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.
Section 501(c)(3) organizations are prohibited from engaging in activities that result in “inurement” of the organizations earnings to insiders, such as founders, directors and officers. The essence of inurement is that a person in a position to influence the decisions of an organization receives disproportionate benefits. Find questions and answers on common self-dealing snares such as sharing office equipment, employees and receiving free tickets and other tangible gifts.
In-Depth knowledge on Self-Dealing
The intermediate sanctions rules prohibit tax-exempt organizations from providing more than fair market value economic benefits to their “disqualified persons.” The intermediate sanctions rules apply to all section 501(c)(3) and section 501(c)(4) organizations except for private foundations, which are subject to special, private foundation “self-dealing” rules. All grantmakers that are public charities, a category that includes community foundations and public foundations, are subject to the intermediate sanctions rules. To prevent violations of the intermediate sanctions rules, four steps should be taken.