Self-Dealing

Self-dealing rules exist because private foundations enjoy significant tax advantages, and Congress wanted to prevent insiders from using a foundation as a personal financial tool. A disqualified person is a defined legal category that generally includes substantial contributors, foundation managers, certain family members of those individuals, and entities they control. Transactions between the foundation and these parties, such as loans, sales of property, or compensation arrangements that are not reasonable, can constitute self-dealing regardless of whether the terms seem fair.

The consequences are serious: excise taxes apply to both the disqualified person who participated and, in some cases, to foundation managers who knowingly allowed the transaction. Repeated or uncorrected violations can escalate penalties significantly. A qualified attorney must review any arrangement that touches a disqualified person before it is executed.

A hypothetical example: a founder donates appreciated real estate to her family foundation and then leases it back from the foundation for her business. Even if the rent is at market rate, this lease could constitute self-dealing, exposing both the founder and the foundation's trustees to excise taxes.

A common confusion is assuming that "arm's-length" pricing makes a transaction permissible. Under self-dealing rules, certain transaction types are simply prohibited regardless of price. Families working through these boundaries should work closely with counsel familiar with the operational complexity that substantial wealth structures create.