[Federal Register Volume 60, Number 244 (Wednesday, December 20, 1995)]
[Rules and Regulations]
[Pages 65566-65568]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30838]



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DEPARTMENT OF THE TREASURY
26 CFR Part 53

[TD 8639]
RIN 1545-AT03


Excise Tax On Self-Dealing By Private Foundations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that clarify the 
definition of self-dealing for private foundations. These regulations 
modify the application of the self-dealing rules to the provision by a 
private foundation of directors' and officers' liability insurance to 
disqualified persons. In general, these regulations provide that 
indemnification by a private foundation or provision of insurance for 
purposes of covering the liabilities of the person in his/her capacity 
as a manager of the private foundation is not self-dealing. 
Additionally, the amounts expended by the private foundation for 
insurance or indemnification generally are not included in the 
compensation of the disqualified person for purposes of determining 
whether the disqualified person's compensation is reasonable.

DATES: These regulations are effective December 20, 1995.

FOR FURTHER INFORMATION CONTACT: Terri Harris or Paul Accettura of the 
Office of the Associate Chief Counsel (Employee Benefits and Exempt 
Organizations), IRS, at 202-622-6070 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    On January 3, 1995 proposed regulations amending Sec. 53.4941(d)-
2(f) [EE-56-94, 1995-6 I.R.B. 39] under section 4941 of the Internal 
Revenue Code of 1986 were published in the Federal Register (60 FR 82). 
The proposed regulations provided that generally it would not be self-
dealing, nor treated as the payment of compensation, if a private 
foundation were to indemnify or provide 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. After IRS and Treasury consideration of the public comments 
received regarding the proposed regulations, the regulations are 
adopted as revised by this Treasury decision.

Explanation of Provisions

    Section 4941(a) imposes a tax on each act of self-dealing between a 


[[Page 65567]]
disqualified person and a private foundation. Section 4941(d)(1)(E) 
defines self-dealing to include 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. Prior to this Treasury decision, 
Sec. 53.4941(d)-2(f)(1) provided that provision of insurance for the 
payment of chapter 42 taxes by a private foundation for a foundation 
manager was self- dealing unless the premium amounts were included in 
the compensation of the foundation manager. The payment of chapter 42 
taxes by the private foundation on behalf of the foundation manager was 
self-dealing whether or not the amounts were included in the manager's 
compensation.
    Section 53.4941(d)-2(f)(3) provided 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 was not self-dealing. Such expenses must have been reasonably 
incurred by the manager in connection with such proceeding. Also, the 
manager must have been successful in such defense, or such proceeding 
must have been 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.
    This Treasury decision expands the scope of the regulations to 
cover indemnification and insurance payments made by a private 
foundation to or on behalf of a foundation manager in connection with 
any civil proceeding arising from the manager's performance of services 
for the private foundation. The regulations also clarify the 
distinction between the treatment of indemnification and insurance 
payments under chapter 42 and the treatment of these same items for 
income tax purposes.
    The proposed regulations resulted in some confusion as to whether 
certain indemnification and insurance payments would be considered 
compensatory or non-compensatory. The final regulations have been 
revised to provide greater clarity. They divide indemnification 
payments and insurance coverage into non- compensatory and compensatory 
categories, described comprehensively in Sec. 53.4941(d)-2(f) (3) and 
(4). The second and third sentences of Sec. 53.4941(d)-2(f)(1) of the 
proposed regulations have been removed because their substance was 
incorporated into Sec. 53.4941(d)-2(f)(4). Generally, the non-
compensatory category includes indemnification and insurance payments 
that cover expenses reasonably incurred in proceedings that do not 
result from a willful act or omission of the manager undertaken without 
reasonable cause. These payments are viewed as expenses for the 
foundation's administration and operation rather than compensation for 
the manager's services. The compensatory category includes 
indemnification or insurance payments that cover taxes (including taxes 
imposed by chapter 42), penalties or expenses of correction, expenses 
that were not reasonably incurred, or expenses for proceedings that 
result from a willful act or omission of the manager undertaken without 
reasonable cause. These payments are viewed as being exclusively for 
the benefit of the manager, not the foundation.
    The regulations provide that non-compensatory indemnification and 
insurance payments are not affected by the prohibition against self-
dealing. Conversely, compensatory indemnification and insurance 
payments are considered acts of self-dealing unless they are added to 
the benefiting manager's total compensation for purposes of determining 
whether that compensation is reasonable. If the total compensation is 
not reasonable, the foundation will have engaged in an act of self-
dealing.
    In some instances, a foundation may purchase an insurance policy 
that provides both non-compensatory and compensatory coverage. Some 
commentators have recommended that no allocation of insurance premiums 
be required when a single policy of this sort is purchased. These 
commentators argue that the allocation requirement places an undue 
burden on private foundations. After careful consideration, the IRS and 
the Treasury Department have decided to retain the allocation provision 
in the final regulations. The self-dealing rules were meant to 
discourage foundations from relieving managers of penalties, taxes and 
expenses of correction, as well as expenses ultimately resulting from 
the manager's willful violation of the law. A rule that did not require 
an allocation to determine whether the disqualified person's 
compensation is reasonable for purposes of chapter 42 could have the 
opposite effect. The insurance allocation rules are now set forth in 
Sec. 53.4941(d)-2(f)(5).
    Some commentators requested a clearer statement of what is meant by 
the statement that indemnification or insurance premiums are to be 
treated as compensation to the benefiting foundation manager. The IRS 
and the Treasury Department agree that further clarification is 
desirable. Accordingly, Sec. 53.4941(d)-2(f)(7) has been added. It 
provides that treatment as compensation for the limited purpose of 
determining whether compensation is reasonable under chapter 42 is 
separate and distinct from treatment as income to the benefiting 
manager under the income tax provisions. Whether any amount of 
indemnification or insurance is included in the manager's gross income 
for individual income tax purposes is determined in accordance with 
section 132, without regard to the treatment of such amounts under 
chapter 42.
    Finally, a provision has been added to the regulations specifying 
that a foundation may disregard de minimis benefits when calculating 
the total amount of compensation paid to an officer, director or 
foundation manager for purposes of determining whether that 
compensation is reasonable. In this context, a de minimis benefit is 
one excluded from gross income under section 132(a)(4). This provision 
makes explicit a Service position that has previously been reflected in 
the instructions to the Form 990-PF.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action 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, 
the notice of proposed rulemaking preceding these regulations was 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Drafting Information

    The principal author of this Treasury decision is Terri Harris, 
Office of the Associate Chief Counsel (Employee Benefits and Exempt 
Organizations), IRS. However, personnel from other offices of the IRS 
and the Treasury Department participated in their development.

List of Subjects in 26 CFR Part 53

    Excise taxes, Foundations, Investments, Lobbying, Reporting and 
recordkeeping requirements. 

[[Page 65568]]


Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 53 is 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. Paragraph (f)(1) is amended by removing the second and third 
sentences and revising the fourth sentence.
    2. Paragraph (f)(3) is revised.
    3. Paragraph (f)(4) is redesignated as paragraph (f)(9).
    4. New paragraphs (f)(4) through (f)(8) are 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. * * * For purposes of the preceding 
sentence, the purchase or sale of stock or other securities by a 
private foundation shall be an act of self-dealing if such purchase or 
sale is made in an attempt to manipulate the price of the stock or 
other securities to the advantage of a disqualified person. * * *
* * * * *
    (3) Non-compensatory indemnification of foundation managers against 
liability for defense in civil proceedings. (i) 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 (or failure to perform services) on behalf of the foundation, 
against all expenses (other than taxes, including taxes imposed by 
chapter 42, penalties, or expenses of correction) including attorneys' 
fees, judgments and settlement expenditures if--
    (A) Such expenses are reasonably incurred by the manager in 
connection with such proceeding; and
    (B) 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.
    (ii) Similarly, except as provided in Sec. 53.4941(d)-3(c), section 
4941(d)(1) shall not apply to premiums for insurance to make or to 
reimburse a foundation for an indemnification payment allowed pursuant 
to this paragraph (f)(3). Neither shall an indemnification or payment 
of insurance allowed pursuant to this paragraph (f)(3) be treated as 
part of the compensation paid to such manager for purposes of 
determining whether the compensation is reasonable under chapter 42.
    (4) Compensatory indemnification of foundation managers against 
liability for defense in civil proceedings. (i) The indemnification by 
a private foundation of a foundation manager for compensatory expenses 
shall be an act of self-dealing under this paragraph unless when such 
payment is added to other compensation paid to such manager the total 
compensation is reasonable under chapter 42. A compensatory expense for 
purposes of this paragraph (f) is--
    (A) Any penalty, tax (including a tax imposed by chapter 42), or 
expense of correction that is owed by the foundation manager;
    (B) Any expense not reasonably incurred by the manager in 
connection with a civil judicial or civil administrative proceeding 
arising out of the manager's performance of services on behalf of the 
foundation; or
    (C) Any expense resulting from an act or failure to act with 
respect to which the manager has acted willfully and without reasonable 
cause.
    (ii) Similarly, the payment by a private foundation of the premiums 
for an insurance policy providing liability insurance to a foundation 
manager for expenses described in this paragraph (f)(4) shall be an act 
of self-dealing under this paragraph (f) unless when such premiums are 
added to other compensation paid to such manager the total compensation 
is reasonable under chapter 42.
    (5) Insurance Allocation. 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 and that each manager's 
portion of the premium attributable to the compensatory coverage is 
included in that manager's compensation for purposes of determining 
reasonable compensation under chapter 42.
    (6) Indemnification. For purposes of this paragraph (f), the term 
indemnification shall include not only reimbursement by the foundation 
for expenses that the foundation manager has already incurred or 
anticipates incurring but also direct payment by the foundation of such 
expenses as the expenses arise.
    (7) Taxable Income. The determination of whether any amount of 
indemnification or insurance premium discussed in this paragraph (f) is 
included in the manager's gross income for individual income tax 
purposes is made on the basis of the provisions of chapter 1 and 
without regard to the treatment of such amount for purposes of 
determining whether the manager's compensation is reasonable under 
chapter 42.
    (8) De minimis items. Any property or service that is excluded from 
income under section 132(a)(4) may be disregarded for purposes of 
determining whether the recipient's compensation is reasonable under 
chapter 42.
* * * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.
    Approved: December 12, 1995.
Leslie Samuels,
Assistant Secretary of Treasury.
[FR Doc. 95-30838 Filed 12-19-95; 8:45 am]
BILLING CODE 4830-01-U