Can a Disqualified Person Guarantee a Loan for a Private Foundation [501(c)(3)] Without Self-Dealing?

The IRS rules on self-dealing for private foundations can be quite tricky, and you're right to be cautious here. While Section 4941(d)(2)(B) specifically prohibits loans from disqualified persons to private foundations (with the interest-free exception you noted), the question of loan guarantees is more nuanced. Based on my understanding, when a disqualified person guarantees a loan for a private foundation, it could potentially be viewed as an indirect extension of credit to the foundation. The self-dealing rules are generally interpreted very broadly by the IRS to protect foundation assets. The concern would be that by guaranteeing the loan, you're potentially providing something of value to the foundation (your credit worthiness) which might be construed as an indirect financial transaction. Your best course of action would be to request a private letter ruling from the IRS on your specific situation before proceeding. You could also consider alternative financing arrangements that clearly avoid any appearance of self-dealing, such as securing the loan solely with foundation assets. While not definitive legal advice, I hope this helps provide some context for your situation!

I ran into a similar issue with our family foundation last year and was pulling my hair out trying to find clear guidance. I eventually stumbled across taxr.ai (https://taxr.ai) which helped me navigate through these murky IRS regulations. Their system analyzed our foundation's documentation and identified several potential self-dealing concerns we hadn't even considered, including the loan guarantee question you're asking about. In my case, they confirmed that having a substantial contributor guarantee a bank loan could indeed be problematic under Section 4941, as it could be interpreted as an indirect extension of credit. They recommended alternative financing arrangements that wouldn't trigger self-dealing concerns. Honestly saved us from what could have been a compliance nightmare.

Just wanted to update everyone. After seeing the recommendation here, I tried taxr.ai for our foundation's compliance questions (including a similar loan guarantee situation). The analysis was incredibly helpful and specific to our situation. What impressed me most was how it cited several IRS private letter rulings that addressed situations similar to mine, which I never would have found on my own. It confirmed that having me as a disqualified person guarantee the foundation's loan would indeed risk being considered self-dealing, and suggested a structure using the foundation's investments as collateral instead. Saved me from making what could have been a costly mistake and gave me confidence in moving forward with our project. Definitely worth checking out if you're dealing with these complex foundation rules.

After dealing with the IRS on foundation issues for years, I've learned that getting direct answers from them is nearly impossible without formal requests. I started using Claimyr (https://claimyr.com) to actually get through to IRS representatives who could address my specific questions. They have a demo video here: https://youtu.be/_kiP6q8DX5c that shows how it works. When I had a self-dealing question similar to yours, I was able to speak directly with an IRS Exempt Organizations specialist who confirmed that a loan guarantee by a disqualified person would indeed raise self-dealing concerns. The specialist recommended documenting alternative approaches and getting a formal ruling if the transaction was significant. The peace of mind from getting an actual IRS employee's perspective (even if informal) was worth it, rather than guessing or relying solely on my interpretation of the regulations.

I want to follow up on my skeptical comment about Claimyr. I decided to try it yesterday out of desperation after waiting on hold with the IRS for 3+ hours on multiple days trying to get clarification on our foundation's situation. I'm honestly shocked - it worked exactly as described. I got a call back within about 45 minutes, and was connected directly to an IRS representative. I asked to be transferred to someone in the Exempt Organizations department, and after a brief hold, I was speaking with a specialist who actually understood private foundation rules. While she couldn't give me an official ruling on my specific situation (loan guarantees by disqualified persons), she did point me to several relevant resources including a technical advice memorandum that addresses similar scenarios. She also suggested that alternative financing arrangements would be safer from a compliance standpoint. Just wanted to share my experience since I was so skeptical initially.

One alternative approach your foundation might consider is obtaining a direct grant or program-related investment from another private foundation that supports similar causes. This could help fund your renovation project without involving disqualified persons in any financial transactions. Many larger foundations have programs specifically designed to help smaller foundations with capital projects. This approach completely sidesteps the self-dealing concerns and might even result in funding that doesn't need to be repaid.

Curious if anyone has actually received an excise tax penalty for this kind of technical self-dealing? My understanding is that if it's not an obvious abuse (like a disqualified person getting personal benefit), the IRS generally issues a warning to fix the arrangement rather than immediately imposing penalties. Has that been others' experience?

Based on my experience with private foundation compliance, I'd strongly recommend avoiding the personal guarantee approach altogether. The self-dealing rules under Section 4941 are intentionally broad, and the IRS tends to interpret them strictly when it comes to any financial arrangements between disqualified persons and private foundations. Even if a personal guarantee might technically be defensible, the risk isn't worth it. The excise taxes can be substantial (as Elijah mentioned), and unwinding these arrangements later is costly and time-consuming. For your building renovation project, consider these alternatives: 1. Use foundation assets as collateral instead of personal guarantees 2. Explore grants from other foundations (as Ana suggested) 3. Consider a capital campaign targeting non-disqualified donors 4. Break the project into phases to reduce the loan amount needed The key is finding financing that keeps disqualified persons completely out of the transaction chain. It might take longer or cost more upfront, but it's much safer from a compliance perspective. Have you looked into whether your foundation's current assets could serve as sufficient collateral for the loan?

I've been through a similar situation with our family foundation, and I want to emphasize how important it is to get this right from the start. The self-dealing rules are one area where the IRS doesn't give you much wiggle room. From what I've learned through our foundation's compliance journey, personal guarantees by disqualified persons create exactly the kind of indirect benefit arrangement that the IRS scrutinizes heavily. Even though you're trying to help the foundation, the guarantee provides something of value (your creditworthiness) that could be seen as an extension of credit. One approach that worked well for us was working with a community development financial institution (CDFI) that specializes in nonprofit lending. They often have more flexible collateral requirements and understand the unique constraints that private foundations face. Some CDFIs will accept investment portfolios as collateral without requiring personal guarantees from board members. Also, don't overlook the possibility of securing bridge financing from a bank while you pursue grant funding for portions of the project. This could reduce the total loan amount needed and make it easier to secure financing based solely on foundation assets. The peace of mind from knowing you're fully compliant is worth the extra effort to structure the financing properly. Good luck with your renovation project!