Undoubtedly, your foundation is asked from time to time to buy tickets to events sponsored by the organizations your foundation supports. You have also probably noticed that the invitations to those events describe a portion of the cost that is tax-deductible and a portion that is not. For example, if you are invited to a charitable fund-raising dinner, the cost of the dinner itself is not deductible.
Therein lies the problem for the private foundation purchasing the ticket: if the person attending the event is a "disqualified person" relative to the foundation (the foundation creator, a trustee, their family or employees, etc.), generally it is a violation of the private foundation self-dealing rules for the foundation to pay any part of the non-deductible portion since that portion (for the meal, entertainment, etc.) benefits the disqualified person.
Can the family foundation pay the deductible portion and the disqualified person pay the nondeductible portion? No, says the IRS in a 1990 private letter ruling. Even the deductible portion provides an indirect benefit to the individual, and that's also prohibited.
Thus, your foundation should consider having a policy that the individual attendees, not the foundation, pay for 100% of the cost of any charitable event ticket.
Another common problem involves writing a foundation check to pay for a personal pledge made by an individual associated with the foundation. In most states, a written pledge to a charity gives rise to an enforceable debt (in New Jersey, even an oral pledge may be enforceable). If a foundation pays the pledge of a disqualified person (i.e., that person's debt), it violates the private foundation self-dealing rules.
Thus, individuals connected with the foundation should make it clear (preferably, in writing) that their pledges are being made on behalf of the foundation. Otherwise, if the foundation pays the individual's pledge, it will be liable for excise taxes, and it could potentially jeopardize the foundation's tax exempt status.
It is our sense that many family foundations are not always careful in dealing with either of the above situations. If your foundation has been too casual in the past, you should change your practices. If you have questions about your foundation's prior practices, you should contact the attorney who has been assisting you in the creation and governance of your family foundation.
