IRS Publication 5616 – Private foundations and their advisors must navigate strict rules to avoid costly penalties. IRS Publication 5616, officially titled Exempt Organizations Technical Guide TG 58: Excise Taxes on Self-Dealing – IRC Section 4941, serves as the IRS’s detailed technical resource on this critical topic.
Revised as of August 1, 2024 (Catalog Number 92781W), this guide explains the prohibitions, exceptions, tax calculations, corrections, and examination procedures under IRC Section 4941. It is current through its revision date, and users should check for later developments on IRS.gov.
Whether you manage a private foundation, serve as a foundation manager, or advise exempt organizations, understanding Publication 5616 helps ensure compliance and prevent excise taxes that can reach 200% of the amount involved.
What Is IRS Publication 5616 and Why Does It Matter?
Publication 5616 is an Exempt Organizations Technical Guide (TG 58) designed primarily for IRS examiners but invaluable for private foundations, trustees, officers, and tax professionals. It consolidates the law, Treasury Regulations, revenue rulings, and practical examples on self-dealing.
Key facts about the publication:
- Revision date: August 1, 2024
- Scope: Covers direct and indirect self-dealing between private foundations (and certain trusts under IRC 4947) and disqualified persons.
- Purpose: Helps identify, calculate, correct, and report violations of IRC Section 4941 while providing examination techniques and audit tips.
- Disclaimer: It is not an official pronouncement of law but offers authoritative technical guidance based on the Internal Revenue Code of 1986, as amended.
Self-dealing rules originated in the Tax Reform Act of 1969 to replace earlier “prohibited transaction” rules. The Pension Protection Act of 2006 increased first-tier tax rates, and later legislation (including the Taxpayer Certainty and Disaster Tax Relief Act of 2019) affected related filing and net investment income taxes.
Understanding Self-Dealing Under IRC Section 4941
Self-dealing is any direct or indirect act between a private foundation and a disqualified person that falls into one of six prohibited categories listed in IRC Section 4941(d)(1). The rule applies regardless of whether the foundation benefits or suffers harm — the mere existence of the transaction with a disqualified person often triggers the tax (Treas. Reg. § 53.4941(d)-1(a)).
Who Is a Disqualified Person?
Disqualified persons (defined in IRC Section 4946 and detailed in TG 63) include:
- Substantial contributors (and 20% owners of them)
- Foundation managers (officers, directors, trustees)
- Family members (spouses, ancestors, lineal descendants, siblings)
- Entities owned more than 35% by the above
- Certain government officials (for payments under Section 4941(d)(1)(F))
The Six Prohibited Acts of Self-Dealing
Publication 5616 dedicates an entire section to these acts with extensive examples and rulings:
- Sale, exchange, or leasing of property (IRC 4941(d)(1)(A))
Any sale or exchange is self-dealing. Leasing is prohibited unless rent-free to the foundation. Special rules apply to liens placed within 10 years, bargain sales, and anonymous stock sales on exchanges. - Lending of money or other extension of credit (IRC 4941(d)(1)(B))
Loans from the foundation to a disqualified person are generally prohibited. Interest-free loans from a disqualified person to the foundation may be allowed if used for exempt purposes. - Furnishing of goods, services, or facilities (IRC 4941(d)(1)(C))
Includes use of foundation offices, vehicles, or equipment. Exceptions exist for public-use facilities or reasonable compensation scenarios. - Payment of compensation or reimbursement of expenses (IRC 4941(d)(1)(D))
Payments to disqualified persons are allowed only if they are for personal services that are reasonable and necessary to carry out the foundation’s exempt purposes and not excessive (IRC 4941(d)(2)(E)). - Transfer or use of the foundation’s income or assets for the benefit of a disqualified person (IRC 4941(d)(1)(E))
Covers guarantees, insurance premiums (unless compensatory), scholarships to relatives, or any indirect benefit. Incidental or tenuous benefits are generally not self-dealing. - Payments to government officials (IRC 4941(d)(1)(F))
Restricted with narrow exceptions for certain awards, scholarships, or reimbursements.
Important Exceptions and Permitted Transactions
The guide outlines numerous statutory and regulatory exceptions, including:
- Transactions without charge to the foundation
- Functionally related business activities with substantial public use
- Reasonable compensation for personal services (with rebuttable presumption safe harbor under Treas. Reg. § 53.4958-6)
- Certain corporate reorganizations and anonymous securities trades
- Banking services under specific conditions
- Pre-1969 leases and certain estate administration transactions
Indirect self-dealing rules (e.g., through controlled entities) receive dedicated coverage, along with control tests, business transaction exceptions, and grants to intermediaries.
Excise Taxes on Self-Dealing: Two-Tier Structure
IRC Section 4941 imposes a two-tier excise tax system:
| Party Liable | Initial (First-Tier) Tax | Additional (Second-Tier) Tax | Cap on Manager Tax (post-2006) |
|---|---|---|---|
| Self-dealer (disqualified person) | 10% of amount involved | 200% of amount involved | N/A |
| Foundation manager (knowing participation) | 5% of amount involved | 50% of amount involved | $20,000 per act |
- Amount involved: Generally the greater of fair market value or amount paid/received; for use of property, the fair rental value.
- Taxable period: Begins on the date of the act and ends on the earlier of correction, notice of deficiency, or assessment.
- Continuing transactions (e.g., ongoing leases or loans): New act occurs each year on January 1, with “pyramiding” of taxes.
Correcting Self-Dealing Transactions
Correction is critical to avoid second-tier taxes. Under IRC 4941(e)(3) and Treas. Reg. § 53.4941(e)-1(c), the foundation must be placed in a financial position no worse than if the transaction had not occurred.
Common correction methods (with examples in the guide):
- Rescind sales and return property plus net income
- Repay loans with market-rate interest differential
- Pay fair rental value for past use of assets
- Repay excess compensation
The guide includes detailed worksheets and exhibits showing calculations for sales, loans, property use, and uncorrected acts.
Reporting Requirements and Forms
- Form 4720: Used to report and pay Chapter 42 excise taxes. Separate forms required for organizations and individuals after 2019.
- Form 990-PF: Private foundations report self-dealing in Part VI and must disclose related transactions.
- Electronic filing is mandatory for most private foundations.
Failure to file or correct can extend statutes of limitations and trigger additional penalties.
Examination Techniques and Audit Tips from TG 58
Publication 5616 provides IRS examiners with practical tools, including:
- Issue indicators (e.g., no Form 4720 filed, loans to insiders, below-market rents)
- Distinguishing discrete vs. continuing transactions
- Statute of limitations protection strategies
- Abatement procedures (limited for first-tier 4941 taxes)
- Sample lead sheets and Thorne letters for proposing second-tier taxes
Private foundations can use these insights proactively to strengthen internal controls and documentation.
Real-World Examples from IRS Publication 5616
The guide features numerous fictitious but illustrative examples:
- Foundation loan to a disqualified person’s controlled corporation
- Below-market rental of foundation property to a family member
- Payment to a disqualified person with no services rendered
- Sale of mortgaged property subject to a recent lien
Each includes step-by-step tax calculations and correction steps.
How to Stay Compliant with IRC Section 4941?
- Maintain a current list of all disqualified persons.
- Review every transaction involving insiders for self-dealing risks.
- Document fair market value determinations and board approvals.
- Seek advance legal counsel for complex transactions.
- File Form 4720 promptly if a violation occurs and correct immediately.
- Download the latest IRS Publication 5616 PDF directly from IRS.gov.
Download IRS Publication 5616
Access the full 2024 revised guide here:
https://www.irs.gov/pub/irs-pdf/p5616.pdf
For related guidance, see:
- TG 57 (Taxes on Net Investment Income – IRC 4940)
- TG 59 (Failure to Distribute Income – IRC 4942)
- TG 63 (Disqualified Persons – IRC 4946)
Conclusion: Protect Your Private Foundation from Costly Self-Dealing Penalties
IRC Section 4941 and IRS Publication 5616 provide a comprehensive framework to prevent abuse while allowing legitimate foundation operations. By understanding disqualified persons, prohibited acts, exceptions, and correction procedures, foundations can avoid excise taxes that escalate rapidly.
Compliance is not optional — second-tier taxes can devastate a foundation’s endowment. Consult a qualified tax attorney or CPA familiar with private foundation rules, and regularly review transactions against the standards in Publication 5616 (Rev. August 2024).
Stay informed. Stay compliant. Your foundation’s charitable mission depends on it.
This article is for educational purposes only and is not legal or tax advice. Always consult IRS.gov and a professional advisor for your specific situation. Last updated based on the August 2024 revision of Publication 5616.