National Institutes of Health

National Institutes of Health Ethics Program

  Ethics National Institutes of Health
National Institutes of Health Logo
Outside Activities of NIH Employees with Foundations


Office of the General Counsel

Office of the Secretary
Washington, D.C. 20201

June 2, 2000


TO: Deputy Ethics Counselors
National Institutes of Health  
FROM: Karen Santoro
Ethics Counsel  
SUBJECT: Outside Activities of NIH Employees with Foundations  

Recently, a provision of the Internal Revenue Code has been brought to my attention that has serious ramifications for NIH employees who have previously received approval to engage in outside employment activities with private foundations. The statute imposes a tax on "each act of self-dealing between a disqualified person and a private foundation." 26 U.S.C. § 4941(a)(1). This statute, which was enacted in 1969, was intended to curb private foundations' attempts to influence Government officials. The Internal Revenue Service has issued a number of revenue rulings with respect to Government employees and prospective activities with private foundations.

Issue: The Internal Revenue Service imposes an individual penalty tax of up to 200% of the amount of compensation from a private foundation to certain Government officials conducting outside activities with these foundations.

Conclusion: Certain Government officials should refrain from accepting compensation (other than travel expenses within the United States) for outside activities with private foundations.

Discussion: Specifically, the statute imposes a tax on each act of self-dealing by a disqualified individual equal to five percent of the amount involved for each year in the taxable period. 26 U.S.C. § 4941(a)(1)[1].  In any case in which an initial tax is imposed on an act of self-dealing which is not corrected within the taxable period, a tax equal to 200 percent of the amount involved will be imposed on the disqualified person. 26 U.S.C. § 4941(b)(1)[2].

The Code defines "self-dealing" as any direct or indirect agreement by a private foundation to make any payment to certain enumerated government officials. 26 U.S.C. § 4941(d)(1)(F)[3].  Government officials who are "disqualified persons" within the scope of this restriction are elective officials, Presidential appointees, Schedule C employees, and individuals compensated at or above GS-15-7 levels, irrespective of their appointment mechanism (Title 42, SBRS, Commissioned Corps), and personal or executive assistants or secretaries to any of the foregoing.  26 U.S.C. § 4946(c). Excluded from the definition of government employees is a "special governmental employee" as defined in 18 U.S.C. § 202(a)[4]; Treas. Reg. 53.4946 §1(g)(1).

Also excluded from the definition of self-dealing are agreements to employ an individual for any period after the termination of his government service if that individual is terminating his government service within a 90 day period. 26 U.S.C. § 4941 (d)(1)(F). For purposes of the statute, a "private foundation" has the same meaning as in 26 U.S.C. § 509. A website for obtaining the status of a foundation can be found at

NOTE: URL Updated when site moved, see:

Government officials who are within the scope of this statute will be required to pay the tax only if the individual participates in the act of self-dealing knowing that it is an act of self-dealing. 26 U.S.C. § 4941 (a)(1). The regulations define "knowing" to include those situations when: the individual has actual knowledge of the facts that such a transaction would be self-dealing; he is aware that the act violates Federal tax law governing self-dealing; and he negligently fails to make reasonable attempts to ascertain whether the act is an act of self-dealing or he is in fact aware that it is in an act of self-dealing. Treas. Reg. § 53.4941 (a)(1)-(b)(3). The burden is thus on the individual to determine whether he or she is liable under the statute.

An individual's participation in an act of self-dealing will not be considered "knowing" if the individual, after full disclosure of the factual situation to legal counsel, relies on the advice of counsel expressed in a "reasoned written legal opinion" that an act is not an act of self-dealing within the meaning of the statute, even if the act is subsequently determined to be self-dealing. Treas. Reg. § 53.4941(a)(1)-(b)(6).

Finally, a tax for self-dealing will not be imposed under the following circumstances: certain nontaxable prizes and awards if the recipients are selected from the general public; nontaxable scholarships and fellowship grants; qualifying annuity plans; contributions or gifts not exceeding an aggregate of $25; payments made under the government employee training program in 5 U.S.C. Ch. 41; and payment of travel expenses within the United States. 26 U.S.C. § 4941 (d)(2)(B); Rev. Rul. 131, 1974-2 C.B. 385.

As a result of this statute, NIH employees paid at or above the GS 15-7 level are effectively prohibited from receiving compensation from a private foundation for activities such as teaching, writing, advising, or consulting. The Internal Revenue Service may serve a deficiency notice upon an employee, who would then be forced to pay the tax or contest the assessment.

Effective immediately, all requests for approval of outside activities must be reviewed in accordance with the statutory provision at 26 U.S.C. § 4941. The compensation level of the individual requesting approval must be considered in conjunction with an analysis of the nature of the private entity offering the opportunity for compensation. Previously approved outside activities with foundations for NIH employees who are paid at or above the GS 15-7 level should be reviewed to determine the status of the foundation. Should the status of the foundation be private, any affected employee must be advised to either accept only travel expenses within the United States for his/her service or resign from such service. Employees who have questions whether payment to them by a private foundation constitutes acts of self-dealing should consult private counsel.

For your information, the Foundation for the National Institutes of Health (FNIH) and the Foundation for Advanced Education in the Sciences (FAES) are For your information, the Foundation for the National Institutes of Health (FNIH) and the Foundation for Advanced Education in the Sciences (FAES) are not considered private foundations for purposes of this prohibition.

The NIH Office of the Legal Advisor has reviewed and concurs in this opinion.

cc: Robert Lanman, Stephen Benowitz

[1] When a tax is imposed on a self-dealer, a corresponding tax of 2.5 percent is imposed on any foundation manager unless the participation by the foundation manager is not willful and is due to reasonable care. 26 U.S.C. § 4941(a)(2). A maximum tax of $10,000 may be imposed. 26 U.S.C. § 4941 (c) (2) .  

[2] The "taxable period" is defined as the period beginning with the date on which the act of self-dealing occurs, and ending on the earliest of: the date that a deficiency notice is mailed by the I.R.S.; the date on which the tax is assessed ; or the date on which the correction of the act of self-dealing is completed. 26 U.S.C. § 4941 (e), Treas. Reg. § 53.4941 (e) -1 (a) (1). As with the initial tax, a corresponding additional tax of 50 percent will be imposed on any foundation manager who refuses to agree to the correction. 26 U.S.C. § 4941 (b) (2). As with the initial tax, the penalty on a foundation manager is limited to $10,000. 26 U.S.C. § 4941 (c) (2)

[3] The statute also defines "self-dealing" to include: the sale or exchange, or leasing, of property; the lending of money or other extension of credit; the furnishing of goods, services, or facilities; payments to a disqualified person as defined in 26 U.S.C. § 4946 (a) (such as substantial contributors, foundation managers, holders of 20 percent of the voting power or beneficial interests; family members of disqualified individuals, or a corporation, partnership, or trust holding a 35 percent interest); and transfer to or use by a disqualified person of the foundation's income or assets. 26 U.S.C. § 4941 (d).

[4] 18 U.S.C. § 202 (a) defines "special Government employee" as temporary employee appointed for a term not to exceed 130 days, a part-time U.S. commissioner or magistrate, a part-time member of Congress, or a Reserve or National Guard officer.