[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