Self-Dealing

views updated

SELF-DEALING

The conduct of a trustee, an attorney, or other fiduciary that consists of taking advantage of his or her position in a transaction and acting for his or her own interests rather than for the interests of the beneficiaries of the trust or the interests of his or her clients.

Self-dealing is wrongful conduct by a fiduciary. A fiduciary is a person who has duties of good faith, trust, special confidence, and candor toward another person. Examples of fiduciary relationships include attorneys and their clients, doctors and their patients, investment bankers and their clients, trustees and trust beneficiaries, and corporate directors and stockholders. Fiduciaries have expert knowledge and skill, and they are paid to apply that knowledge and skill for the benefit of another party. Under the law, a fiduciary relationship imposes certain duties on fiduciaries because a fiduciary is in a special position of control over an important aspect of another person's life.

One important duty of a fiduciary is to act in the best interests of the benefited party. When a fiduciary engages in self-dealing, she breaches this duty by acting in her own interests instead of the interests of the represented party. For example, self-dealing occurs when a trustee uses money from the trust account to make a loan to a business in which he has a substantial personal interest. A fiduciary may make such a transaction with the prior permission of the trust beneficiary, but if the trustee does not obtain permission, the beneficiary can void the transaction and sue the fiduciary for any monetary losses that result.

The laws pertaining to self-dealing are found mainly in case law, judicial opinions, and some statutes. Case law authorizes the recovery of monetary damages from the self-dealing fiduciary.

One of the most notable statutes relating to self-dealing is 26 U.S.C.A. § 4941 (1969), which allows the internal revenue service to impose a five percent excise tax on each act of self-dealing by a disqualified person with a private, nonprofit foundation. Disqualified persons include substantial contributors to the foundation, foundation managers, owners of more than 20 percent of the foundation's interest, and members of the family of disqualified persons. If the self-dealing act is not timely corrected, the IRS may impose on the self-dealer an additional 200 percent excise tax on the amount of the transaction.