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charitable purpose, provided that such activities do not constitute more than an
“insubstantial” part of the organization’s total activities. Accordingly, a 501(c)(3)
organization may engage in a limited amount of activities that are not strictly
charitable, so long as the activities do not violate any of the rules described in
Chapters 29, 31, 32, and 33.

The Activity Itself Must Be Charitable. Each of the organization’s activities
must be evaluated separately to determine whether it furthers a charitable
purpose. The fact that funds generated from an activity may ultimately be used to
further a charitable purpose will not by itself cause the activity to be charitable. For
example, the operation of a sandwich shop on a commercial basis for paying
customers is not charitable even though all net income from the shop may be used
for charitable purposes. The operation of a soup kitchen for the homeless, on the
other hand, is charitable.

CHAPTER 29. Private Inurement

a. General Prohibition

A 501(c)(3) organization must be operated in such a manner that none of the
organization’s assets “inures to the benefit” of any private individual. An “insider” is
an individual that has influence over the organization, such as an officer or director,
or an officer or director’s family member. Private inurement occurs when a person
who is an “insider” with respect to the organization derives a benefit from the
organization without giving something of at least equal value in return.

The determination of whether a person is an insider is based on all relevant

facts and circumstances and will generally depend on the level of influence that the
individual has over the organization. Entities such as corporations and
partnerships that are controlled by insiders may also be treated as insiders with
respect to an exempt organization. For example, a corporation that is wholly
owned by a board member of the organization is an insider with respect to the
organization.

In order to identify and avoid potential private inurement situations, an
organization should adopt a conflict of interest policy and should annually survey
its board members, officers and senior staff to identify all organizations in which
they or their family members have substantial interests and to identify all situations
in which the organization has financial dealings with potential insiders. The
organization must take care to ensure that all such arrangements are entered into

at “arm’s length” and are in the best interest of the organization. The IRS publishes

WASHINGTON NONPROFIT HANDBOOK -95- 2018