Closed-year interest remains in the balance for open-year self-dealing tax

Plain-English summary

A private foundation made a self-dealing loan to a disqualified person, and unpaid interest was added to the loan balance each year. By the time of examination, the assessment period had expired for the original loan and some early deemed acts of self-dealing. Chief Counsel advised that section 6501 prevents assessment of excise tax for those closed-year acts but does not erase accrued interest or principal changes from the loan balance. Each later deemed act has its own amount involved and limitations period. The balance used for an open year must therefore include unpaid interest accrued during closed years.

Ruling snapshot

• Question: Does interest accrued in closed years remain part of the loan balance used to compute the amount involved for open-year self-dealing acts?
• Outcome: Advice given, closed-year accrued interest remains in the balance for open-year computations
• Key authorities: IRC §§ 4941 and 6501; Treas. Reg. § 53.4941(e)-1

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       memorandum
       Number: 202243008
       Release Date: 10/28/2022
       CC:EEE:EOET:EO1:CHyde
       POSTS-129069-20

UILC: 4941.05-02

date: September 26, 2022

 to:   Casey Lothamer
       Area Counsel (Mid-Atlantic Area)
       (Tax Exempt and Government Entities)

from: Lynne A. Camillo
Deputy Associate Chief Counsel (Exempt Organizations and Employment Taxes)
(Employee Benefits, Exempt Organizations, and Employment Taxes)

subject: Amount Involved in a Section 4941 Self-Dealing Loan - Interest and the Effect of the
Period of Limitations

       This Chief Counsel Advice responds to your request for assistance. This advice may not
       be used or cited as precedent.

       ISSUE

       You have asked whether, for purposes of the section 4941(a)(1)1 excise tax on a self-
       dealing loan, interest that accrues2 on the loan during years for which the section 6501
       period of limitation has closed (a “closed year”) is included in the loan balance to
       compute the amount involved for the deemed acts of self-dealing that occur in years for
       which the period of limitations is still open (an “open year”).

       CONCLUSION

       Interest that accrues during closed years is included in the loan balance to compute the
       amount involved for the deemed acts of self-dealing in open years. Section 6501
       generally prohibits the assessment of amounts of tax more than three years after the
       filing of a return. Although the Service may not assess the section 4941 excise tax for
       acts of self-dealing that occurred in closed years, any accrued interest and principal

       1 Unless otherwise noted, all section references are to the Internal Revenue Code of 1986, as amended.
       2 References to accrued interest in this memo assume that the disqualified person has not paid the

       accrued interest.

POSTS-129069-20 2

payments from closed years affect the loan balance going forward and must be
accounted for to determine the amount involved for deemed acts of self-dealing that
occur in open years.

FACTS

A private foundation makes a loan to a disqualified person described in section 4946(a),
which constitutes an act of self-dealing under section 4941(d)(1)(B). Unpaid interest is
to be added to the loan balance each year. The disqualified person does not make any
payments of interest or principal. By the time the loan is addressed during an
examination, the period of limitations has expired for the initial act of self-dealing that
occurred on the date the loan was made and for several of the earliest deemed acts of
self-dealing within the taxable period.3

LAW AND ANALYSIS

Section 4941(a)(1) imposes an excise tax on each act of self-dealing between a
disqualified person and a private foundation. The rate of tax is equal to 10% of the
amount involved with respect to the act of self-dealing for each year (or part thereof) in
the taxable period.

Section 4941(e)(1) defines “taxable period” as the period beginning with the date on
which the act of self-dealing occurs and ending on the earliest of (1) the date of mailing
of a notice of deficiency with respect to the section 4941(a)(1) tax, (2) the date on which
the section 4941(a)(1) tax is assessed, or (3) the date on which correction of the act of
self-dealing is completed.

Section 4941(e)(2) defines the term “amount involved” as, in general, the greater of the
amount of money and the fair market value of the other property given or the amount of
money and the fair market value of the other property received with respect to an act of
self-dealing. In the case of taxes imposed by section 4941(a), the fair market value is
determined as of the date on which the act of self-dealing occurs.

Section 6501(a) provides that, generally, the amount of any tax imposed shall be
assessed within three years after the filing of a return.

Section 6501(l)(1) provides that for purposes of any tax imposed by chapter 42 (other
than section 4940), the return referred to in section 6501 is the return filed by the private
foundation for the year in which the act (or failure to act) giving rise to liability for such
tax occurred.

3 In general, a separate period of limitations applies to each deemed act of self-dealing beginning when

the private foundation files its Form 990-PF for the foundation’s taxable year in which the deemed act of
self-dealing occurred. See section 6501(l)(1).
POSTS-129069-20 3

Treas. Reg. § 53.4941(e)-1(b)(2)(ii) provides that where the use of money or other
property is involved, the amount involved shall be the greater of the amount paid for
such use or the fair market value of such use for the period for which the money or
other property is used.

Section 53.4941(e)-1(b)(3) provides that, in the case of taxes imposed by section
4941(a), the fair market value of the property or the use thereof is determined as of the
date on which the act of self-dealing occurred.

Section 53.4941(e)-1(b)(4), Ex. 2 illustrates that when the amount involved is
determined based on the fair market value of the use of money, it is computed by
multiplying the loan balance on the date the act of self-dealing occurred, the fair market
interest rate on that date, and the period of use.

Section 53.4941(e)-1(e)(1)(i) provides that if a transaction relates to the leasing of
property, the lending of money or other extension of credit, other use of money or
property, or payment of compensation, the transaction will generally be treated as giving
rise to an act of self-dealing on the day the transaction occurs, plus an act of self-
dealing on the first day of each taxable year or portion of a taxable year which is within
the taxable period and which begins after the taxable year in which the transaction
occurs.

Section 53.4941(e)-1(e)(1)(ii), Ex. 2 illustrates that where a continuing act of self-
dealing, such as a lease, occurs over a four-year period, there are four separate acts of
self-dealing, four amounts involved, and four taxable periods.

A self-dealing loan is generally treated for purposes of section 4941 as giving rise to an
act of self-dealing on the date the loan occurs (the “initial act of self-dealing”) plus an act
of self-dealing on the first day of each taxable year or portion of a taxable year that is
within the taxable period.4 (These additional acts of self-dealing are referred to in this
memo as “deemed acts.”) For each deemed act, there is a separate taxable period
beginning on the date the deemed act occurred and a separate amount involved. See
§ 53.4941(e)-1(e)(1)(ii), Ex. 2.

The section 4941(a)(1) excise tax is equal to 10% of the amount involved with respect
to an act of self-dealing for each year (or part thereof) in the taxable period. The amount
involved in an act of self-dealing involving the use of money (such as a loan) is the
greater of the amount paid for such use (i.e., the interest paid) or the fair market value
of such use for the period used. Under the facts presented, no amount of interest was
paid by the disqualified person for use of the loan. Accordingly, the amount involved for
each act of self-dealing must be computed based on the fair market value of use of the

4 The relevant taxable year for determining when a deemed act of self-dealing occurs is the taxable year

of the disqualified person rather than that of the private foundation. See Rev. Rul. 75-391, 1975-2 CB

446. As noted above, however, the filing of Form 990-PF for the foundation’s taxable year in which the
     deemed act occurs starts the limitations period for the deemed act.
     POSTS-129069-20 4

outstanding loan balance due to the private foundation, which includes the principal
remaining on the loan and any accrued but unpaid interest. The fair market value of
such use is computed by multiplying the loan balance on the date the act of self-dealing
occurred, the fair market interest rate on that date, and the period of use. See
§ 53.4941(e)-1(b)(3) and (4), Ex. 2.

To compute the amount involved for a deemed act of self-dealing, the loan balance as
of the date the deemed act occurred must be determined, taking into account any
accrued interest on the loan and payments of principal up to that date.5 The amount
involved for a deemed act of self-dealing is determined as of the date the deemed act
occurred and is not affected by expiration of the period of limitations for an earlier act of
self-dealing.

The effect of section 6501 is that the Service may not assess amounts of tax for acts of
self-dealing that occurred in closed years. However, the loan balance, including accrued
but unpaid interest, is not an amount of tax. Section 6501 does not prevent accrued
interest and payments of principal, regardless of whether they were incurred or made in
open or closed years, from affecting the loan balance used in determining the amount
involved.6

Consequently, interest that accrues on a loan during closed years is included in the loan
balance to compute the amount involved for a deemed act of self-dealing that occurs in
an open year.

Please call Christopher Hyde at 202-317-5800 if you have any further questions.

5 See Rev. Rul. 2002-43, 2002-28 IRB 85; see also Rev. Rul. 2006-38, 2006-29 IRB 80. Although these

revenue rulings apply to prohibited transactions under section 4975, they illustrate general principles used
to calculate the amount involved, because the amount involved in both rulings is determined by the
application of § 53.4941(e)-1, which governs both section 4941 and section 4975. See Temp. Reg.
§ 141.4975-13. Although Rev. Rul. 2006-38 states that it does not apply to self-dealing violations under
section 4941, we believe this caveat is directed to the fact that the section 6621(a)(2) underpayment rate
used to calculate the amount involved when an employer does not timely pay elective deferrals to a
qualified plan may not be appropriate for self-dealing violations under section 4941. Rev. Rul. 2006-38 is
cited here only to the extent it applies and illustrates the general principles of Treas. Reg. § 53.4941(e)-1.
6 It is well recognized that with respect to net operating losses, the Service may make adjustments to

items originating in years otherwise barred by the period of limitations under section 6501 in order to
determine the tax for an open year to which those items are carried. See Mennuto v. Commissioner, 56
T.C. 910, 923 (1971) (“[T]he critical element is that the deficiency being determined is for a year on which
the period of limitations has not run.”).