Accrued unpaid interest and principal payments will be included in calculating excise taxes on self-dealing loans after the expiration of the limitations period

Last month the Internal Revenue Service (“IRS”) revised Technical Guide 58 (“TG58”) concerning the excise taxes imposed for self-dealing transactions between private foundations and disqualified persons. While Technical Guides are not official announcements of law, they provide helpful insight into the posture of the IRS at the time of their publication.

Internal Revenue Code (“IRC”) § 4941 prohibits financial transactions between a private foundation and disqualified persons (a.k.a., acts of self-dealing) and imposes an excise tax on both, the private foundation and the disqualified persons, for engaging in such transactions. Disqualified persons include substantial contributors to the foundation, foundation managers and their family members.

With limited exceptions, self-dealing transactions include the furnishing of goods, services, or facilities for the benefit of disqualified persons. IRC § 6501 sets the period of limitations (i.e., the time during which excise taxes can be assessed for self-dealing) to no more than three years after the filing of the tax return for the year in which the self-dealing took place.

The update to TG58 cites a recent IRS advisory opinion in which advisory counsel addressed whether unpaid interest and principal payments on a self-dealing loan that accrued during years for which the period of limitations was closed should be included in the loan balance to compute the amount of tax due for the years in which the period of limitations is open.

The advisory opinion took the position that since the unpaid interest and principal payments affect the loan balance into the future, they must be included in computing the tax due for the self-dealing transaction, despite having accrued during closed years. 

This advisory opinion heightens the consequences for private foundations that engage in self-dealing transactions, even if inadvertently.

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This information is for educational purposes only to provide general information and a general understanding of the law. It does not constitute legal advice and does not establish any attorney-client relationship.