Helping Former Employee Creates Complex Problems for Private Foundation

Where we started: Two philanthropists decided to help a former employee launch a management company by having an investment company they own make a capital contribution to the newly formed management company in exchange for 50 percent of the equity. The plan was for the management company to provide management services to charitable private foundations created by the philanthropists.

Fortunately, the philanthropists checked with us before the private foundations engaged the management company to ensure such an arrangement would not present tax or other issues. The principal concern was whether the private foundations would be engaged in a prohibit transaction if they engaged the management company because of the philanthropists’ indirect 50-percent equity ownership of the management company.

Our strategy – plus more: Our attorneys analyzed the relationship of the parties, which were complicated by the fact that some of the private foundations were created jointly by the philanthropists when they were married and some were created separately by each philanthropist after they divorced. We worked through the intricacies of the prohibited transaction rules in the Internal Revenue Code and regulations, and suggested alternatives to the proposed arrangements.

Upshot: We were able to create a structure that allowed the desired arrangement to proceed, much to the satisfaction of our client, and we continue to advise them.