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Federal law regarding conflicts of interest and self-dealing at foundations can be complex and confusing. Family foundation boards that are eager to comply with both the letter and spirit of the law should understand the legal definition of “disqualified persons” as well as the variety of rules for certain regulated activities.
These rules prohibit the trustees themselves, certain family members, managers, and other “disqualified persons” from benefiting from the philanthropic activities of the foundation.
Federal law imposes a penalty tax on any disqualified person or foundation manager who engages in an act of self-dealing with a private foundation. Self-dealing is defined to include almost all business and "financial transactions between a private foundation and its “disqualified persons”.
A transaction that involves self-dealing always has three elements: a private foundation, a disqualified person, and an act of self-dealing between the two. Understanding the meaning of the term “disqualified person,” is, therefore, key to understanding and applying self-dealing rules. With regard to private foundations, such persons include:
- All Substantial Contributors to the Foundation.
- All Managers of the Foundation
- Owners of Businesses that Are Substantial Contributors to the Foundation
- Family Members
- Corporations Owned by Other Disqualified Persons
- Partnerships Owned by Other Disqualified Persons
- Other Entities Owned by Disqualified Persons
- Government Officials
In general, rules against self-dealing prohibit the following transactions between private foundations and their disqualified persons:
- The sale, exchange or lease of property
- The loan of money or extension of credit
- The furnishing of goods, services, or facilities
- Compensation or payment of expenses by the private foundation to a disqualified person
- The transfer to or use by or for the benefit of, a disqualified person, of foundation income or assets
- Payments to government officials
Read the full PDF about conflicts of interest with foundations by Benjamin T. White, Alston & Bird at the National Center for Family Philanthropy.