No-rule list updated for private foundation self-dealing

The IRS updated its no-rule list to include certain self-dealing transactions.

The IRS announced that it will not issue letter rulings on whether certain transactions constitute self-dealing under Sec. 4941(d). This announcement represents an addition to the IRS’s no-rule list published in Rev. Proc. 2021-3.

Generally, Sec. 4941(d) prohibits a private foundation and any disqualified person from entering into any of several direct or indirect transactions between them: (1) sales, exchanges, or leases of property; (2) lending of money or other extensions of credit; (3) furnishing of goods, services, or facilities; (4) payment of compensation; and (5) transfers of assets to, or for the benefit of, the disqualified person. It also prohibits agreements by a private foundation to make any payment of money or other property to a government official, other than certain employment agreements.

On occasion, donors may try to circumvent these rules by entering into a transaction with an LLC that, by itself, does not meet the definition of a disqualified person. For example, a potential donor may provide assets, including promissory notes, to an LLC in exchange for a nonvoting interest in the LLC and then gift or bequeath the same nonvoting interest to a private foundation. By providing the private foundation with nonvoting rights, the donor can essentially avoid a negative outcome, as the private foundation would lack the “control” element necessary for self-dealing. Because of the specific facts and circumstances involved in these transactions, many organizations would preemptively seek a ruling from the IRS that the transaction was not an indirect self-dealing transaction.

Under Rev. Proc. 2021-40, the IRS will not issue letter rulings on whether an act of self-dealing occurs when a private foundation, or other entity subject to Sec. 4941, owns or receives an interest in an LLC or other entity that owns a promissory note issued by a disqualified person. Rev. Proc. 2021-40 explains that the IRS is “currently reviewing its prior ruling position on [these] transactions.” The new revenue procedure applies to all letter requests pending in or received by the IRS on or after Sept. 3, 2021.