A mutual-fund manager earned nearly $5 million over eight years from a lucrative side gig. He was trustee of his business partner’s private charitable foundation.
Another charitable foundation, set up by a carpet merchant, has millions of dollars in loans outstanding to the man’s carpet company.
A third paid out more to companies owned by the foundation president’s family than it gave to charity in a recent year.
All these transactions were lawful, the foundations said in their tax filings.
A half-century ago, Congress, troubled by tales of foundation self-dealing, enacted a law to prevent insiders from taking advantage of their positions. The law prohibits most business between private foundations and their insiders—meaning their officers, directors and substantial donors. It says foundations may not engage in property deals, loans or the exchange of other goods and services with insiders.
Some foundations have grown adept at relying on a bevy of complex exemptions to their advantage. More than 1,800 foundations checked boxes on their fiscal 2016 tax filings indicating that they engaged in business activities with insiders but weren’t violating the self-dealing law, The Wall Street Journal found in a review of thousands of filings.
The law permits foundations to employ insiders for certain services provided they aren’t paid excessive compensation, which would be considered self-dealing. About 10,000 private foundations checked boxes on their fiscal 2016 returns indicating they legally compensated insiders.
It’s impossible to determine from tax data how many of the exemption claims were clearly justifiable, or whether some might stretch the definitions.
Even if legally defensible, transactions between foundations and insiders may violate the spirit of the law, said William Josephson, a former charities regulator in New York. Charitable-foundation assets are there for “serving a public purpose, and compensating you is not a public purpose,” he said.
Foundation insiders deemed by the Internal Revenue Service to be self-dealing, such as through business they do with the foundation, must pay extra taxes and unwind the deals. The IRS imposes such extra taxes on about 200 people a year. The agency audits less than 1% of nonprofit tax filings.
Paying the Penalty
The IRS imposes extra taxes on about 200 people a year for self-dealing at private foundations, out of insiders at more than 100,000 foundations.
Self-dealers taxed
Revenue collected
$3.0 million
250
2.5
200
2.0
150
1.5
100