by Andrew C. Schulz
From Council Columns
In the May/June 1998 issue of Foundation News & Commentary, Jane Nober wrote "That's the Ticket" about using foundation funds to pay for tickets to fundraising events. Six years later, questions about tickets and other tangible benefits paid for by the foundation are still among the most common inquiries received by the Council on Foundations' legal department. We thought it would be helpful to review the basic rules for private foundations and highlight some recent questions we've answered. Although these rules do not technically apply to community foundations, they are well-advised to follow them to protect their boards from excise tax penalties under Section 4958 of the Internal Revenue Code and ensure that donors or their advisors do not receive improper private benefits from grants from donor-advised funds. As always, because this article presents complicated legal and policy issues, you should seek qualified legal counsel if you have questions.
A review of the rules: Most tickets have some economic value, whether the ticket is for a dinner, performance or general admission to a museum or other facility. Under the private foundation self-dealing rules, foundation resources may not be used to benefit a disqualified person (which the law defines as foundation board members, executive staff, major donors and the family members of any of those persons and businesses they control). If any of those individuals use tickets purchased by or given to the foundation, it may constitute an act of self-dealing. An exception may be available if the person uses the ticket in his or her official capacity as a foundation representative and the use is reasonable and necessary to the performance of those duties (i.e., to monitor a charity's use of a foundation grant).
May a trustee's spouse attend an event using a foundation ticket? The Council recommends against this practice. There is no guidance from the IRS indicating that a spouse falls within the limited exception afforded disqualified persons who attend events in order to carry out their responsibilities to the foundation. In order to be permissible, spousal participation must be both reasonable and necessary to the performance of the trustee's foundation duties.
Our trustees' children may be trustees one day; may they use tickets to attend events to learn about our grantees? The Council is very cautious about justifying the attendance of children or grandchildren at charity events on the grounds that attendance helps them learn their future duties. In the only published guidance on this issue (PLR 9546020, 1995), the IRS set a high bar for what constitutes an acceptable trustee training program: the individuals in question had reached the minimum age required for election to the board; a significant pro-portion of those trained were likely to become trustees in the near future; the training program would be a formal and structured affair; active participation was required for election to the board; and the number participating was small compared to the total number of children. Under those circumstances, the IRS agreed that the training was both reasonable and necessary, so using foundation funds to pay for it would not be an act of self-dealing. Providing tickets to children who may or may not serve as trustees someday would not meet this standard.
May trustees attend events to show foundation support for the host charity? While showing foundation support may be justification for a trustee to use foundation-purchased tickets to attend an event, whether or not it is reasonable and necessary depends on the facts. At a minimum, the foundation should document the basis on which it selects events or charities to which it lends this form of support. Is there a link between the foundation's support of a particular charity and increased support of that charity by others? Is the benefit to the charity sufficient to justify the expense to the foundation? How many trustees need to attend an event to show the foundation's support? Such use of foundation tickets may be permissible in some situations.
What else should we think about as we review our policies on the use of tickets? We recommend that boards consider not just whether current policies meet the minimum legal requirements, but also the ethical framework. Boards should discuss the fact that their decisions about their use-or a family member's use-of foundation tickets could involve a conflict of interest. While the amount of money involved may be small, use of foundation tickets does confer an economic benefit and this creates tension with the board member's duty of loyalty to the foundation. We recommend considering the public appearance of the foundation as well. Currently, many are questioning the extent to which foundation expenditures confer benefits on foundation insiders and whether such expenditures should be curtailed. Considering the issues from the point of view of the general public may help the board weigh them.
Questions? Contact Andrew Schulz at email@example.com.