A business can generate goodwill through its philanthropic efforts, and such efforts can be good for business. For instance, the IRS has made clear that foundation expenditures that raise awareness of charitable causes can incidentally enhance the general reputation or prestige of its sponsoring company and this would not be an act of self-dealing.
A foundation’s program that generates business or results in an economic benefit for the company, however, regardless of charitable intent, will likely violate the self-dealing rules.
Recently, a manager of a utility company’s foundation contacted Legal Resources with a related question: to help alleviate suffering caused by the COVID-19 pandemic, could the foundation create a program to assist low-income utility customers in bill repayment?
The Council’s legal team advised the company foundation that the IRS may deem the program as an act of self-dealing. When a company foundation expenditure results in a tangible economic benefit for the sponsoring company, an act of self-dealing has likely occurred. It can also occur when foundation assets have been used by or for the benefit of a disqualified person. This is because no grant or other activity of the foundation may directly produce sales or otherwise generate revenue for the company.
Here, the IRS may reasonably conclude that the foundation was creating a business opportunity for the utility company by paying outstanding customer bills with foundation money. This indirect benefit provided to the utility company is no less an act of self-dealing by the foundation with a disqualified person (the company) than if the foundation paid the company directly. Thus, the legal team cautioned that using foundation assets to generate business for the utility company would not only violate the self-dealing rules but would also serve a substantial non-charitable purpose.