## Facts

- John W. Madden, Jr. created and managed the Museum of Outdoor Arts, a tax-exempt organization under I.R.C. § 501(c)(3).
- The Museum operated an outdoor art venue associated with a commercial office complex and hosted events (including weddings) generating revenue.
- Madden held a majority interest in GMC, a company that provided maintenance and janitorial services.
- The Museum paid GMC for maintenance and janitorial services connected to the Museum’s operations and events.
- Because of Madden’s ownership, GMC was a “disqualified person” with respect to the Museum for purposes of the private-foundation self-dealing rules.
- The IRS issued deficiency notices asserting (i) excise taxes for self-dealing under I.R.C. § 4941 based on the Museum’s payments to GMC and (ii) unrelated business taxable income (UBTI) from certain leases and event-related arrangements.
- Petitioners challenged the determinations in consolidated proceedings in the United States Tax Court.

## Issues

1. Whether the Museum’s payments to GMC for maintenance and janitorial services were acts of self-dealing under I.R.C. § 4941.
2. Whether the payments, even if within the self-dealing definition, were excluded by the “personal services” exception in I.R.C. § 4941(d)(2)(E) because they were reasonable, not excessive, and necessary to carrying out the Museum’s exempt purposes.
3. Whether, and to what extent, the Museum’s lease and event-related revenue constituted UBTI under I.R.C. §§ 511–514.

## Decision

- The Tax Court treated the payments to GMC as transactions that would be self-dealing absent an exception.
- The court rejected the IRS’s narrow interpretation that § 4941(d)(2)(E) covers only enumerated “professional” services and concluded that maintenance and janitorial services can qualify as “personal services.”
- The court held that payments for such services fall within § 4941(d)(2)(E) when the services are necessary to the foundation’s exempt purposes and compensation is reasonable and not excessive; where those conditions were satisfied, self-dealing excise taxes did not apply to the payments.
- On UBTI, the court conducted an arrangement-by-arrangement analysis and concluded the Museum had UBTI from some, but not all, leases and related income streams.

## Legal Principles

- Under I.R.C. § 4941, furnishing goods or services between a private foundation and a disqualified person is self-dealing unless a statutory exception applies.
- The § 4941(d)(2)(E) exception excludes payments of compensation to a disqualified person for personal services that are reasonable and necessary to carrying out the foundation’s exempt purposes, provided the compensation is not excessive.
- “Personal services” under § 4941(d)(2)(E) are not limited to traditionally “professional” services; operational services such as custodial, maintenance, and janitorial work may qualify if the statutory requirements are met.
- Whether compensation is “reasonable” and “not excessive” is a factual determination based on the nature of the services and the amounts paid.
- UBTI determinations for exempt organizations depend on whether specific income-producing activities are substantially related to exempt purposes and whether statutory exclusions apply; lease and event income must be evaluated based on the facts of each arrangement.

## Conclusion

The Tax Court held that a private foundation’s payments to a disqualified person for maintenance and janitorial work can be protected by the § 4941(d)(2)(E) personal-services exception when the services are necessary to exempt functions and reasonably compensated, while separately finding that only some of the Museum’s lease and event-related revenue constituted UBTI after a fact-specific review.


Madden v. Comm'r, 74 T.C.M. (CCH) 440 (T.C. 1997)