Private foundations are subject to a number of rules and restrictions designed to ensure that their assets are used exclusively for charitable purposes, and not for the benefit of the organization’s directors or benefactors. These rules, though, can lead to concern over seemingly innocent actions. Recently, the Internal Revenue Service (“IRS”) reached the logical, appropriate conclusion in such a case.
Internal Revenue Code Section 4941 prohibits private foundations from engaging in acts of “self dealing” with “disqualified persons.” Disqualified persons are generally significant donors, 20% or greater owners of significant donors, directors, officers, managers, family members of the foregoing, and entities that are owned 35% or more by any of the foregoing. Self-dealing is broadly defined, and includes many types of transactions involving a private foundation, on one side, and a disqualified person, on the other.
Because of the broad nature of Section 4941 and the tax of at least 10% of the value of the transaction that is imposed on the disqualified person, a private foundation recently requested a ruling from the IRS that a proposed transaction was not an act of self-dealing. An individual amassed a significant collection of modern art and, at his death, left the collection to a foundation he established. After his death, his daughter and son-in-law remained directors of the foundation. The foundation loaned many of its works to an art center the collector funded, but the art center wasn’t big enough to maintain all of the artwork on display. Other pieces were loaned to museums worldwide and an airport terminal.
Still, there were undisplayed pieces in the collection, so the foundation proposed exhibiting five to 10 pieces at a local shopping mall. This seemed logical, as it would allow hundreds of thousands of people to see the pieces for free, and it would encourage shoppers to view additional portions of the collection at the art center. A great win for the foundation – more support for the art center, while providing free art for the public to view!
The small problem: Founder’s daughter and son-in-law, disqualified persons because they are related to a substantial contributor and because they are directors, owned more than 35% of the shopping mall, making it a disqualified person. Technically, this could be an act of self-dealing.
Happily, in Private Letter Ruling 201029039, the IRS determined that any benefit to the shopping mall, perhaps in the form of increased traffic and sales for those who came to view the art, was incidental and tenuous compared to the benefit to the public. It also found that displaying the artwork at the shopping center furthered the foundation’s exempt purpose of promoting appreciation and public awareness of 20th century artwork.
While the IRS’ private letter rulings cannot be cited as precedent, they do provide a general indication of how the IRS might rule in other similar situations. It demonstrates that the IRS does look at the totality of the facts of a situation, and can see where the benefit to the public and furtherance of an exempt entity’s goals outweighs any small benefit to an individual.