Page 107 - Washington Nonprofit Handbook 2018 Edition

on its website a model conflict of interest policy. For a sample conflicts of interest
policy, see https://wayfindlegal.org/tools/legal/.

The IRS may revoke an organization’s 501(c)(3) status if any private
inurement occurs. As a technical matter, there is no de minimis exception. Private
inurement may arise in many ways. Some of the most common situations are
described below.

b. Compensation Arrangements

A 501(c)(3) organization may pay reasonable compensation to employees or
others for services rendered. Excessive compensation, however, such as
compensation that exceeds payments made by similar organizations for similar
services, may result in inurement. In order to avoid private inurement, an
organization should put into place procedures to create a “rebuttable presumption”
of reasonableness discussed below in Chapter 30.

As a general rule, a 501(c)(3) organization should not pay any person a salary
or other compensation that is calculated as a percentage of the organization’s net
earnings. For example, a 501(c)(3) organization cannot pay its executive director a
salary calculated as 10% of the organization’s net income. This would be private
inurement and could result in revocation of the organization’s federal tax
exemption.

c. Purchases and Sales

If a 501(c)(3) organization purchases property or services from an insider for
more than adequate consideration, or pays rent in excess of fair market value,
either of these examples may constitute private inurement. Similarly, if a 501(c)(3)
organization furnishes property or services to an insider without receiving
adequate consideration in return, inurement may result. If the 501(c)(3)
organization provides property or services for less than fair market value to the
general public in the course of fulfilling its tax-exempt purposes (e.g., an orchestra
performing free concerts), private inurement generally will not result.

d. Loans

If a 501(c)(3) organization borrows money from an insider at a rate of interest
that is above market rate, or loans money to an insider without receiving adequate
security or reasonable interest, this may also result in private inurement.

WASHINGTON NONPROFIT HANDBOOK -96- 2018