1. Self-Dealing and
Compensation Related
Issues for Private
Foundations
Frank H. Smith, Tax Partner and Simone
Putnam, SPHR, HROS Partner
March 28, 2012
Thrive. Grow. Achieve.

2. SELF-DEALING
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3. SELF-DEALING
PROHIBITED TRANSACTIONS
DIRECT OR INDIRECT
DISQUALIFIED PERSONS (DISTINGUISHED FROM
DISINTERESTED/INTERESTED PERSONS)
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4. DISQUALIFIED PERSONS
Disqualified persons are individuals or organizations a private
foundation is deemed to be related to and with which the private
foundation is limited from engaging in transactions which may create
self-dealing.
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5. DISQUALIFIED PERSONS
DISQUALIFIED PERSONS INCLUDE THE FOLLOWING:
• Officers, directors or trustees of the foundation
• A substantial contributor to the foundation
• Companies or partnership substantially owned by disqualified persons
• Spouse and families of any of the above (family in this instance includes
ancestors, children, grandchildren, great-grandchildren and their spouses, but
not siblings)
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6. SELF-DEALING
A DISQUALIFIED PERSON IS RESTRICTED IN THE TYPES OF
TRANSACTIONS THAT CAN BE ENGAGE IN WITH A PRIVATE
FOUNDATION. THESE TRANSACTIONS INCLUDE:
• A sale, exchange, or leasing of property
• Lending of money or other extension of credit
• Furnishing of goods, services, or facilities
• Payment of compensation
• Transfer to or use of the income or assets of a private foundation
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7. SELF-DEALING
EXCEPTIONS:
• Payment of reasonable compensation for the performance of personal services
• Provision of facilities by a disqualified person to a related private foundation
without charge
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8. DISCLOSURE REQUIREMENTS
PRIVATE FOUNDATIONS ARE SUBJECT TO MANY DISCLOSURE AND
REPORTING REQUIREMENTS, INCLUDING THE DISCLOSURE OF
COMPENSATION OF BOARD MEMBERS AND OFFICERS AND OTHER
HIGHLY COMPENSATED INDIVIDUALS.
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9. CONTROLLED ORGANIZATIONS
ACTS WITH CONTROLLED ORGANIZATIONS ARE GENERALLY TREATED
AS THOUGH THE ACT WAS PERFORMED BY THE PRIVATE
FOUNDATION ITSELF.
AN ORGANIZATION IS TREATED AS CONTROLLED BY A PRIVATE
FOUNDATION IF THE FOUNDATION, ONE OR MORE FOUNDATION
MANAGERS, OR DISQUALIFIED PERSONS OF THE FOUNDATION
CAN, BY AGGREGATING THEIR VOTES OR AUTHORITY, REQUIRE THE
ORGANIZATION TO ENGAGE IN THE SELF-DEALING TRANSACTION.
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10. SALE, EXCHANGE, LEASE OR FURNISHING
PROPERTY ORGANIZATIONS
THESE TYPES OF TRANSACTIONS BETWEEN A PRIVATE FOUNDATION
AND A DISQUALIFIED PERSON IN REGARD TO THE FOUNDATION IS
CONSIDERED SELF-DEALING.
EXAMPLES INCLUDE:
• Sale of incidental supplies by a disqualified person to a private foundation.
• Sale of stock by a disqualified person to a private foundation for a bargain price
(regardless of amount paid).
• Purchase of a mortgage held by its bank trustee, who is a disqualified person.
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11. SALE, EXCHANGE, LEASE OR FURNISHING
PROPERTY ORGANIZATIONS
• An exchange of property, such as transfer of shares of stock of an interest-free
loan.
• Transfer of real estate equal to the amount of the disqualified person’s loan.
• Leasing of property between a private foundation and a disqualified person
would be considered self-dealing unless it is without charge.
• Direct or indirect furnishing of good, services, or facilities between a private
foundation and disqualified persons.
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12. LENDING OF MONEY OR OTHER
EXTENSION OF CREDIT
• Lending of money or extension of credit (direct or indirect) between a private
foundation and a disqualified person would be considered self-dealing.
• The transfer of a disqualified person’s obligation by an unrelated party to a
foundation results in self-dealing if the foundation becomes a creditor under the
note.
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13. PAYMENT OF TRAVEL EXPENSES FOR A
FAMILY FOUNDATION
ASSETS OF A FAMILY FOUNDATION CANNOT BE USED TO FINANCE
THE TRAVEL OF SPOUSES AND CHILDREN UNLESS:
• Reimbursement of family can be used as a board member’s
compensation, provided it is reasonable and it shows up as a reportable income
on the board member’s Form 1099 or W-2.
• Reimbursement can be made if costs were incurred to support legitimate and
meaningful duties for the spouse and/or children that further the charitable
purposes of the foundation.
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14. PERSONAL FAMILY PLEDGES
A LEGALLY BINDING PLEDGE IS A PERSONAL DEBT, AND IF A
DISQUALIFIED PERSON MAKES SUCH A PLEDGE, IT IS AN ACT OF
SELF-DEALING FOR A FOUNDATION TO PAY THAT DEBT.
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15. ATTENDING FUNDRAISERS
• If the foundation buys a ticket to a fundraising event and the ticket price includes
payment for goods and services, the tickets cannot be used by a disqualified
person unless that person attends the event as part of their foundation
responsibilities.
• Having the disqualified person personally pay for the benefit portion of the ticket
does not resolve the self-dealing issue.
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16. SHARING OFFICE SPACE AND PERSONNEL
A NUMBER OF PRIVATE FOUNDATIONS SOUGHT AND RECEIVED
APPROVAL FOR SHARED OFFICE SPACE AND PERSONNEL.
• Separate contracts
• Time sharing arrangement
• Cost sharing arrangements
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17. PAYMENT OF COMPENSATION
• In general, the payment of compensation, including reimbursement of expenses
to a disqualified person is considered self-dealing.
• However, performance of personal services can be self-dealing unless the
services are necessary to carry out the tax-exempt purpose of the foundation
and the compensation is not excessive.
A personal service would include
legal, accounting, banking, and investment services as well as
anything directly related to governance. It is confined to those
services that “are essentially professional and managerial in
nature.”
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18. PAYMENT OF COMPENSATION
• Hiring a family member as a staff and paying them in any form of compensation
is allowed, but the compensation must be reasonable and the services must be
necessary, personal, and charitable.
• Board members can legally be compensated even though most foundations do
not compensate them. The rules would be the same as for hiring a staff. The pay
must be reasonable and the work must be necessary.
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19. REASONABLE COMPENSATION
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20. REASONABLE COMPENSATION
• What is reasonable compensation? The IRS defines reasonable compensation
as “the value that would ordinarily be paid for like services by like enterprises
under like circumstances.”
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21. REASONABLE COMPENSATION – 3 STEP
PROCESS
• The transaction is approved by an authorized body of the foundation.
• The authorized body uses “appropriate data” to determine comparability prior to
making a decision.
• The authorized body documents the basis for its determination while making its
decision.
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22. REASONABLE COMPENSATION – BEST
PRACTICES
• Create a Position Description
• Determine Your Compensation Policy/Philosophy
• Identify Relevant Factors for Comparison
• Identify and Obtain Appropriate Comparability Data
• Assess All Components of Executive Compensation
• Full Board Approval for Executive Compensation
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23. COMPENSATION POLICY/PHILOSOPHY
• A compensation policy/philosophy serves as a long-term policy on executive
compensation.
• Provides consistency in setting executive compensation.
• Articulates how the foundation links pay to performance, strategy, values and
mission.
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24. APPROPRIATE COMPARABILITY DATA
COMPENSATION MUST BE COMMENSURATE WITH THE DUTIES AND
RESPONSIBILITIES OF THE PERSON BEING COMPENSATED.
APPROPRIATE DATA INCLUDES COMPENSATION LEVELS PAID BY
SIMILARLY SITUATED FOUNDATIONS.
CONSIDER THE FOLLOWING FACTORS TO DETERMINE SIMILARLY
SITUATED FOUNDATION:
• Individual’s duties and responsibilities.
• Number of employees of the foundation.
• Size of the foundation’s assets.
• Type of foundation (operating, grant making, etc.).
• Geographic location.
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25. COF – SALARY SURVEY (SAMPLE PAGE)
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26. COF – SALARY SURVEY (SAMPLE PAGE)
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27. ASSESS ALL COMPONENTS OF
COMPENSATION
CONSIDER THE VALUE OF ALL BENEFITS BEING PROVIDED TO THE
EXECUTIVE WHEN EVALUATING THE REASONABLENESS OF
COMPENSATION.
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28. FULL BOARD APPROVAL
• Regardless of who conducts the preliminary research and makes recommendations
for executive compensation levels, the ultimate responsibility for executive
compensation falls to the entire board.
• All board members must know the full details of the chief executive’s compensation
package and have the opportunity to discuss and approve it.
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29. COMPENSATION – OTHER CONSIDERATIONS
• Consider equity and the perception of equity. Consider the implications of paying
your chief executive at a disproportionate level than the rest of the staff.
• Protect the board’s decision from undue influence by the chief executive. The chief
executive should not recommend his/her own salary increase; if a compensation
consultant is hired, he/she should be retained by the board and not by the
executive.
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30. COMPENSATION – OTHER CONSIDERATIONS
CONT’D.
• Remember that the compensation package is likely to become common knowledge.
Each board member should be prepared to explain and defend the compensation
package to many different constituencies.
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31. PENALTIES
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32. CONSEQUENCES OF SELF-DEALING
FIRST TIER TAX OF 10%
• Self-assessed and nonwaivable
• Undoing the transaction to the extent possible
• Beware the correction does not create another self-dealing transaction
• Assessed on the self-dealer
• Participating managers may also be assessed if willful and not due to reasonable
cause (5%)
SECOND TIER TAX OF 200% (50% FOR MANAGERS)
TERMINATION TAX IF SELF-DEALING IS NOT CURED
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33. RESOURCES
FORM 990-PF INSTRUCTIONS
PUBLICATION 578
WWW.IRS.GOV
20 QUESTIONS
PPC DESKBOOK
BNA PORTFOLIOS
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34. Q&A
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35. THANK YOU!
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