A recently released private paper provides guidance on what constitutes self-dealing transactions between a governing private foundation (PF) and certain “disqualified persons”.
To counter the temptation of certain individuals to misuse PF for non-charitable purposes, the Internal Revenue Code imposes an excise tax on self-dealing transactions between PF and certain “ineligible persons” including substantial contributors, PF managers. and their family members. PF is also required to spend or distribute a minimum amount of its investment assets annually to meet its charitable objectives.
Trust distributed art collection to PF
PLR 202204003 (issued January 28, 2022), which includes the proposed distribution of an art collection from the grantor’s revocable trust to the PF, with significant ties to the grantor and his family and the PF’s use of the art collection.
The grantor’s revocable trust holds an art collection that, in accordance with the terms of the trust agreement, will be distributed to one or more non-profit organizations upon the grantor’s death as determined by the trust’s arts advisor. The Trust nominated the grantor’s son as the Art Advisor to the Trust, who is also the Chairman of the Board of PF. The grantor served on the Board of Directors of PF and was a former Chairman of the Board of Directors. On the death of the grantor, the trust proposed that it distribute the art collection to the PF, along with additional cash, free of any encumbrances and liens.
PF, which was organized under IRC section 501(c)(3) for educational, religious, scientific, literary and charitable purposes, historically supported the arts.
Upon receipt of the art collection, PF envisioned hiring a curator to manage the art collection and entering into one or more long-term loan arrangements with non-profit organizations to display pieces of the art collection to the general public. Will do Whenever the pieces of the art collection were not under the management or protection of an organization pursuant to the loan arrangement, the artwork would be in transit, in storage for future exhibitions, subject to restoration or available for study and analysis by scholars and art experts . , Additionally, PF would pay for the artwork’s expenses while it was not subject to a loan arrangement, oversee and protect copyright and legal ownership and enter into licensing agreements relating to the artwork’s likeness or use of the images.
At the heart of the ruling request, PF anticipated that exhibitions of various pieces of the art collection would include recognition or acknowledgment of the grantor’s gift of the art collection to PF and/or recognition or acknowledgment of the family for which PF was exhibiting the artwork. Designed to make it possible.
self-dealing
Whether the grantor, the family member of the grantor or the trust of the grantor is indulging in an act of self-dealing with the PF?
IRC Section 4941 levies excise tax on every act of self-dealing between a PF and an ineligible person.
IRC section 4946(a) defines a “disqualified person” to include a substantial contributor to a PF, a PF manager (defined as an officer, director or trustee of a PF under IRC section 4946(b)(1)). and a substantial contributor or family member of the PF Manager. As per section 4946(d) a substantial contributor or “family member” of the PF manager includes spouse, ancestor, children, grandchildren, great-grandchildren and spouses of the children, grandchildren and great-grandchildren of the individual.
Section 4941(d) defines “self-dealing” as “the presentation, directly or indirectly, of goods, services or facilities between a private foundation and an unqualified person;” However, it is not an act of self-dealing if the furnishing is without charge and if the goods, services or facilities are used exclusively for the purposes specified in IRC section 501(c)(3).
On the facts, the grantor, the son of the grantor, the trust and other family members for whom the PF is designated are ineligible persons. In view of each of the proposed transactions between ineligible persons and PF, the taxpayer was concerned about two possible incidents of self-dealing between PF and ineligible persons.
Artwork distribution. There is no doubt that the distribution of artwork to the PF is the submission of goods to the PF by an unqualified person; However, because the artwork will be used exclusively for the purposes specified in section 501(c)(3) as described in the analysis of minimum investment returns discussed below, the distribution is clearly not an act of self-dealing. Is.
Acknowledgment of gift and/or recognition of family’s PF support by the grantor. Section 4941 defines “self-dealing” partly as “any direct or indirect transfer or use by or for the benefit of an unqualified person of the income or property of a private foundation.” In accordance with Treasury Regulation Section 53.4941-2(f), a person ineligible to receive “a contingent or diminutive benefit” from the income or assets of the PF is, in itself, not a use of such property that would qualify as an act of its own. -Behaviour.
For example, the recognition that a significant contributor may receive as part of a PF’s charitable activities does not result in an act of self-dealing because the benefit is usually incidental and difficult.
In its representation to the IRS, the taxpayer proposed to display pieces from PF’s art collections in art institutions in accordance with their charitable purposes. Such display shall include a recognition or an acknowledgment that the grantor gifted the piece to the PF and/or the family for whom the PF is named, has made it possible for the artwork to be displayed. Based on these facts, the IRS concluded that the proposed recognition or acknowledgment does not, in itself, result in an act of self-dealing because the recognition that the grantor or family members would receive would result from charitable activities. PF is only a casual and hard benefit.
Minimum Investment Calculation
Will the value of the art collection be included in the calculation to determine the quantum of income to be distributed by the PF? IRC Section 4942 levies excise tax on the undivided net income of a PF. This tax can be significant – up to 30% of such undivided income. To determine its undistributed income, a PF deducts its eligible distributions from its distributable amount.
As per section 4942(d), the distributable amount is calculated as follows:
The minimum investment is 5% of the return: The aggregate fair market value of all the properties of the PF reduced by the debt associated with the acquisition of such properties. As per section 4942(d), assets directly used (or put to use) in fulfilling the exempted purpose of PF are excluded from the assets taken into account in determining the minimum investment return. Therefore, the distributable amount of PF decreases if it “holds assets directly used (or held for use) in fulfillment of the exempted purpose of the Foundation.”
According to Tree. Registration Section 53.4942(a)-2(c)(3)(i), a property “directly used (or held for use) in carrying out the exempt object of the Foundation” only if actually held by the P.F. The asset is used for the purpose of its exemption or, if its immediate use is not practical, the PF has a definite plan to use such asset within a reasonable time. treasure. Regs section 53.4942(a)-2(c)(3)(ii)(c) lists works of art owned by PF as examples of property on public display “for direct use in the operation of the Foundation”. used or held for use” exemption purposes. In addition, Revenue Rule 74-498 held that a collection of paintings owned by PF is an asset to advance borrowed art under an active loan program for exhibition in museums, universities and similar institutions Which is used directly in meeting the “exemption of foundation” purpose and hence the value of the painting was excluded from the calculation of minimum investment return of PF.
Whether an asset is included or excluded from the calculation of minimum investment return of PF, it may have a significant impact on the amount to be disbursed by the PF, and if the PF fails to disburse such amount, Significant penalties apply. In analyzing whether the art collection will be used (or held for use) to meet the PF’s exempt purpose, the IRS looked at the history of the PF’s charitable activities and the PF’s role in managing and accessing the art collection. . loan arrangement.
Charitable Activities of PF, Taxpayer has a long history of furthering its exempt educational and charitable purposes by giving PF grants and supporting the arts through other efforts. The proposed activity – entering into long-term loan arrangements with one or more museums, galleries, libraries, PFs, universities or other non-profit organizations to exhibit art collections – is in line with these exempt objectives.
Role of PF in managing art collection and entering into credit arrangements. The IRS emphasized the PF’s active role in entering into loan arrangements with non-profit organizations, managing art collections, providing for the exhibition and display of art collections, and displaying art collections in its determination. The collection will be used or held directly for use in meeting the exempted purposes of PF.
PF envisions hiring a curator to manage the collection, and PF staff will be responsible for selecting non-profit organizations to publicly exhibit the art collection; Evaluating and financing the acquisition of additional artwork; Overseeing the insurance, care, maintenance and protection of artwork; Ancillary costs associated with providing adequate space for the exhibition of the artwork; and helping selected non-profit organizations publicize exhibitions of artwork in art collections. In selecting non-profit organizations, PF will evaluate the organization’s ability to protect the artwork during exhibition and transit, the facilities for the organization to display the artwork, cultural and artistic value that the artwork will have on it. The organization’s ability to maximize exposure to the organization and the general public to its larger community and art collection.
In addition to entering into a loan arrangement, PF would pay for expenses when the artwork was not under the loan arrangement, monitor and protect copyright and legal ownership of the artwork and would consider and potentially enter into licensing agreements relating to the use. The likeness of artwork or of images. When the artwork was not under loan arrangements, the work would be in transit, in storage for future exhibitions, subject to restoration or available for study and analysis by scholars and experts.
Because of the PF’s active role in managing the art collection and loan program, the IRS determined that the artwork would be used, or for use directly, to meet the PF’s exempt purposes and could be excluded from it. Minimum investment return calculation.
PF and concerned person beware
Based on the facts of the PLR, neither the distribution of the art collection to the PF nor the recognition that the donor or family member for whom the PF was designated would constitute acts of self-dealing. In addition, the close link between the PF’s charitable activity, the valuable art collection it will hold and the PF’s active participation in the management and use of the art collection helps the PF reduce its distributable amount.
For an outsider reading the PLR, one thing is clear: the requirements under Sections 4941 and 4942, the Treasury Rules and the Revenue Rules thereunder provide a complex web of rules and calculations that a PF needs to be aware of. The donors, officers, directors and trustees of the PF and their family members should be very cautious about receiving any benefit or contributing to the PF so as to avoid the harsh punishment that comes with the acts of their own behaviour, Even if such acts are unintentional. Failure to pay heed to the rules and regulations can land taxpayers in the area of heavy excise duty and penalties which result from participating in self-dealing activities or failing to disburse proper amount of income from PF.
