowed if such supplies or
facilities are furnished without charge. Similarly, the furnishing of
services (even though such services are not personal in nature) shall be
permitted if such furnishing is without charge. For purposes of this
subparagraph, a furnishing of goods shall be considered without charge
even though the private foundation pays for transportation, insurance,
or maintenance costs it incurs in obtaining or using the property, so
long as the payment is not made directly or indirectly to the
disqualified person.
(e) Payment of compensation. The payment of compensation (or payment
or reimbursement of expenses) by a private foundation to a disqualified
person shall constitute an act of self-dealing. See, however,
Sec. 53.4941(d)-3(c) for the exception for the payment of compensation
by a foundation to a disqualified person for personal services which are
reasonable and necessary to carry out the exempt purposes of the
foundation.
(f) Transfer or use of the income or assets of a private foundation--
(1) In general. The transfer to, or use by or for the
benefit of, a disqualified person of the income or assets of a private
foundation shall constitute an act of self-dealing. For purposes of the
preceding sentence, the purchase or sale of stock or other securities by
a private foundation shall be an act of self-dealing if such purchase or
sale is made in an attempt to manipulate the price of the stock or other
securities to the advantage of a disqualified person. Similarly, the
indemnification (of a lender) or guarantee (of repayment) by a private
foundation with respect to a loan to a disqualified person shall be
treated as a use for the benefit of a disqualified person of the income
or assets of the foundation (within the meaning of this subparagraph).
In addition, if a private foundation makes a grant or other payment
which satisfies the legal obligation of a disqualified person, such
grant or payment shall ordinarily constitute an act of self-dealing to
which this subparagraph applies. However, if a private foundation makes
a grant or payment which satisfies a pledge, enforceable under local
law, to an organization described in section 501(c)(3), which pledge is
made on or before April 16, 1973, such grant or payment shall not
constitute an act of self-dealing to which this subparagraph applies so
long as the disqualified person obtains no substantial benefit, other
than the satisfaction of his obligation, from such grant or payment.
(2) Certain incidental benefits. The fact that a disqualified person
receives an incidental or tenuous benefit from the use by a foundation
of its income or assets will not, by itself, make such use an act of
self-dealing. Thus, the public recognition a person may receive, arising
from the charitable activities of a private foundation to which such
person is a substantial contributor, does not in itself result in an act
of self-dealing since generally the benefit is incidental and tenuous.
For example, a grant by a private foundation to a section 509(a) (1),
(2), or (3) organization will not be an act of self-dealing merely
because such organization is located in the same area as a corporation
which is a substantial contributor to the foundation, or merely because
one of the section 509(a) (1), (2), or (3) organization's officers,
directors, or trustees is also a manager of or a substantial contributor
to the foundation. Similarly, a scholarship or a fellowship grant to a
person other than a disqualified person, which is paid or incurred by a
private foundation in accordance with a program which is consistent with:
(i) The requirements of the foundation's exempt status under section 501(c)(3),
(ii) The requirements for the allowance of deductions
under section 170 for contributions made to the foundation, and
(iii) The requirements of section 4945(g)(1),
will not be an act of self-dealing under section 4941(d)(1) merely
because a disqualified person indirectly receives an incidental benefit
from such grant. Thus, a scholarship or a fellowship grant made by a
private foundation in accordance with a program to award scholarships or
fellowship grants to the children of employees of a substantial
contributor shall not constitute an act of self-dealing if the
requirements of the preceding sentence are satisfied. For an example of
the kind of scholarship program with an employment nexus that meets the
above requirements, see Sec. 53.4945-4(b)(5) (example 1).
(3) Non-compensatory indemnification of foundation managers against
liability for defense in civil proceedings.
(i) Except as provided in
Sec. 53.4941(d)-3(c), section 4941(d)(1) shall not apply to the
indemnification by a private foundation of a foundation manager, with
respect to the manager's defense in any civil judicial or civil
administrative proceeding arising out of the manager's performance of
services (or failure to perform services) on behalf of the foundation,
against all expenses (other than taxes, including taxes imposed by
chapter 42, penalties, or expenses of correction) including attorneys'
fees, judgments and settlement expenditures if--
(A) Such expenses are reasonably incurred by the manager in
connection with such proceeding; and
(B) The manager has not acted willfully and without reasonable cause
with respect to the act or failure to act which led to such proceeding
or to liability for tax under chapter 42.
(ii) Similarly, except as provided in Sec. 53.4941(d)-3(c), section
4941(d)(1) shall not apply to premiums for insurance to make or to
reimburse a foundation for an indemnification payment allowed pursuant
to this paragraph (f)(3). Neither shall an indemnification or payment of
insurance allowed pursuant to this paragraph (f)(3) be treated as part
of the compensation paid to such manager for purposes of determining
whether the compensation is reasonable under chapter 42.
(4) Compensatory indemnification of foundation managers against
liability for defense in civil proceedings.
(i) The indemnification by a
private foundation of a foundation manager for compensatory expenses
shall be an act of self-dealing under this paragraph unless when such
payment is added to other compensation paid to such manager the total
compensation is reasonable under chapter 42. A compensatory expense for
purposes of this paragraph (f) is--
(A) Any penalty, tax (including a tax imposed by chapter 42), or
expense of correction that is owed by the foundation manager;
(B) Any expense not reasonably incurred by the manager in connection
with a civil judicial or civil administrative proceeding arising out of
the manager's performance of services on behalf of the foundation; or
(C) Any expense resulting from an act or failure to act with respect to
which the manager has acted willfully and without reasonable cause.
(ii) Similarly, the payment by a private foundation of the premiums
for an insurance policy providing liability insurance to a foundation
manager for expenses described in this paragraph (f)(4) shall be an act
of self-dealing under this paragraph (f) unless when such premiums are
added to other compensation paid to such manager the total compensation
is reasonable under chapter 42.
(5) Insurance Allocation. A private foundation shall not be engaged
in an act of self-dealing if the foundation purchases a single insurance
policy to provide its managers both the noncompensatory and the
compensatory coverage discussed in this paragraph (f), provided that the
total insurance premium is allocated and that each manager's portion of
the premium attributable to the compensatory coverage is included in
that manager's compensation for purposes of determining reasonable
compensation under chapter 42.
(6) Indemnification. For purposes of this paragraph (f), the term
indemnification shall include not only reimbursement by the foundation
for expenses that the foundation manager has already incurred or
anticipates incurring but also direct payment by the foundation of such
expenses as the expenses arise.
(7) Taxable Income. The determination of whether any amount of
indemnification or insurance premium discussed in this paragraph (f) is
included in the manager's gross income for individual income tax
purposes is made on the basis of the provisions of chapter 1 and without
regard to the treatment of such amount for purposes of determining
whether the manager's compensation is reasonable under chapter 42.
(8) De minimis items. Any property or service that is excluded from
income under section 132(a)(4) may be disregarded for purposes of
determining whether the recipient's compensation is reasonable under chapter 42.
(9) Examples. The provisions of this paragraph may be illustrated by
the following examples:
Example (1). M, a private foundation, makes a grant of $50,000 to
the governing body of N City for the purpose of alleviating the slum
conditions which exist in a particular neighborhood of N. Corporation P,
a substantial contributor to M, is located in the same area in which the
grant is to be used. Although the general improvement of the area may
constitute an incidental and tenuous benefit to P, such benefit by
itself will not constitute an act of self-dealing.
Example (2). Private foundation X established a program to award
scholarship grants to the children of employees of corporation M, a
substantial contributor to X. After disclosure of the method of carrying
out such program, X received a determination letter from the Internal
Revenue Service stating that X is exempt from taxation under section
501(c)(3), that contributions to X are deductible under section 170, and
that X's scholarship program qualifies under section 4945(g)(1). A
scholarship grant to a person not a disqualified person with respect to
X paid or incurred by X in accordance with such program shall not be an
indirect act of self-dealing between X and M.
Example (3). Private foundation Y owns voting stock in corporation
Z, the management of which includes certain disqualified persons with
respect to Y. Prior to Z's annual stockholder meeting, the management
solicits and receives the foundation's proxies. The transfer of such
proxies in and of itself shall not be an act of self-dealing.
Example (4). A, a disqualified person with respect to private
foundation S, contributes certain real estate to S for the purpose of
building a neighborhood recreation center in a particular
underprivileged area. As a condition of the gift, S agrees to name the
recreation center after A. Since the benefit to A is only incidental and
tenuous, the naming of the recreation center, by itself, will not be an
act of self-dealing.
(g) Payment to a government official. Except as provided in section
4941(d)(2)(G) or Sec. 53.4941(d)-3(e), the agreement by a private
foundation to make any payment of money or other property to a
government official, as defined in section 4946(c), shall constitute an
act of self-dealing. For purposes of this paragraph, an individual who
is otherwise described in section 4946(c) shall be treated as a
government official while on leave of absence from the government
without pay.
[Dec. 20, 1995]
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