Sharing Office Space

Question:

Can a company provide office space to the company foundation?

Answer:

A parent company can always provide the company foundation with office space as long as it does so free of charge. While it is even possible for the parent company and the foundation to share the cost of office space, great care needs to be taken to structure the arrangement in a manner that does not violate the prohibition against self-dealing.

Background: The self-dealing rules prohibit private foundations, including company foundations, from entering into a range of financial transactions with disqualified persons. Among those considered disqualified persons are substantial contributors to the foundation. The parent company is virtually always a substantial contributor and thus a disqualified person in relationship to the company foundation.

Sharing Office Space: The parent company may provide free office space to the foundation. However, the company will not be able to claim a charitable deduction for such a contribution. Because of the self-dealing prohibition, the parent company may not charge the foundation for the use of the office space. Whether the amount of rent is reasonable or even drastically below the market rate does not matter. While it may be possible for the foundation to sublease space if it pays rent directly to a third party landlord (that is not a disqualified person), these arrangements can be complicated and legal counsel should be consulted before entering into them.

Obtaining Related Services: When a foundation leases space there are often additional expenses, including fees for utilities, maintenance, and/or parking. As with office space, the self-dealing rules prohibit the foundation from paying the parent company directly for these services but the foundation may pay third-party vendors to provide them. The parent company may also provide these services to the foundation without charge.