Internal Revenue Code sections 4941 and 4946 prohibit various transactions between private foundations and certain "disqualified persons." For instance, disqualified persons are not allowed to sell or rent property to the private foundation, even for fair market value.
Disqualified persons include:
1. A substantial contributor to the private foundation (generally gave more than $5,000 in total),
2. A foundation manager, and
3. Members of their family.
Section 4946(d) explains that for this purpose, family members include only the spouse, ancestors, children, grandchildren, great grandchildren, and the spouses of children, grandchildren, and great grandchildren. As a result, Bill Gates can't sell property to his mother-in-law's private foundation, but his mother-in-law can sell property to Bill Gates's private foundation.
Under a separate rule in Internal Revenue Code section 108(e)(4), a mother-in-law can buy the debts owed by her son-in-law without triggering adverse tax consequences, while the son-in-law who buys debts owed by the mother-in-law would cause the mother-in-law to pay more taxes. The policy rationale of this rule is left as an exercise to the reader.
More after the jump...
Section 4946(d) is part of the general schizophrenia in the Internal Revenue Code on who counts as a family member, depending on whether being a family member is a good thing, a bad thing, or too much of a good thing and on what the Congressional staffer ate for lunch that day. Some examples of different family definitions:
Section 108(e)(4)(B). the family of an individual consists of the individual's spouse, the individual's children, grandchildren, and parents, and any spouse of the individual's children or grandchildren.
Section 267(c)(4). The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants.
Section 318(a)(1)(A). An individual shall be considered as owning the stock owned, directly or indirectly, by or for—(i) his spouse, and (ii) his children, grandchildren, and parents.
Section 529(e)(2). The term “member of the family” means, with respect to any designated beneficiary, [various family members]; and (D) any first cousin of such beneficiary.
Section 1361(c)(1)(B). The term “members of a family” means a common ancestor, any lineal descendant of such common ancestor, and any spouse or former spouse of such common ancestor or any such lineal descendant. An individual shall not be considered to be a common ancestor if, on the applicable date, the individual is more than 6 generations removed from the youngest generation of shareholders who would (but for this subparagraph) be members of the family.
As Harper Lee might have written in To Kill a Mockingbird, "you can choose your friends but you sure can't choose your family, unless you work in the tax-writing section of the House Committee on Ways and Means."