[Code of Federal Regulations]
[Title 26, Volume 17]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR53.4941(d)-2]

[Page 53-58]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 53_FOUNDATION AND SIMILAR EXCISE TAXES--Table of Contents
 
                     Subpart B_Taxes on Self-Dealing
 
Sec. 53.4941(d)-2  Specific acts of self-dealing.

    Except as provided in Sec. 53.4941(d)-3 or Sec. 53.4941(d)-4:
    (a) Sale or exchange of property--(1) In general. The sale or 
exchange of property between a private foundation and a disqualified 
person shall constitute an act of self-dealing. For example, the sale of 
incidental supplies by a disqualified person to a private foundation 
shall be an act of self-dealing regardless of the amount paid to the 
disqualified person for the incidental supplies. Similarly, the sale of 
stock or other securities by a disqualified person to a private 
foundation in a ``bargain sale'' shall be an act of self-dealing 
regardless of the amount paid for such stock or other securities. An 
installment sale may be subject to the provisions of both section 
4941(d)(1)(A) and section 4941(d)(1)(B).
    (2) Mortgaged property. For purposes of subparagraph (1) of this 
paragraph, the transfer of real or personal property by a disqualified 
person to a private foundation shall be treated as a sale or exchange if 
the foundation assumes a mortgage or similar lien which was placed on 
the property prior to the transfer, or takes subject to a mortgage or 
similar lien which a disqualified person placed on the property within 
the 10-year period ending on the date of transfer. For purposes of this 
subparagraph, the term ``similar lien'' shall include, but is not 
limited to, deeds of trust and vendors' liens, but

[[Page 54]]

shall not include any other lien if such lien is insignificant in 
relation to the fair market value of the property transferred.
    (b) Leases--(1) In general. Except as provided in subparagraphs (2) 
and (3) of this paragraph, the leasing of property between a 
disqualified person and a private foundation shall constitute an act of 
self-dealing.
    (2) Certain leases without charge. The leasing of property by a 
disqualified person to a private foundation shall not be an act of self-
dealing if the lease is without charge. For purposes of this 
subparagraph, a lease shall be considered to be without charge even 
though the private foundation pays for janitorial services, utilities, 
or other maintenance costs it incurs for the use of the property, so 
long as the payment is not made directly or indirectly to a disqualified 
person.
    (3) Certain leases of office space. For taxable years beginning 
after December 31, 1979, the leasing of office space by a disqualified 
person to a private foundation shall not be an act of self-dealing if:
    (i) The leased space is in a building in which there are other 
tenants who are not disqualified persons,
    (ii) The lease is pursuant to a binding lease which was in effect on 
October 9, 1969, or pursuant to renewals of such a lease,
    (iii) The execution of the lease was not a prohibited transaction 
(within the meaning of section 503(b) or the corresponding provisions of 
prior law) at the time of such execution, and
    (iv) The terms of the lease (or any renewal) reflect an arm's length 
transaction.

A lease or renewal of such lease is described in this subparagraph (3) 
only if it satisfies the requirements of Sec. 53.4941(d)-4(c) (1) and 
(2), applied without regard to the December 31, 1979 deadline described 
therein.
    (c) Loans--(1) In general. Except as provided in subparagraphs (2), 
(3), and (4) of this paragraph, the lending of money or other extension 
of credit between a private foundation and a disqualified person shall 
constitute an act of self-dealing. Thus, for example, an act of self-
dealing occurs where a third party purchases property and assumes a 
mortgage, the mortgagee of which is a private foundation, and 
subsequently the third party transfers the property to a disqualified 
person who either assumes liability under the mortgage or takes the 
property subject to the mortgage. Similarly, except in the case of the 
receipt and holding of a note pursuant to a transaction described in 
Sec. 53.4941(d)-1(b)(3), an act of self-dealing occurs where a note, 
the obligor of which is a disqualified person, is transferred by a third 
party to a private foundation which becomes the creditor under the note.
    (2) Loans without interest. Subparagraph (1) of this paragraph shall 
not apply to the lending of money or other extension of credit by a 
disqualified person to a private foundation if the loan or other 
extension of credit is without interest or other charge.
    (3) Certain evidences of future gifts. The making of a promise, 
pledge, or similar arrangement to a private foundation by a disqualified 
person, whether evidenced by an oral or written agreement, a promissory 
note, or other instrument of indebtedness, to the extent motivated by 
charitable intent and unsupported by consideration, is not an extension 
of credit (within the meaning of this paragraph) before the date of 
maturity.
    (4) General banking functions. Under section 4941(d)(2)(E) the 
performance by a bank or trust company which is a disqualified person of 
trust functions and certain general banking services for a private 
foundation is not an act of self-dealing, where the banking services are 
reasonable and necessary to carrying out the exempt purposes of the 
private foundation, if the compensation paid to the bank or trust 
company, taking into account the fair interest rate for the use of the 
funds by the bank or trust company, for such services is not excessive. 
The general banking services allowed by this subparagraph are:
    (i) Checking accounts, as long as the bank does not charge interest 
on any overwithdrawals,
    (ii) Savings accounts, as long as the foundation may withdraw its 
funds on no more than 30-days notice without subjecting itself to a loss 
of interest on

[[Page 55]]

its money for the time during which the money was on deposit, and
    (iii) Safekeeping activities.

See example (3) Sec. 53.4941(d)-3(c)(2).
    (d) Furnishing goods, services, or facilities--(1) In general. 
Except as provided in subparagraph (2) or (3) of this paragraph (or 
Sec. 53.4941(d)-3(b)), the furnishing of goods, services, or facilities 
between a private foundation and a disqualified person shall constitute 
an act of self-dealing. This subparagraph shall apply, for example, to 
the furnishing of goods, services, or facilities such as office space, 
automobiles, auditoriums, secretarial help, meals, libraries, 
publications, laboratories, or parking lots. Thus, for example, if a 
foundation furnishes personal living quarters to a disqualified person 
(other than a foundation manager or employee) without charge, such 
furnishing shall be an act of self-dealing.
    (2) Furnishing of goods, services, or facilities to foundation 
managers and employees. The furnishing of goods, services, or facilities 
such as those described in subparagraph (1) of this paragraph to a 
foundation manager in recognition of his services as a foundation 
manager, or to another employee (including an individual who would be an 
employee but for the fact that he receives no compensation for his 
services) in recognition of his services in such capacity, is not an act 
of self-dealing if the value of such furnishing (whether or not 
includible as compensation in his gross income) is reasonable and 
necessary to the performance of his tasks in carrying out the exempt 
purposes of the foundation and, taken in conjunction with any other 
payment of compensation or payment or reimbursement of expenses to him 
by the foundation, is not excessive. For example, if a foundation 
furnishes meals and lodging which are reasonable and necessary (but not 
excessive) to a foundation manager by reason of his being a foundation 
manager, then, without regard to whether such meals and lodging are 
excludable from gross income under section 119 as furnished for the 
convenience of the employer, such furnishing is not an act of self-
dealing. For the effect of section 4945(d)(5) upon an expenditure for 
unreasonable administrative expenses, see Sec. 53.4945-6(b)(2).
    (3) Furnishing of goods, services, or facilities by a disqualified 
person without charge. The furnishing of goods, services, or facilities 
by a disqualified person to a private foundation shall not be an act of 
self-dealing if they are furnished without charge. Thus, for example, 
the furnishing of goods such as pencils, stationery, or other incidental 
supplies, or the furnishing of facilities such as a building, by a 
disqualified person to a foundation shall be allowed if such supplies or 
facilities are furnished without charge. Similarly, the furnishing of 
services (even though such services are not personal in nature) shall be 
permitted if such furnishing is without charge. For purposes of this 
subparagraph, a furnishing of goods shall be considered without charge 
even though the private foundation pays for transportation, insurance, 
or maintenance costs it incurs in obtaining or using the property, so 
long as the payment is not made directly or indirectly to the 
disqualified person.
    (e) Payment of compensation. The payment of compensation (or payment 
or reimbursement of expenses) by a private foundation to a disqualified 
person shall constitute an act of self-dealing. See, however, Sec. 
53.4941(d)-3(c) for the exception for the payment of compensation by a 
foundation to a disqualified person for personal services which are 
reasonable and necessary to carry out the exempt purposes of the 
foundation.
    (f) Transfer or use of the income or assets of a private 
foundation--(1) In general. The transfer to, or use by or for the 
benefit of, a disqualified person of the income or assets of a private 
foundation shall constitute an act of self-dealing. For purposes of the 
preceding sentence, the purchase or sale of stock or other securities by 
a private foundation shall be an act of self-dealing if such purchase or 
sale is made in an attempt to manipulate the price of the stock or other 
securities to the advantage of a disqualified person. Similarly, the 
indemnification (of a lender) or guarantee (of repayment) by a private 
foundation with respect to a loan to a disqualified person shall be 
treated as a

[[Page 56]]

use for the benefit of a disqualified person of the income or assets of 
the foundation (within the meaning of this subparagraph). In addition, 
if a private foundation makes a grant or other payment which satisfies 
the legal obligation of a disqualified person, such grant or payment 
shall ordinarily constitute an act of self-dealing to which this 
subparagraph applies. However, if a private foundation makes a grant or 
payment which satisfies a pledge, enforceable under local law, to an 
organization described in section 501(c)(3), which pledge is made on or 
before April 16, 1973, such grant or payment shall not constitute an act 
of self-dealing to which this subparagraph applies so long as the 
disqualified person obtains no substantial benefit, other than the 
satisfaction of his obligation, from such grant or payment.
    (2) Certain incidental benefits. The fact that a disqualified person 
receives an incidental or tenuous benefit from the use by a foundation 
of its income or assets will not, by itself, make such use an act of 
self-dealing. Thus, the public recognition a person may receive, arising 
from the charitable activities of a private foundation to which such 
person is a substantial contributor, does not in itself result in an act 
of self-dealing since generally the benefit is incidental and tenuous. 
For example, a grant by a private foundation to a section 509(a) (1), 
(2), or (3) organization will not be an act of self-dealing merely 
because such organization is located in the same area as a corporation 
which is a substantial contributor to the foundation, or merely because 
one of the section 509(a) (1), (2), or (3) organization's officers, 
directors, or trustees is also a manager of or a substantial contributor 
to the foundation. Similarly, a scholarship or a fellowship grant to a 
person other than a disqualified person, which is paid or incurred by a 
private foundation in accordance with a program which is consistent 
with:
    (i) The requirements of the foundation's exempt status under section 
501(c)(3),
    (ii) The requirements for the allowance of deductions under section 
170 for contributions made to the foundation, and
    (iii) The requirements of section 4945(g)(1),

will not be an act of self-dealing under section 4941(d)(1) merely 
because a disqualified person indirectly receives an incidental benefit 
from such grant. Thus, a scholarship or a fellowship grant made by a 
private foundation in accordance with a program to award scholarships or 
fellowship grants to the children of employees of a substantial 
contributor shall not constitute an act of self-dealing if the 
requirements of the preceding sentence are satisfied. For an example of 
the kind of scholarship program with an employment nexus that meets the 
above requirements, see Sec. 53.4945-4(b)(5) (example 1).
    (3) Non-compensatory indemnification of foundation managers against 
liability for defense in civil proceedings. (i) Except as provided in 
Sec. 53.4941(d)-3(c), section 4941(d)(1) shall not apply to the 
indemnification by a private foundation of a foundation manager, with 
respect to the manager's defense in any civil judicial or civil 
administrative proceeding arising out of the manager's performance of 
services (or failure to perform services) on behalf of the foundation, 
against all expenses (other than taxes, including taxes imposed by 
chapter 42, penalties, or expenses of correction) including attorneys' 
fees, judgments and settlement expenditures if--
    (A) Such expenses are reasonably incurred by the manager in 
connection with such proceeding; and
    (B) The manager has not acted willfully and without reasonable cause 
with respect to the act or failure to act which led to such proceeding 
or to liability for tax under chapter 42.
    (ii) Similarly, except as provided in Sec. 53.4941(d)-3(c), section 
4941(d)(1) shall not apply to premiums for insurance to make or to 
reimburse a foundation for an indemnification payment allowed pursuant 
to this paragraph (f)(3). Neither shall an indemnification or payment of 
insurance allowed pursuant to this paragraph (f)(3) be treated as part 
of the compensation paid to such manager for purposes of determining 
whether the compensation is reasonable under chapter 42.
    (4) Compensatory indemnification of foundation managers against 
liability for

[[Page 57]]

defense in civil proceedings. (i) The indemnification by a private 
foundation of a foundation manager for compensatory expenses shall be an 
act of self-dealing under this paragraph unless when such payment is 
added to other compensation paid to such manager the total compensation 
is reasonable under chapter 42. A compensatory expense for purposes of 
this paragraph (f) is--
    (A) Any penalty, tax (including a tax imposed by chapter 42), or 
expense of correction that is owed by the foundation manager;
    (B) Any expense not reasonably incurred by the manager in connection 
with a civil judicial or civil administrative proceeding arising out of 
the manager's performance of services on behalf of the foundation; or
    (C) Any expense resulting from an act or failure to act with respect 
to which the manager has acted willfully and without reasonable cause.
    (ii) Similarly, the payment by a private foundation of the premiums 
for an insurance policy providing liability insurance to a foundation 
manager for expenses described in this paragraph (f)(4) shall be an act 
of self-dealing under this paragraph (f) unless when such premiums are 
added to other compensation paid to such manager the total compensation 
is reasonable under chapter 42.
    (5) Insurance Allocation. A private foundation shall not be engaged 
in an act of self-dealing if the foundation purchases a single insurance 
policy to provide its managers both the noncompensatory and the 
compensatory coverage discussed in this paragraph (f), provided that the 
total insurance premium is allocated and that each manager's portion of 
the premium attributable to the compensatory coverage is included in 
that manager's compensation for purposes of determining reasonable 
compensation under chapter 42.
    (6) Indemnification. For purposes of this paragraph (f), the term 
indemnification shall include not only reimbursement by the foundation 
for expenses that the foundation manager has already incurred or 
anticipates incurring but also direct payment by the foundation of such 
expenses as the expenses arise.
    (7) Taxable Income. The determination of whether any amount of 
indemnification or insurance premium discussed in this paragraph (f) is 
included in the manager's gross income for individual income tax 
purposes is made on the basis of the provisions of chapter 1 and without 
regard to the treatment of such amount for purposes of determining 
whether the manager's compensation is reasonable under chapter 42.
    (8) De minimis items. Any property or service that is excluded from 
income under section 132(a)(4) may be disregarded for purposes of 
determining whether the recipient's compensation is reasonable under 
chapter 42.
    (9) Examples. The provisions of this paragraph may be illustrated by 
the following examples:

    Example (1). M, a private foundation, makes a grant of $50,000 to 
the governing body of N City for the purpose of alleviating the slum 
conditions which exist in a particular neighborhood of N. Corporation P, 
a substantial contributor to M, is located in the same area in which the 
grant is to be used. Although the general improvement of the area may 
constitute an incidental and tenuous benefit to P, such benefit by 
itself will not constitute an act of self-dealing.
    Example (2). Private foundation X established a program to award 
scholarship grants to the children of employees of corporation M, a 
substantial contributor to X. After disclosure of the method of carrying 
out such program, X received a determination letter from the Internal 
Revenue Service stating that X is exempt from taxation under section 
501(c)(3), that contributions to X are deductible under section 170, and 
that X's scholarship program qualifies under section 4945(g)(1). A 
scholarship grant to a person not a disqualified person with respect to 
X paid or incurred by X in accordance with such program shall not be an 
indirect act of self-dealing between X and M.
    Example (3). Private foundation Y owns voting stock in corporation 
Z, the management of which includes certain disqualified persons with 
respect to Y. Prior to Z's annual stockholder meeting, the management 
solicits and receives the foundation's proxies. The transfer of such 
proxies in and of itself shall not be an act of self-dealing.
    Example (4). A, a disqualified person with respect to private 
foundation S, contributes certain real estate to S for the purpose of 
building a neighborhood recreation center in

[[Page 58]]

a particular underprivileged area. As a condition of the gift, S agrees 
to name the recreation center after A. Since the benefit to A is only 
incidental and tenuous, the naming of the recreation center, by itself, 
will not be an act of self-dealing.

    (g) Payment to a government official. Except as provided in section 
4941(d)(2)(G) or Sec. 53.4941(d)-3(e), the agreement by a private 
foundation to make any payment of money or other property to a 
government official, as defined in section 4946(c), shall constitute an 
act of self-dealing. For purposes of this paragraph, an individual who 
is otherwise described in section 4946(c) shall be treated as a 
government official while on leave of absence from the government 
without pay.

[T.D. 7270, 38 FR 9493, Apr. 17, 1973, as amended by T.D. 7938, 49 FR 
3848, Jan. 31, 1984; T.D. 8639, 60 FR 65568, Dec. 20, 1995]