Welcome back to our discussion on 501(c)(3)’s, inurement, and excess benefit transactions! If you missed the last post that provided an overview of the rules related to this topic, you can find the link to the previous post here. Now that the overview is out of the way, here are some ideas on how to avoid inurement issues
- Avoid dealings between the organization and insiders within the organization.
Anytime a director, officer, or some other kind of insider receives some kind of benefit or deal from the organization, there is an inurement and excess benefit transaction risk. Looking back at revenue ruling involving the radiologist, there is a risk in this situation that whatever deal forms between the insider and the organization is not at arms’ length, and that the insider is in a position of control within the organization. Furthermore, that same insider could be a “disqualified person,” which creates an excess benefit transaction risk. If the organization avoids dealings with these insiders, it does lower the inurement risk.
2. Implement conflict of interest policies.
Though avoidable to a certain extent, it is likely that those involved inside an organization will wear many hats, and sometimes that hat-wearing will compel some kind of compensation, which makes dealings with insiders simply unavoidable. In these situations, it is helpful to have conflict of interest policies that can provide separation between the insider and the deal. The policy might include provisions like preventing the insider from voting on, directing, or otherwise involving themselves in the process of developing and approving the benefit offered to the insider. Implementing these policies helps to ensure that the dealings are at arms’ length, and that the insider is not exercising control over the organization as it relates to the specific benefit.
3. Dealings on reasonable terms and at Fair Market Value (FMV).
Finally, ensuring that the organization is dealing on reasonable terms and at FMV is also helpful to avoid inurement risks. If the terms of a deal are reasonable and at FMV, then that addresses two of the issues raised in the revenue ruling (reasonable terms and reasonable payment), as well as the excess benefit transaction risk (disqualified person receiving more value than what they are offering).