October 30, 1997 | Read Time: 1 minute
The U.S. Tax Court has ruled that a Denver museum’s use of a maintenance-services company owned largely by a museum manager was improper.
The Museum of Outdoor Arts was created as a private foundation by John W. Madden, Jr., and others, and set up at an office complex. Most of the artwork of the “museum without walls” is displayed outdoors along public thoroughfares that run throughout the complex of 49 commercial buildings spread over 200 acres of land. For several years, the museum turned to the maintenance company owned mostly by Mr. Madden to do its janitorial work for special events that the museum staged at the office complex.
The I.R.S. said the arrangement was “self-dealing” because the law forbids the “furnishing of goods, services, or facilities” between a private foundation and someone close to the organization. The museum, however, argued that the arrangement qualified for an exception under the law for certain arrangements that would otherwise be self dealing: when a foundation provides compensation for “personal services” that are reasonable and necessary for the foundation to carry out its mission. Although the statute does not define the term “personal services,” federal regulations give as examples legal and banking services.
The Tax Court sided with the I.R.S. Federal law and regulations on “personal services” should not be interpreted broadly to include maintenance and janitorial work, the court said. “The services in the regulations are essentially professional and managerial in nature,” it said. To rule otherwise, the court added, would go against the intention of Congress to prohibit self-dealing: “Any exceptions to the self-dealing transactions rules should be construed narrowly.” (John W. Madden, Jr., et al., v. Commissioner of Internal Revenue, T.C. Memo. 1997-395.)
