How Should You Deal with the Self-dealing Rules?

Tax Professionals' Resource
April 10, 2013 — 1,562 views  
Become a Bronze Member for monthly eNewsletter, articles, and white papers.

Self-dealing refers to the behavior of a trustee, an executive officer, or an attorney in such a way that he makes use of his position in a particular organization and starts to act on his own personal interests rather than the interests of the members of the trust/organization. This is a form of conflict of interest and may involve illegal utilization of assets and properties.

Disqualified Persons

Self-directed rules are applicable for disqualified transactions and people who are involved in prohibited transactions. The rules give a clear idea about the transactions that such individuals can’t be a part of. The disqualified individuals can include anyone who is closely related to the foundation. It can also include legal entities and organizations where the disqualified individual has a significant interest. All transactions which provide indirect financial benefit to such disqualified persons can be considered as prohibited transactions.

The Self-Dealing Rules

The self-dealing rules include certain specifications when it comes to the transactions between the foundation and the disqualified persons. Such disqualified persons are not allowed to sell, lease, or exchange property, provide goods and services, lend money, or transfer the use of the company’s/trust’s income and assets. The foundation/trust also cannot pay excessive compensation to disqualified individuals. The enforceable pledge of such disqualified persons also need not be satisfied. They are also not allowed to make payments to government individuals on the behalf of the trust/foundation.

Rules Related to Compensation

The self-dealing rules state that it is acceptable to pay compensation to a disqualified individual for personal services which are rendered. However, the services must be necessary for the well-being of the foundation, and the compensation which is paid should be reasonable and not above the acceptable limits.

Rules Related to Reimbursement for Expenses

According to the self-dealing rules, if the expenses taken up by the staff member or member of a governing body are necessary to perform the exempt activities of the foundation and if the amount of expenses is reasonable, then the foundation/trust can reimburse the expenses. But, the trust needn’t pay for activities like the traveling expense of the family member of an employee who has no relation with the activities of the foundation.

Rules Related to Shared Office Space

The self-dealing rules state that the foundation/trust shall not pay rent to a disqualified person for a shared office space, even if the amount is reasonable. This self-dealing situation can be avoided if the trust/foundation enters into a business deal for leasing the office space with a third party who is not a disqualified individual.

Penalties for Violations

Any violation of the self-dealing rule can lead to the incurrence of huge penalties. In the instance of a penalty, the disqualified individual who enters into a transaction with the foundation is considered to be a self-dealer and a penalty of 10 percent of the total amount involved is imposed. If the transaction is not corrected within a specific period of time, then there is a chance for an additional tax to be imposed.

Tax Professionals' Resource