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
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