The IRS has
ruled that various lending of art, leasing, and other transactions
between a private foundation and disqualified persons will not
constitute acts of self-dealing, due to the applicability of various
exceptions and “special rules” (Priv. Ltr. Rul. 201346011).
operating foundation (Foundation) has as its primary activity the
operation of a museum. A disqualified person with respect to the
Foundation (Grantor) owns a collection consisting of a library portion
and an artifacts portion. The library portion consists of books,
documents, photographs, and memorabilia about artifacts generally
(Library Collection). The artifacts portion consists of artifacts
selected for their historical, social, technical, or aesthetic
significance (Artifacts Collection). The Grantor plans to transfer
ownership of both of these collections to a revocable living trust
(Trust), of which the Grantor is the trustee. The Trust thus also is a
is currently lending the Library Collection to the Foundation without
charge. The Trust will pay all expenses for the betterment of this
collection. The Foundation will pay all repairs and maintenance,
preservation, and safekeeping costs of the Library Collection.
is proposing to loan, through the Trust, the Artifacts Collection to the
Foundation. The Trust is to provide office and display space for the
Foundation’s exclusive use in a building that it owns, without charge,
and provide office equipment, furniture, and supplies, and accounting
services and other general and administrative services. A company,
wholly owned by the Grantor (Company) (and thus also a disqualified
person), occupies the portion of the building not used by the
Foundation. The Foundation and the Company will share the cost of the
Foundation will transport artifacts for exhibition at public events and
use certain artifacts in competitions. The Foundation will pay the
expenses for transportation, insurance, and the like. The Trust will pay
all capital expenses that improve an artifact, such as restoration.
Foundation plans to hire employees to perform certain low-level
conservation tasks. The Company’s employees will perform specialized
conservation tasks that require many years of study to master,
particularly inasmuch as the results must satisfy museum-quality
standards for historical artifacts.
Grantor nor the Trust has claimed a charitable contribution deduction
with respect to the Library Collection or the Artifacts Collection.
Following the death of the Grantor, the assets of the Trust are to be
transferred to a public charity.
tax is imposed on each act of self-dealing between a disqualified person
and a private foundation (IRC § 4941). Acts of self-dealing are defined
(IRC § 4941(d)(1)). Exceptions and other “special rules” are provided
(IRC § 4941(d)(2)).
includes the furnishing of goods, services, or facilities between a
private foundation and a disqualified person (IRC § 4941(d)(1)(C)). This
type of furnishing is allowed, however, if the furnishing is without
charge and if the goods, services, or facilities furnished are used
exclusively for charitable purposes (IRC § 4941(d)(2)(C)) (without-charge exception).
The furnishing exception is available even if the foundation pays for
transportation, insurance, or maintenance costs incurred in obtaining or
using the property, as long as the payment is not made to a
disqualified person (Reg. § 53.4941(d)-2(d)(3)).
A lease of
property between a private foundation and a disqualified person
generally is an act of self-dealing (IRC § 4941(d)(1)(A)). An exception
is available, however, for leasing arrangements without charge, even if
the foundation pays for janitorial services, utilities, or other
maintenance costs as long as the payment is not made to a disqualified
person (Reg. § 53.4941(d)-2(b)(2)).
of compensation by a private foundation to a disqualified person
generally is an act of self-dealing (IRC § 4941(d)(1)(D)). Pursuant to
an exception, however, the payment of compensation to a disqualified
person for personal services that are reasonable and necessary to
carrying out exempt purposes is not self-dealing if the compensation is
not excessive (IRC § 4941(d)(2)(E)) (personal services exception).
Personal services are those that are professional and managerial in
nature (as reflected in the examples in Reg. § 53.4941(d)-3(c)(2)).
does not occur where the benefit received by a disqualified person from
a private foundation is incidental or tenuous (Reg. §
53.4941(d)-2(f)(2)) (incidental benefit exception). Public recognition is an incidental benefit.
the Foundation will be borrowing the Artifacts Collection from the Trust
without charge and exhibiting it to the public, the IRS ruled that the
transaction will not be self-dealing due to the without-charge
exception. This is the case even though the Foundation will be paying
for transportation, insurance, conservation, and maintenance costs.
These payments will not be made to disqualified persons. The IRS
emphasized that the artifacts are of “lasting interest and value,” that
the museum engages in public outreach through the use of volunteer tour
guides and charges affordable admission fees, and that a charitable
contribution deduction is not being claimed.
provision to the Foundation by the Trust of exhibit space was also held
to be protected by the without-charge exception. The IRS noted that use
of the facility is for the Foundation’s charitable mission and that the
Company will pay its portion of occupancy costs directly to unrelated
As to the
matter of compensation, the IRS wrote that the services the Foundation
proposes to acquire from the Company are “very specific technical
services” for the conservation of exhibits, being “similar to the
services an anthropologist or archeologist would provide with respect to
artifacts.” These services were held to be professional in nature,
reasonable and necessary for a museum, and assumed to be reasonable—and
thus eligible for the personal services exception.
further held that the participation by the Grantor and/or the Company in
certain show or event activities on the Foundation’s behalf, and the
acknowledgment of these persons, are not forms of self-dealing because
of the incidental benefit exception. [12.4(a)]
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