Form 8261 Instructions: Filing for a Self-Dealing Act

Form 8261, Information Return by an Issuer of a Publicly Offered Security, is a specialized information return filed with the Internal Revenue Service. It is used to report the issuance of certain debt instruments that are an act of self-dealing involving a private foundation. This form is filed by the entity that creates the debt, not the private foundation or the individuals involved. It serves as a notification to the IRS that a transaction with potential tax implications has occurred.

Understanding Self-Dealing and Disqualified Persons

Private foundations are charitable organizations, often funded by a single source like an individual, family, or corporation. They are subject to strict regulations to ensure their assets are used for charitable purposes. The prohibition of “self-dealing,” which are specific financial transactions between the foundation and a “disqualified person,” is a central part of this regulation. These rules prevent individuals with influence over a foundation from using its assets for personal benefit.

A disqualified person includes individuals and entities with a close relationship to the private foundation. This category includes any substantial contributor, which is a person who has given more than $5,000 if it amounts to over 2% of the total contributions received by the foundation since its inception. Foundation managers, such as officers, directors, or trustees, are also considered disqualified persons, as are owners of more than 20% of a business that is a substantial contributor.

Family members of the individuals mentioned above are also included in the definition of a disqualified person. This includes spouses, ancestors, children, grandchildren, great-grandchildren, and the spouses of these descendants. Furthermore, a corporation, partnership, trust, or estate is a disqualified person if more than 35% of its ownership or beneficial interest is held by other disqualified persons.

For Form 8261, the relevant act of self-dealing is the lending of money or other extension of credit between a private foundation and a disqualified person. When a disqualified person issues a debt instrument, such as a bond or a note, and a private foundation purchases it, a prohibited act of self-dealing has occurred. This triggers significant excise tax consequences for the disqualified person.

Identifying the Filer

The responsibility for filing Form 8261 falls on the issuer of the debt instrument. The filer is the corporation, partnership, or other entity that created and offered the evidence of indebtedness, not the private foundation or the disqualified person.

For example, if a corporation that is a disqualified person issues corporate bonds and the private foundation uses its assets to purchase them, an act of self-dealing has occurred. The corporation that issued the bonds is the “issuer” and bears the legal obligation to prepare and submit Form 8261 to the IRS.

Information Required to Complete Form 8261

Before completing Form 8261, the issuer must gather specific details about itself, the disqualified person, and the debt instrument. The most current version of the form should be obtained from the IRS website. The form is structured into three parts.

Part I of the form is focused on the issuer of the debt. This section requires the filer to provide its legal name, full mailing address, and its Employer Identification Number (EIN).

Part II requires information about the disqualified person who is a party to the self-dealing act. The issuer must enter the disqualified person’s name, address, and Taxpayer Identification Number (TIN).

Part III delves into the specific details of the debt instrument itself. The issuer must report the date the debt was incurred, the total face amount of the debt instrument, and the principal balance at the beginning and end of the issuer’s tax year. The form also requires the stated interest rate on the debt and the total amount of interest paid to the private foundation during the tax year.

Filing Procedures and Deadlines

The form must be submitted via mail, as no electronic filing option is available for this return. The issuer should consult the most recent instructions for Form 8261 to confirm the correct mailing address.

The filing deadline is tied to the issuer’s tax year. Form 8261 is due on or before the 15th day of the fifth month following the end of the issuer’s annual accounting period. For an issuer that uses the calendar year, the deadline is May 15 of the subsequent year.

The issuer should maintain proof of timely mailing. Sending the form via certified mail with a return receipt is a recommended practice, as it provides a verifiable record that the form was sent on or before the deadline.

Penalties for Failure to File

The Internal Revenue Code imposes penalties for failing to file Form 8261 on time. These penalties are directed at the issuer of the debt instrument. The penalties are not levied against the private foundation or the disqualified person for the failure to file this specific form, although they face separate excise taxes for the underlying act of self-dealing.

A penalty is imposed for each day the return is late. The penalty amount is set at a specific dollar figure for each day the failure continues, and the total penalty for any single return is capped at a maximum amount. Issuers should refer to the latest IRS guidance for the exact dollar amounts.

The law provides for a potential waiver of the penalty if the issuer can demonstrate that the failure to file was due to reasonable cause and not willful neglect. To establish reasonable cause, the issuer would need to provide a credible explanation showing that it exercised ordinary business care and prudence but was unable to file the return by the deadline.