Charging related private foundation for services was not act of self-dealing.In Letter Ruling 200238053, the Service ruled that a management company's proposal to charge a related private foundation for personal services personal services n. in contract law, the talents of a person which are unusual, special or unique and cannot be performed exactly the same by another. These can include the talents of an artist, an actor, a writer, or professional services. the company provides to the foundation will not be an act of self-dealing. A taxpayer established a Sec. 509 private foundation to help carry out his charitable giving program. He also established a revocable rev·o·ca·ble also re·vok·a·ble adj. That can be revoked: a revocable order; a revocable vote. Adj. 1. grantor trust Grantor trust A mechanism of issuing MBS wherein the mortgages' collateral is deposited with a trustee under a custodial or trust agreement. that was the sole owner of a privately held management company. The company currently provides personal services to the taxpayer, his family, the private foundation and various other for-profit enterprises in which the taxpayer owns interests. Those services include accounting, bookkeeping bookkeeping, maintenance of systematic and convenient records of money transactions in order to show the condition of a business enterprise. The essential purpose of bookkeeping is to reveal the amounts and sources of the losses and profits for any given period. , asset management, tax investment, business travel, secretarial and administrative support and coordination with outside advisers (including legal counsel, tax advisers and various consultants and administrative and support services support services Psychology Non-health care-related ancillary services–eg, transportation, financial aid, support groups, homemaker services, respite services, and other services ). The taxpayer currently pays the company for the services it provides to his various interests. The company seeks to change its arrangement and receive payment for the personal services it provides to the private foundation and the taxpayer's other family interests under a cost-sharing service agreement. Under the agreement, each party will pay the company directly for its allocable share of the Company's operating expenses Operating expenses The amount paid for asset maintenance or the cost of doing business, excluding depreciation. Earnings are distributed after operating expenses are deducted. . The company will charge the private foundation only for services performed directly in furtherance fur·ther·ance n. The act of furthering, advancing, or helping forward: "Pakistan does not aspire to any . . . role in furtherance of the strategies of other powers" Ismail Patel. of its exempt purposes. Secretarial services that the company previously provided will not be included in the service agreement. The company plans to use an independent consultant experienced in employee benefits and human resources The fancy word for "people." The human resources department within an organization, years ago known as the "personnel department," manages the administrative aspects of the employees. to ensure that its fees are reasonable. Law and Analysis Sec: 4941(a) imposes an excise tax Excise Tax 1. An indirect tax charged on the sale of a particular good. 2. A penalty tax applied to ineligible transactions in retirement accounts. This penalty is assessed by and paid to the IRS. Notes: 1. on acts of self-dealing between a private foundation and a "disqualified dis·qual·i·fy tr.v. dis·qual·i·fied, dis·qual·i·fy·ing, dis·qual·i·fies 1. a. To render unqualified or unfit. b. To declare unqualified or ineligible. 2. person." Under Sec. 4946(a)(1)(E), the management company is a disqualified person by reason of its relationship to the taxpayer and the trust. Regs. Sec. 53.4941(d)-2(d)(1) provides that, except as provided in Regs. Sec. 53.4941(d)-3(b)(2) or (3), the furnishing of services between a private foundation and a disqualified person is an act of self-dealing. However, under Regs. Sec. 53.4941(d)-3(c) (1), a private foundation's payment to a disqualified person for personal services necessary to carry out the foundation's exempt purposes, is not self-dealing if the compensation is not excessive. Regs. Sec. 53.4941(d)-3(c)(2) presents several examples illustrating when the payment of compensation to a disqualified person is not self-dealing. The Service concluded that although the management company is a disqualified person for the foundation, the company could charge for the personal services under the proposed service agreement without engaging in an act of self-dealing under Sec. 4941. It reasoned that the arrangement is analogous to the situations described in Regs. Sec. 53.4941 (d)-3(c) (2), Examples (1), (2) and (3). Implications Letter Ruling 200238053 is the latest in a series of rulings defining the scope of the exception to self-dealing found in Regs. Sec. 53.4941(d)-3(c). This exception applies to the payment of reasonable compensation by a private foundation to a disqualified person for personal services necessary to carry out the foundation's exempt purposes. Relying on Madden, TC Memo 1997395, the Service generally limits this exception to professional and managerial services. In the ruling, it applied the exception to all the services the company provided under the cost-sharing agreement. FROM PHILLIP G. ROYALTY, WASHINGTON, DC |
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