By Usman Mohammad and Emma Westerhof
The CPA Journal, Tax Practice & Procedure Column
April/May 2021 Issue
The Donald J. Trump Foundation was undone by alleged acts of self-dealing involving its namesake, Donald J. Trump, who also allegedly used the foundation to promote his candidacy for president in 2016. The New York State Office of the Attorney General (OAG) alleged that the Trump Foundation violated New York’s prohibition on self-dealing transactions involving private foundations. The OAG levied a $2 million fine against the Trump Foundation, filed a petition for its involuntary dissolution, and also referred the matter to the IRS for further investigation and sanctions (see June 14, 2018, Letter from NYS OAG to IRS Commissioner, available at https://bit.ly/32dm68D).
The trouble that befell the Trump Foundation is not unusual for private foundations. Private foundations are a popular vehicle for funding charitable causes, but many run into problems with “self-dealing” rules. IRC section 4941 prohibits nearly all financial transactions between a private foundation and individuals affiliated with the foundation, including substantial contributors, managers, entities in which these individuals have a substantial ownership interest, and their family members. Such individuals or entities are known as “disqualified persons,” and transactions between the foundation and such persons that violate IRC section 4941 may result in monetary sanctions in the form of excise taxes; such taxes can comprise as much as 200% of the monetary value of the transaction. The tax is levied on the self-dealer and the foundation manager. Timely correction of an act of self-dealing can reduce the amount of the excise tax.
CPAs Can Help
Private foundations must navigate self-dealing concerns on a year-round basis, including when filing their tax returns. Foundations must formally attest to the fact that there were no self-dealing transactions during the year by filing IRS Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation.
Because of the complexity of Form 990-PF, tax preparers are regularly engaged to help foundations complete the form. But preparers may also be blamed when alleged acts of self-dealing go unreported. For example, in United States v. Wright [798 F. App’x 849 (6th Cir. 2019)], a taxpayer who was charged with, inter alia, willful failure to report self-dealing transactions with his private foundation asserted as a defense the taxpayer’s purported reliance on the advice of the accountant that prepared Form 990-PF for the foundation. As a result, the accountant was required to testify about the information he sought and received from the taxpayer, and the accountant’s thought processes in determining what should be reported as a self-dealing transaction on the form. This case illustrates that accountants are expected to spot self-dealing transactions that should be reported on Form 990-PF.
To prepare Form 990-PF accurately, accountants must be familiar with what constitutes self-dealing, the exceptions to self-dealing, and the more nebulous aspects of the self-dealing rules such as “indirect” self-dealing and “incidental and tenuous benefits.”
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Published with permission from The CPA Journal, a publication of the NYSSCPA.
