[Federal Register Volume 60, Number 1 (Tuesday, January 3, 1995)]
[Proposed Rules]
[Pages 82-83]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31666]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 53
[EE-56-94]
RIN 1545-AT03
Excise Tax On Self-Dealing By Private Foundations.
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed amendments to the regulations
that define self-dealing by private foundations. The proposed
amendments modify the application of the self-dealing rules to the
provision by a private foundation of director's and officer's liability
insurance to disqualified persons. These amendments provide that
indemnification by a private foundation or provision of insurance for
purposes of covering the liabilities of the person in their capacity as
a manager of the private foundation is not self-dealing. Additionally,
the amounts expended by the private foundation are not included in the
compensation of the disqualified person for purposes of determining
reasonable compensation of the disqualified person.
DATES: Written comments and requests for a public hearing must be
received by April 3, 1995.
ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (EE-56-94), room 5228,
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington,
DC 20044. In the alternative, submissions may be hand delivered between
the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R (EE-56-94),
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW,
Washington DC.
FOR FURTHER INFORMATION CONTACT: Terri Harris or Paul Accettura at 202-
622-6070 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Section 4941(a) imposes a tax on each act of self-dealing between a
disqualified person and a private foundation. Section 4941(d)(1)(E)
defines self-dealing as any direct or indirect transfer to, or use by
or for the benefit of, a disqualified person of the income or assets of
a private foundation. Section 53.4941(d)-2(f)(1) currently provides
that provision of insurance for the payment of chapter 42 taxes by a
private foundation for a foundation manager is self-dealing unless the
premium amounts are included in the compensation of the foundation
manager. Direct indemnification for the payment of chapter 42 taxes to
the foundation manager from the private foundation is self-dealing
whether or not the amounts are included in the manager's compensation.
Section 53.4941(d)-2(f)(3) currently provides that the
indemnification of certain expenses by a private foundation for a
foundation manager's defense in a judicial or administrative proceeding
involving chapter 42 taxes is not self-dealing. Such expenses must have
been reasonably incurred by the manager in connection with such
proceeding. Also, the manager must be successful in such defense, or
such proceeding must be terminated by settlement, and the manager must
not have acted willfully and without reasonable cause with respect to
the act or failure to act which led to the liability for tax under
chapter 42.
Revenue Ruling 82-223, 1982-2 C.B. 301, discussed the application
of the self-dealing rules to the provision of insurance by a private
foundation for the indemnification of a foundation manager's defense in
actions involving state laws relating to the mismanagement of funds of
charitable organizations. Rev. Rul. 82-223 implied that the private
foundation's provision of insurance is includible in the foundation
manager's taxable income. This position created a situation in which
private foundation managers who were ``employees'' of the private
foundation could exclude the insurance premiums from their income under
the section 132(d) fringe benefit exclusion; however, this raised the
possibility that unpaid ``volunteer'' managers would have to include
the premiums in their income and, since they had no profit motive with
which to support a working condition fringe benefit exclusion, could
not exclude the income.
This situation has recently been corrected by the publication of
amendments to regulations under section 132. Section 1.132-5(r)
currently provides that bona fide volunteers for exempt organizations
are deemed to have a profit motive for purposes of excluding a working
condition fringe benefit.
Although these benefits are excluded from compensation under
section 132(d), the problem of including the income excluded under
section 132 in the compensation paid to the foundation manager still
remains for purposes of determining whether a foundation managers's
compensation is reasonable. These amendments to Sec. 53.4941(d)-2(f)
are intended to clarify the IRS's position that, generally, the payment
of indemnification and insurance by a private foundation for a
foundation manager in situations arising from the performance of
services on behalf of the private foundation are not self-dealing and
are not considered when determining reasonable compensation of the
foundation manager.
Explanation of Provisions
The proposed regulations provide that it generally will not be
self-dealing, or treated as the payment of compensation, if a private
foundation indemnifies or provides insurance to a foundation manager in
any civil judicial or civil administrative proceeding arising out of
the manager's performance of services on behalf of the foundation.
An indemnification or purchase of insurance would be an act of
self-dealing if the expenses relating to such defense are not
reasonably incurred by the manager in connection with such proceeding.
Additionally, the manager must not have acted willfully and without
reasonable cause with respect to the act or failure to act which led to
such proceeding or to such liability. [[Page 83]] Also, if the
indemnification or insurance is to pay chapter 42 tax, it will be an
act of self-dealing unless the amounts are treated as compensation.
Special Analyses
It has been determined that these proposed rules are not major
rules as defined in EO 12866. Therefore, a regulatory assessment is not
required. It has also been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory
Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations,
and, therefore, a Regulatory Flexibility Analysis is not required.
Pursuant to section 7805(f) of the Internal Revenue Code, a copy of
these proposed regulations will be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact
on small business.
Comments and Requests for a Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments that are submitted
timely (preferably a signed original and eight (8) copies) to the IRS.
All comments will be available for public inspection and copying. A
public hearing may be scheduled if requested in writing by any person
that timely submits written comments. If a public hearing is scheduled,
notice of the date, time, and place for the hearing will be published
in the Federal Register.
Drafting Information
The principal author of these proposed regulations is Terri Harris,
Office of the Assistant Chief Counsel (Employee Benefits and Exempt
Organizations), IRS. However, personnel from other offices of the IRS
and Treasury Department participated in their development.
List of Subjects in 26 CFR Part 53
Excise taxes, Foundations, Investments, Lobbying, Reporting and
recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 53 is proposed to be amended as follows:
PART 53--FOUNDATION AND SIMILAR EXCISE TAXES
Paragraph 1. The authority for part 53 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Par. 2. Section 53.4941(d)-2 is amended as follows:
1. Paragraphs (f)(1) and (3) are revised.
2. Paragraph (f)(4) is redesignated as paragraph (f)(5).
3. New paragraph (f)(4) is added.
The additions and revisions read as follows:
Sec. 53.4941(d)-2 Specific acts of self-dealing.
* * * * *
(f) Transfer or use of the income or assets of a private
foundation--(1) In general. The transfer to, or use by or for the
benefit of, a disqualified person of the income or assets of a private
foundation shall constitute an act of self-dealing. For purposes of the
preceding sentence, the payment by a private foundation of any tax
imposed on a foundation manager by chapter 42 shall be treated as a
transfer of the income or assets of a private foundation for the
benefit of a disqualified person unless such payment is treated as part
of the compensation to such manager. Similarly, the payment by a
private foundation of the premiums for an insurance policy providing
liability insurance to a foundation manager for chapter 42 taxes shall
be an act of self- dealing under this paragraph unless such premiums
are treated as part of the compensation paid to such manager.
* * * * *
(3) Indemnification of foundation managers against liability for
defense in civil proceedings. Except as provided in Sec. 53.4941(d)-
3(c), section 4941(d)(1) shall not apply to the indemnification by a
private foundation of a foundation manager, with respect to the
manager's defense in any civil judicial or civil administrative
proceeding arising out of the manager's performance of services on
behalf of the foundation, against all expenses (other than taxes,
penalties, or expenses of correction) including attorneys' fees, if--
(i) Such expenses are reasonably incurred by the manager in
connection with such proceeding; and
(ii) The manager has not acted willfully and without reasonable
cause with respect to the act or failure to act which led to such
proceeding or to liability for tax under chapter 42. Similarly, except
as provided in Sec. 53.4941(d)-3(c), section 4941(d)(1) shall not apply
to premiums for insurance to reimburse a foundation for an
indemnification payment allowed pursuant to this paragraph (f)(3)(ii).
Neither shall such indemnification or payment of insurance be treated
as part of the compensation paid to such manager. Thus, a private
foundation shall not be engaged in an act of self-dealing if the
foundation purchases a single insurance policy to provide its managers
both the noncompensatory and the compensatory coverage discussed in
this paragraph (f), provided that the total insurance premium is
allocated to include, in each manager's compensation, that manager's
portion of the premium attributable to the compensatory coverage, which
is the coverage for the amount of penalty, tax, expense of correction,
judgment or expense, that is owed by the manager.
(4) Indemnification. For purposes of this paragraph (f), the term
indemnification shall include not only reimbursement by the foundation
for losses and expenses that the foundation manager has already
incurred but also direct payment by the foundation of such expenses as
the expenses arise.
* * * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 94-31666 Filed 12-30-94; 8:45 am]
BILLING CODE 4830-01-U