by Jane C. Nober
This article is from Council Columns.
Many foundation board members wear more than one philanthropic hat. In addition to serving on the board of a grantmaker, they may also serve on the boards of grantseeking charities—or even on their staffs. Several issues may arise when board members find themselves on both sides of a grant request.
A general concern raised by organizations that may share board members or staff with a grantseeking charity is that if they grant money to the charity, they could be viewed as providing economic benefits to their common board member. Board members, substantial contributors to foundations, and their families are considered "disqualified persons" under the tax code. This means that except for receiving reasonable compensation for necessary personal services performed for the foundation, such disqualified persons may not receive payments or other economic benefits from the foundation. The IRS usually regards such payments or benefits as "self-dealing."
Grants to Organizations With Board Members in Common With a Foundation
In formulating the rules regarding private foundation grantmaking, the Treasury Department foresaw that grantmakers would consider requests from charities on whose boards they sat. Treasury regulations make it clear that any public recognition or other goodwill that accrues to a board member, manager or other disqualified person as a result of the foundation’s grantmaking is an incidental benefit and does not give rise to self-dealing. The regulations are specific in regard to public charities: a foundation’s grant to a public charity "will not be an act of self-dealing merely … because one of the [public charity’s] officers, directors or trustees is also a manager of or a substantial contributor to the foundation" (Reg.§ 53.4941 (d)-2(f)(2)).
Just because a foundation's grant to an organization with which it shares a board member is not necessarily an act of self-dealing, however, does not make it something the foundation should undertake without due consideration. Many foundations have policies that require the relevant board member to abstain from voting on the grant, and some further bar him or her from participating in discussions of the proposed grant. At a minimum, all foundation board members should be made aware of any colleague’s special interest in the grant.
Grants to Organizations Where Foundation Managers (or Their Families) Serve as Staff
Tricky questions may arise when a potential grantee has staff members with close relationships to the grantmaking foundation. The Council recommends that no foundation funds should be earmarked for the salary of a disqualified person. Such earmarking (defined as an oral or written understanding that funds will be used in a particular way) edges toward the appearance of self-dealing. Grants for the general purposes of the grantee generally do not raise this problem. A situation in which a disqualified person’s salary constitutes the bulk of a grantee’s budget, however, may present problems the foundation does not wish to face. Again, disclosure of a disqualified person’s position in relation to a potential grantee is wise. Recording such a disclosure in the minutes of a meeting can help answer future questions of whether everyone knew about the situation.
Concerns may also arise when a foundation makes a grant for a project in which a disqualified person is likely to participate. For example, a foundation concerned with education may make a grant for a program at a university at which one of its board members teaches. The professor may, in turn, be selected by the university to staff this project and receive additional compensation. As long as (1) there is full disclosure of the facts to other board members, (2) the foundation does not require that the board member be selected, and (3) the university has discretion to staff this project with the most appropriate personnel, this grant should not pose legal problems. Nonetheless, a foundation should be more than cautious about the appearance a grant may create and should check with legal counsel regarding the specifics of any situation.
The Problem With Control
When a disqualified person holds a very senior position with a grantee—one that entitles him or her to exercise control over the grantee's expenditures—an additional issue may be raised by the foundation’s grant.
Control, according to the Treasury rules, means the ability to require the donee organization to make, or refrain from making, an expenditure (see Reg.§ 53.4942(a)-3(a)(3)). The rules (which seek to prevent foundation funds from getting shifted from one controlled organization to another and ensure that they are paid out for real charitable purposes) note that the issue is control of the organization, not of a particular grant.
If a disqualified person or persons control the grantee, the grant funds must be wholly distributed by the end of the first taxable year after the year in which the contribution is received. Even though the grantee may be a public charity, the distribution must be made according to the rules that govern private foundation grants. The private foundation donor must obtain complete records of the expenditures and retain them.
Finally, the distribution from the grantee must be deemed "out of corpus," i.e., not out of undistributed income from the year the grant is made or from a prior year. This last can be difficult to document because organizations other than private foundations do not devote a lot of time to determining which gifts are out of corpus.
Treasury regulations provide that unless the grant money is promptly and appropriately spent, the grant will not count toward the foundation’s required annual payout of roughly 5 percent of its assets. The Council recommends that a foundation consult with an experienced lawyer or accountant if a board member may be in a position to exercise control over a grantee's expenditures.
These cautions aside, the rules governing private foundations do make it possible for grantmakers to further their charitable interests through the foundation as well as through other involvements.