Self-Dealing Expansion
This Expansion elaborates upon Line 2 of
Schedule A's Part III (Statement About
Activities) found at page 2 of Schedule A.
Line 2 asks whether the filer engaged in any of a
number of specified transactions (which we have
referred to in the text generally as
"self-dealing transactions.") with
specified persons. Below we analyze each
such transaction. Here is Line 2.
As may be noted, there are five categories of
transactions asked about (Lines 2a –
e). For each such type of transaction, the
filer is required to check a "Yes" or
"No" block to indicate whether it
engaged in such a transaction. If it
answers the question “Yes,” it is
required to attach a statement explaining the
transaction.
Line 2 asks if the filer had any of the specified transactions.
Those persons are the filer’s trustees, directors, officers,
creators, key employees, or members of their families, or any taxable
organization with which any such person is affiliated as an officer,
trustee, majority owner, or principal beneficiary. It will
be noticed that these are all persons who might have sufficient
control over the filer to cause it to engage in improper activities.
We refer to any of these persons below as a "Line 2-party."
In our analysis we focus on transactions that
might seem to be improper, as we believe these
kinds of transactions are the target of Line
2. Near the end of the Expansion we point
out that it is entirely possible that such
transactions may have benefited the filer and
thus are not improper. While the lines
covering the particular transaction in question
in such cases would be answered "Yes,"
their "innocent" nature world be
explained in the attachment that, as noted, is to
be made for any question answered
"Yes."
Let us now consider some of the principal ways
that the transfers inquired about in Line 2 may
be made between a Line 2-party and the
filer. First, a Line 2-party may have sold
or leased property to the filer at a price above
its far market value [1] or the filer may
have sold or leased property to a Line 2-party at
a price below fair market value. In any of
these cases, the filer would be required to
answer Line 2a, “Yes” and attach a
detailed statement explaining the transactions.
Second, the filer may have lent money to a
Line 2-party at an interest rate below the market
rate or on some other favorable conditions or a
Line 2-party may have made a loan to the filer at
an interest rate above the market or on some
other unfavorable conditions. [2] In any of
these cases, the filer would be required to
answer Line 2b, “Yes” and attach a
detailed statement explaining the transactions.
Third, the filer may have hired a Line 2-party to perform services
for it for consideration above what the market would bear or on
some other favorable conditions. For example, the filer may
engage a board member to place its liability insurance at a brokerage
rate in excess of what would normally be paid and the engagement
may have been made without canvassing other brokers to ascertain
whether they might perform superior services at a lower price. [3]
Another example would involve the filer making its facilities available
to a Line 2-party for some private reason of the Line 2-party (e.g.,
his daughter’s wedding) either without the Line 2-party compensating
the filer for the use of the facilities or compensating the filer
at a rate below that at which the filer usually makes the facilities
available. [4] Allowing a
Line 2-party to use an automobile belonging to the filer for his
private use for more than a de minimis amount of time would be another
example of such a transfer. Or a Line 2-party may have furnished
goods, etc., to the filer at price above that which would be considered
reasonable. In any of these cases, the filer would be required
to answer Line 2c, “Yes” and attach a detailed statement
explaining the transactions.
Finally, the filer may have transferred funds or other assets to
a Line 2-party for no reason other than to shift assets of the filer
improperly into the private hands of the Line 2-party, that is,
to loot the filer. This may involve simply the transfer of
cash or it may involve paying bills of the Line 2-party without
reporting the payments as part of compensation. These latter
transfers might include defraying a Line 2-party’s children's
tuition or club dues and expenses in circumstances where the club
was not used by the key employee to advance the exempt organization's
exempt purposes or the furnishing of a home to live in, the value
of which would not be excluded from the key employee's gross income
under § 119 of the Code. [5]
Gifts [6]
and transfers of income or other assets not treated as compensation
(such as flat-out looting) would be reported here. In any
of these cases, the filer would be required to answer Line 2e, “Yes”
and attach a detailed statement explaining the transactions.
It is barely conceivable that this question would be answered "Yes,"
but again if someone knew of such transfers and had access to the
Form 990 that answered the question "No," further action
might be suggested.
It should be realized that the transactions
covered by Line 2 in many cases might be of
benefit to the filer and the farthest thing from
an improper act. For example, a board
member might have sold the filer some property at
a price below market value. Or a board
member might have made a loan to the filer to
help it through a bad period. [7] In these
cases, the filer would also answer the relevant
Line 2 question "Yes." These
transactions would be described in the attached
statement where it would be explained that they
were made for the benefit of the filer and not
the board member. Indeed, if the filer
answers any of the Lines 2a through 2e
"Yes" and does not attach a statement
explaining the transaction, a reader might
suppose that the filer was not disclosing aspects
of the transactions that it believed would
embarrass it. In these circumstances a
determined reader might inquire of the filer why
no statement was attached.
Line 2d asks about the payment of compensation
(or payment or reimbursement of expenses if more
than $1,000) to any Line 2-party. The
Instructions make clear that: "If the only
compensation or payment relates to amounts
reported in Part V of Form 990, or Part IV of
Form 990-EZ, check 'Yes' and write 'See Part V,
Form 990,' or 'See Part IV of From 990-EZ,' on
the dotted line to the left of the entry
space." Here is where an organization
would list compensation in excess of $1,000 paid
to members of the families of officers,
directors, key employees, etc. Such
payments may give pause.
Note, Line 2 asks whether "the
organization, either directly or indirectly,
engaged in any of the following acts..." The
word "indirectly" covers the situation
where the sale or loan, etc., was made to or by
an affiliate of the filing organization, although
the Instructions do not make this clear and there
is no indication of how "related" the
second, affiliated organization needs be to have
the transaction listed here. [8]
It should be noted that there is one kind of
self-dealing transaction that will not be picked
up by the Form 990, namely, what is sometimes
called appropriation of a corporate
opportunity. For example, if a board member
learns of an opportunity through his service on a
nonprofit board and takes advantage of the
opportunity for himself [9] , this may not be
a strictly self-dealing transaction but it would
be a clear conflict of interest and
improper. The Form 990 would not pick it
up.
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