Private Foundation Guidelines: Avoiding Self-Dealing at Fundraising and Entertainment Events
Private foundations play a vital role in supporting charitable causes, often through participation in fundraising events organized by public charities. However, when these events include entertainment or social aspects, foundations must be especially careful to comply with federal tax regulations, particularly those on self-dealing.
One common dilemma involves tickets that foundations may receive, either as a complimentary gesture or in exchange for a donation. For example, a foundation may donate a significant amount to a local theater and receive complimentary tickets in return. This situation raises questions for the foundation’s leadership: Can we use these tickets personally? Can we bring our family members? Would it be better to decline the tickets altogether?
Similar concerns arise when a foundation pays for—or receives—tickets to attend high-profile fundraising dinners or participate in charity golf tournaments: Should the foundation cover the cost for board members or other leadership to attend an elegant dinner or play in a charity golf event? Is it appropriate for the foundation to pay for their families as well?
This article will explore the limitations private foundations face when providing tickets or benefits from fundraising and entertainment events to disqualified persons and offer guidance on best practices to avoid complications.
What Are Disqualified Persons?
Before delving into the rules, it’s essential to understand who qualifies as a disqualified person. Under IRS guidelines, disqualified persons include individuals or entities closely connected to a private foundation’s control. These include:
• Foundation founders / Substantial contributors (funders)
• Trustees, directors, or officers of the foundation
• Family members of any of the above (spouses, children, etc.)
• Business entities or trusts in which disqualified persons hold a significant ownership interest or control
Disqualified persons are subject to strict rules concerning their interactions with the foundation’s resources, particularly when it comes to financial transactions or receiving tangible benefits, such as tickets to events.
Self-Dealing in Relation to Fundraising and Entertainment Events
Self-dealing encompasses certain prohibited financial transactions between a private foundation and its disqualified persons. The IRS generally considers using foundation-acquired tickets to attend a fundraising or entertainment event as self-dealing. This is because attending these events often involves personal benefits—like food, entertainment, and beverages—viewed as a misuse of foundation assets for personal enjoyment.
Even if a foundation’s support for an event has a charitable basis, allowing a disqualified person to attend using foundation-acquired tickets without a clear business purpose can risk violating self-dealing regulations. Imagine a private foundation buying tickets to an NFL game purely for the entertainment of its directors. Here, there is no charitable purpose that aligns with the foundation's mission, making it a clear case of self-dealing: the directors would enjoy personal benefits like entertainment and refreshments at the foundation’s expense, violating the rules.
This principle also applies to other types of events, such as upscale dinners at nonprofit fundraisers. Unless the foundation can clearly demonstrate that attending such events directly supports its charitable mission and outweighs any entertainment value, foundation funds should not cover attendance costs for disqualified persons.
Example: Charity Golf Tournament
Consider a charity golf tournament—a common nonprofit fundraiser where personal enjoyment is often a key attraction. Although there may be opportunities to network with charitable contacts and stakeholders, the primary draw of the event typically lies in its social and entertainment aspects. In this case, any charitable purpose is intertwined with, and perhaps secondary to, the recreational nature of the event. A more effective way to support the cause would be to make a direct donation to the charity rather than participate in the tournament. While direct donations may lack the same personal enjoyment, they generally maximize charitable impact and help avoid any self-dealing issues by eliminating personal benefits to disqualified persons.
Exception: When Attendance May Be Permissible
While the general rule is that attending a fundraising event using a foundation-purchased ticket constitutes self-dealing, there are a few narrow exceptions:
If a disqualified person, such as an officer or director, needs to attend in their official capacity to further the foundation’s charitable mission—such as evaluating a grantee's project, engaging in community networking, or meeting with key stakeholders who are vital to advancing the foundation’s goals—their attendance may be allowed. The key here is establishing and documenting the business need for their presence.
So, if a director attends a fundraising gala with an extravagant dinner and live music, the event's entertainment value may outweigh any charitable purpose for their attendance. Unless the event somehow significantly promotes the foundation’s charitable mission, the risk of self-dealing remains.
Family members, however, are not covered by this exception. Even if a foundation leader has a legitimate reason to attend, their family must purchase their own tickets unless they too have a foundation-related responsibility.
Misconceptions: Splitting Costs
One potential solution some have proposed is to split the cost of the event ticket between the foundation and the disqualified person, with the disqualified person paying the fair market value of the entertainment portion. However, the IRS does not accept this approach. Even if the disqualified person covers the cost of their personal benefit, the mere fact that the foundation’s funds allowed them access to the event can still be considered self-dealing.
The IRS's position is clear: "bifurcating" the ticket price doesn’t solve the problem because the foundation still facilitates access to a benefit that wouldn’t have been available otherwise.
Best Practices: Avoiding Self-Dealing
To navigate the complexities of supporting fundraising events without running afoul of the self-dealing rules, foundations should follow these best practices:
1. Use personal funds for event tickets. Whenever possible, disqualified persons should purchase tickets using their own money, not the foundation’s assets. To avoid confusion, foundations may consider adopting a policy that prohibits accepting tickets to fundraising events altogether.
2. Document business needs. If a foundation officer or director needs to attend an event for legitimate reasons (such as networking or monitoring charitable programs), this should be well-documented. The foundation should maintain a clear record explaining the charitable purpose behind the attendance.
Revisiting the Opening Questions
Let’s revisit the questions posed at the beginning of this article:
• Can a foundation director use complimentary entertainment tickets personally? No. Using complimentary tickets for personal entertainment is considered self-dealing. Even if the tickets come as part of a donation, the personal enjoyment of the event constitutes improper use of foundation assets.
• Can family members attend events using foundation-purchased tickets? No. Family members of disqualified persons must purchase their own tickets unless they have a legitimate, documented foundation-related role at the event.
• Can the foundation ever cover the cost of charitable events for board members and other foundation leadership? This depends on whether their attendance serves a clear charitable purpose and legitimate business need. If there is no documented business need, covering the cost would likely be considered self-dealing.
• Should the foundation decline event tickets? In most cases, if there is no compelling business need, it’s safest to decline complimentary tickets. The foundation can still support the event through donations or sponsorships without using tickets that provide personal benefits to disqualified persons.
Conclusion: Walking the Line
For private foundations, adhering to self-dealing regulations is essential when engaging with fundraising events that offer social or entertainment benefits. While some limited exceptions allow attendance for a legitimate business purpose—such as a documented foundation-related need—these situations should be approached carefully and sparingly. Whenever possible, disqualified persons should use personal funds for event tickets, ensuring that no personal benefit arises from foundation assets.
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