Here’s a story—a hypothetical one—what if Mike and Carol Brady established a foundation for their philanthropic giving? As of late, Legal Affairs has seen an increase in inquiries both relating to and from family foundations. As such, we thought it would be ‘groovy’ to highlight some frequently asked questions, while paying homage to our favorite 70s TV family.
Family foundations are subject to the rules governing private foundation excise taxes such as investment income, minimum distributions and jeopardy investments. This blog focuses on the rules against self-dealing. This is because the prohibition against self-dealing contains many potential hazards for family foundations and the rules are far reaching and pervade many elements of a foundation’s business.
Family Members and Disqualified Persons
Private foundations are prohibited from entering into any financial transaction with disqualified persons. Disqualified persons include officers, directors, trustees, employees with authority to act on behalf of the foundation and substantial contributors to the foundation. The family members of these persons listed are also disqualified persons. The Internal Revenue Code defines family members as “ancestors, spouses, children, grandchildren, great grandchildren and the spouses of those individuals.”
Note: The definition of family member does not include brothers and sisters. In this regard, had either Mike, Carol or both served as officers or were substantial contributors, all six Brady children would be disqualified. But if instead, suppose it was Greg and Marcia, the foundation would be prohibited from entering into financial transactions with mom and dad (ancestors), but not Peter, Jan, Bobby or Cindy (though a conflict of interest would have to be disclosed).
Could the Foundation Pay Jan a Salary?
Jan may be paid a salary as long as the total compensation is for “personal” services and the amount is reasonable. The IRS has defined personal services as legal services, investment counseling and general banking, and a number of rulings have also suggested that some office support, like secretarial help and related clerical services may be considered as such.
Can the Foundation Pay Rent for Space Owned by Bobby? Space Owned by Alice?
The foundation should not pay rent to Bobby because he is a disqualified person, even if Bobby were to charge an amount significantly below fair market rate as this would be an act of self-dealing. If Bobby were to set the rate at zero, however, there is no self-dealing, and it would be permissible for the foundation to pay its fair share of utilities, janitorial services insurance or maintenance as long as the payment is not made directly to Bobby but to third-party providers.
The foundation may pay for space owned by Alice because she is not technically a family member.
Tickets to a Davy Jones Performance
If the foundation purchased tickets or received them from a grantee and then were made available to Marcia or any other Brady child, self-dealing will have said to occur. This is because goods of tangible economic value (the ticket) has been provided to a disqualified person as the result of foundation expenditures.