Every year thousands of people in cities and towns across the country generously purchase tickets to attend one or more gala fundraisers to help support their favorite charities. Although the cost to attend a gala fundraiser may vary widely, from the charity's point of view, the hope is to turn a "profit" so that the charity will have additional resources to conduct its activities.

Although most party-goers will pay the cost to attend a charity gala from their personal funds, or from their business, it is not uncommon to review a charity's list of ticket purchasers and find that one or more tickets (or even full tables) were purchased by a family or company foundation. Despite the frequency of this, except in very specific circumstances, such expenditures by a family or company foundation could prove to be costly.

Under the tax law, a foundation may not use its assets to benefit certain individuals (known as disqualified persons). Disqualified persons generally include board members, officers, donors who contribute more than certain specified amounts, certain family members and businesses that are treated as related to the other disqualified persons. When a foundation provides an economic benefit to a disqualified person, the tax law considers the benefit an act of self-dealing. The use of a foundation's assets to purchase a ticket for a disqualified person is an act of self-dealing because a ticket to a gala fundraiser has at least some economic value (thereby giving the disqualified person a personal benefit). When an act of self-dealing occurs, both the disqualified person and the foundation manager(s) (e.g., board members) who assist in the act will be subjected to substantial excise taxes. (One common exception to this rule is when a foundation purchases tickets, but the tickets go unused.)

A question that often arises is whether a person can avoid the self-dealing rules by dividing the cost of the ticket (i.e., by having the disqualified person pay the fair value of the ticket and having the foundation pay the balance). Unfortunately, the Internal Revenue Service has taken the position that clever strategies such as this will not avoid self-dealing.

Although less commonly seen, the same prohibition applies to a donor-advised fund — such funds cannot be used to purchase tickets to a gala fundraiser. These circumstances are less common because most donor-advised funds (and community foundations) will explicitly prohibit such payments and professionals are typically monitoring the distribution of funds.

This is an important example of why operating a foundation can be a tricky business. The laws impacting charitable organizations (including family foundations) and the use of foundation funds are complicated. If you are involved with a charity or are thinking of becoming involved with one, make sure you seek experienced, skilled professionals to work with you and your organization.

And one final note, if you are planning to support your favorite charity by attending its gala fundraiser, the safest approach is to pay for the tickets yourself and have a great time at the event!

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