Originally published in the Wisconsin Philanthropy Network’s blog.
Self-dealing is an important legal issue for private foundations. Private foundations are those section 501(c)(3) organizations that have very few donors (such as a company or family foundation that only receives contributions from a single donor, a single company, or family members).
All private foundations are subject to a special set of “super” conflict of interest rules known as the “self-dealing” rule. The self-dealing rule can be confusing. Under most conflict of interest rules, a conflict can be resolved as long as the transaction is fair or beneficial to the organization or approved by independent directors. This is the case under the Wisconsin Statutes for both Wisconsin non-stock corporations and Wisconsin trusts (Wis. Stats. §§ 181.0831, 701.0802).
This is not the case under the self-dealing rule. The self-dealing rule just outright prohibits “self-dealing” transactions. This includes all transactions between the private foundation and its insiders (who are technically known as “disqualified persons”). The prohibition broadly applies to just about any transaction between the foundation and its disqualified persons, such as a sale, exchange, lease, or loan, between a private foundation and a disqualified person. The self-dealing rule also prohibits the furnishing of goods, services, or facilities by a foundation to a disqualified person.
The difficulty with the self-dealing rule is that its reach entraps transactions that are beneficial to charitable ends. For example, if a disqualified person sells a house to a private foundation, and the house is worth $100,000 but the disqualified person only receives $5,000, the transaction is self-dealing and the penalty applies. This is the case even though the foundation has come out ahead by $95,000. The self-dealing prohibition applies even if the parties pay fair market value for what is being exchanged. The self-dealing prohibition is far-reaching and applies to transactions that appear otherwise harmless or logically present no conflict of interest.
While the self-dealing rule is broadly written, there are also a number of exceptions that allow a private foundation to move forward with its work. We’ll focus on the most common of these exceptions in upcoming e-blasts.