Self-dealing is defined to include almost all business and financial transactions between a private foundation and its “disqualified persons.” So what is exactly is a disqualified person?
The following is excerpted from the National Center for Family Philanthropy’s Passages Issue Brief, “Avoiding Conflicts and Self-Dealing for Family Foundation Boards,” by Ben White. Friends of the Family and FP Online subscribers may access this file by clicking on the image at left.
A transaction that involves self-dealing always has three elements: a private foundation, a disqualified person, and an act of self-dealing between the two. Understanding the meaning of the term “disqualified person,” is, therefore, key to under-standing and applying self-dealing rules.
Basically, a disqualified person is a person—individual, corporation, partnership, trust, estate, or other foundation—that has one or more particular relationships with a private foundation. With regard to private foundations, such persons include:
- All Substantial Contributors to the Foundation. A substantial contributor is any person who has contributed or bequeathed more than $5,000 to a foundation, when that contribution or bequest constitutes more than 2 percent of the total contributions and bequests received by the foundation from the date of its establishment through the close of the fiscal year in which the contribution or bequest was received. For a foundation organized as a trust, a substantial contributor includes the creator or grantor of the trust. However, the term does not include a governmental entity. A person classified as a substantial contributor generally remains so forever, notwithstanding the amount of subsequent contributions by others. Under certain limited circumstances, however, a donor ceases to be a substantial contributor if he or she and certain “related persons” have no connection to the foundation for a 10-year period and aggregate contributions by the donor and the related persons are insignificant when compared with the aggregate contributions of one other person. Contributions by a donor and related persons generally will be considered insignificant in relation to the contribution of some other person if their contributions are less than 1 percent of the contributions made by the other person. Private foundations must maintain a running tally of contributions and bequests from all persons, taking into account the attribution rules described below, to identify their substantial contributors.
- All Managers of the Foundation. Officers, directors, and trustees, as well as individuals with powers or responsibilities similar to those of officers, directors, or trustees of the foundation are viewed as a “foundation manager” and, therefore, as a disqualified person of the foundation. A person is considered an officer of a foundation if he or she is designated as such under the foundation’s governing instruments or regularly makes administrative or policy decisions on behalf of the foundation. In general, a foundation employee who has authority merely to recommend administrative or policy decisions, but must have approval from a superior to implement those decisions, is not an officer. Independent contractors—for instance, accountants, lawyers, and investment managers or advisors—acting in their capacity as such, are not considered officers of a foundation.
- Owners of Businesses that Are Substantial Contributors to the Foundation. A person who owns more than 20 percent of the total combined voting power of a corporation, the profits interest of a partnership, or the beneficial interest of a trust or unincorporated enterprise that is (during the ownership) a substantial contributor to a private foundation, is included in the ranks of disqualified persons. Eliminating the business ownership interest eliminates the disqualified person taint.
- Family Members. Immediate family members of disqualified persons (i.e., a person who is a substantial contributor, a foundation manager, or a 20 percent owner) are also considered disqualified persons. This category includes the spouse, ancestors, children, grandchildren, great-grandchildren, and the spouses of children, grandchildren, and great-grandchildren, but not siblings.
- Corporations Owned by Other Disqualified Persons. Corporations of which more than 35 percent of the total combined voting power is owned by substantial contributors, foundation managers, 20 percent owners, or members of the family of any of these persons meet the definition of disqualified persons.
- Partnerships Owned by Other Disqualified Persons. Like corporations, a partnership is a disqualified person if more than 35 percent of its profits interest is owned by substantial contributors, foundation managers, 20 percent owners, or members of the family of any of these persons.
- Other Entities Owned by Disqualified Persons. A trust, estate, or unincorporated enterprise is a disqualified person if more than 35 percent of its beneficial interest is owned by substantial contributors, foundation managers, 20 percent owners, or members of the family of any of these persons.
- Government Officials. A government official may be a disqualified person with respect to a private foundation, but only for purposes of the self-dealing rules (not for purposes of other private foundation restrictions). Government officials include all elected executive or legislative officials as well as any person in the executive, judicial, or legislative branch above a certain grade level.