Treasury Department EO Priority Guidance Plan

Last Friday, the Treasury Department issued its annual “priority guidance plan.” In the Exempt Organizations category, it listed 10 items, 9 of which are the same as they were last year. (Thanks Paul Streckfus for the summary).  Some of the items have been on the list for many years, including the following, which is celebrating its ten-year anniversary on the list: “5. Guidance under §4941 regarding private foundation’s investment in a partnership in which disqualified persons are also partners.”

For the uninitiated, section 4941 prohibits self-dealing between private foundations and certain disqualified persons. The restrictions on self-dealing are much stricter than the restrictions that apply to transactions between public charities and their disqualified persons or than the restrictions that would be imposed by state fiduciary duty standards.  Therefore, they have the potential to significantly impact investment strategies by private foundations when those strategies include entities that also have disqualified persons as investors.

The ten-year anniversary of this item on the Treasury’s priority guidance plan is an opportunity to revisit a fantastic six-year-old article by Elaine Waterhouse Wilson, a professor at West Virginia University College of Law: Is Consistency the Hobgoblin of Little Minds? Co-Investment Under Code Section 4941. The article provides detailed background about private foundation investing practices and their interaction with multiple legal regimes. It then describes several private letter rulings that the IRS issued in the early 2000s that, “allow such an arrangement, on the notion that when a private foundation invests in a partnership, it is not entering into a transaction of any kind with either the partnership itself or the other partners.”  Because there is no transaction, “there can be no act of self-dealing.” Wilson argues that this theory is inconsistent with other code provisions and state-law partnership law, and so creates unnecessary problems.  Instead, she urges the Treasury to “provide a limited regulatory safe harbor allowing such transactions” but make sure that the guidance communicates that “the subsequent use of the asset in a manner that is not consistent with proportionate co-ownership may be an act of self-dealing[.]” Professor Wilson’s treatment of the subject is required reading for anyone interested in the issue, and well illustrates how difficult it is to craft good regulatory guidance.

Benjamin Leff