Page 108 - Washington Nonprofit Handbook 2018 Edition
P. 108
Loans by nonprofit corporations to their officers and directors are prohibited
under Washington State law, even if the terms are favorable to the corporation.
e. Joint Venture Arrangements
Inurement may also arise from joint venture arrangements between 501(c)(3)
organizations and for-profit entities, especially in situations where, under the joint
venture arrangement, the for-profit entity has control over the exempt
organization’s assets or operations or receives a percentage of the exempt
organization’s net earnings.
CHAPTER 30. Intermediate Sanctions
a. Overview
The penalty for private inurement, as discussed above, is revocation of the
organization’s tax-exempt status. The tax law also imposes punitive excise taxes on
individuals who engage in impermissible transactions with charitable organizations.
The IRS may impose such excise taxes as an intermediate step instead of revoking
the organization’s exempt status, or it may penalize individuals in addition to
revoking exempt status.
b. Outline of Penalties
The tax law imposes a punitive excise tax on any “disqualified person”
(defined below.) who engages in an “excess benefit transaction” (defined below)
with a 501(c)(3) organization that is not a private foundation (or a 501(c)(4)
organization), and on “organization managers,” which includes board members,
officers and the executive director, who knowingly and willfully approve such
transactions.
Initially, the tax on a disqualified person is 25% of the excess benefit that the
disqualified person received. For example, if the person sold property to the
organization for $10,000 when the fair market value was really $4,000, the excess
benefit is $6,000 and the initial tax is $1,500 (25% of $6,000). If the transaction is
not “corrected” or undone to the extent possible, the disqualified person is subject
to an additional tax of 200% of the excess benefit. In the above example, the
additional tax is $12,000 ($12,000 is 200% of the excess benefit, which was $6,000).
In addition, an “organization manager,” may be subject to a separate tax if
the manager approves an excess benefit transaction knowing that it is improper,
unless the action is not willful and is due to reasonable cause. The tax on the
WASHINGTON NONPROFIT HANDBOOK -97- 2018