Even Rubber Chicken Dinners Have Tangible Economic Value!
Earlier this year, I wrote about a very troubling subject in the philanthropic world in my blog, “Who actually owns that private foundation?” (2/20/2013). The post generated a fair number of comments from philanthropic advisors who confirmed that it is, indeed, a sensitive topic for donors. The donors feel that, until the funds held in the private foundation are expended for charitable purposes, they (the donors) retain full control and can do pretty much what they want with them.
WRONG!
The self-dealing rules under IRC §4941 greatly limit the ability of “disqualified persons [1]” to do business with or generally 
benefit from a private foundation. This includes the sales or leasing of property, lending of money, furnishing of goods, services, or facilities, payment of compensation or expenses, transfer of income or assets of the foundation to the disqualified person, and any payments to government officials. These limitations seem fair enough and we discussed a couple of them, including the payment of compensation to disqualified persons in the earlier blog. But, like anything else in the tax law, there are exceptions and there can also be exceptional (read: oddball) results. For example, consider the “rubber chicken” dinner. You’ve been there, right? Because of your unwavering support for your favorite charity, but mainly because your Rolodex reads like a “who’s who” in the rarefied world of generous high net worth donors, the charity offers to honor you at its annual journal dinner dance. As part of the deal, you agree to pay $5,000 for a table of ten, $1,500 of that would be tax deductible. What is the best way to handle this financial commitment?
- You should use your family’s private foundation to pay for the tickets and invite your relatives to fill the ten spots at the table. (Clue: Not the right answer)
- You should leave the foundation out of it altogether and pay for the table using personal funds. You will be able to claim a $1,500 tax deduction on your personal tax return (subject to certain limitations). (Clue: This answer is red hot.)
- Bifurcate the transaction. You pay the non-tax deductible piece ($3,500) and the foundation pays the deductible piece ($1,500) under the theory that it is tax deductible anyway and therefore a proper expenditure for the foundation. (Clue: Points for creativeness but alas, this answer is also incorrect.)
As noted, choice B would generally be the correct choice because it avoids any hint of self-dealing. As incredible as it might sound, choice A would most likely be considered an act of self-dealing because, simply stated, something of value (the rubber chicken dinner) was secured by the foundation for the benefit of disqualified persons. And choice C, while pretty creative, fails the smell test too because, as the IRS likes to point out, the admission is a fixed price that includes both a fair market value and a charitable element – and one cannot exist without the other.
While these results may seem odd, the rules, themselves, exist to protect the integrity of private foundations. Donors must accept the limitations as a cost of doing business.
[1] Disqualified persons include substantial contributors to the foundation, foundation managers, a more than 20% owner of an entity that is a substantial contributor, family members of any of these, and certain other entities.
