TAX ALERT  |  September 03, 2021

The IRS recently announced that it would no longer issue private letter rulings (PLRs) on whether an act of self-dealing occurs when a private foundation owns or receives an interest in a limited liability company (LLC) or other entity that owns a promissory note issued by a disqualified person. 

Background 

Tax-exempt private foundations described in sections 501(c)(3) and 509(a), non-exempt charitable trusts described in section 4947(a)(1) and certain split interest trusts described in section 4947(a)(2) are subject to the section 4941 prohibition against self-dealing. Transactions between a disqualified person and a private foundation, including the lending money or other extensions of credit generally constitute prohibited acts of self-dealing. These acts can be direct or indirect (e.g., between a disqualified person and an organization controlled by the private foundation). 

Treas. Reg. section 53.4941(d)-2(c)(1) provides that self-dealing includes the transfer of a note, the obligor of which is a disqualified person, by a third party to a private foundation that becomes a creditor under the note.  

In recent years, the IRS has issued a number of PLRs that involved the transfer of a disqualified person’s note to an LLC in which a private foundation had a non-controlling interest. In each of these rulings, the IRS held that the proposed transaction would not constitute an impermissible act of self-dealing. Refer to, e.g., PLRs 202101002, 202037009, 201907004, 201407023 and 201407021. 

Rev. Proc. 2021-40 

The IRS is currently reviewing its prior ruling position on whether self-dealing includes a private foundation’s interest in an LLC or other entity that owns a disqualified person’s promissory note. Therefore, and in the interest of sound tax administration, the IRS will no longer issue a ruling on this matter. Any rulings affected by this announcement currently pending before the IRS will be closed, and the IRS will refund the user fee.