CHAPTER FOUR
Private Inurement, Private Benefit, and Excess Benefit Transactions
- § 4.4 Private Inurement—Scope and Types
- *§ 4.6 Essence of Private Benefit
- § 4.9 Excess Benefit Transactions
§ 4.4 PRIVATE INUREMENT—SCOPE AND TYPES
p. 104. Insert following carryover paragraph, before heading:
(j) Provision of Healthcare Services to One Individual or Family
Organizations will be denied recognition of tax exemption as charitable entities, on the ground of private inurement, if healthcare services are provided to only one individual or family. For example, an organization was denied exempt status because a substantial portion of its funds was to be used to pay for the medical and rehabilitative care of an individual who was related to each of the trustees of the organization.197.1 A nonprofit organization established to negotiate, receive funds, organize, and manage support for three special‐needs children of a family was denied recognition of exemption.197.2 A trust was held ineligible for exemption as a charitable entity because its function was to pay a family's medical expenses in the aftermath of an automobile accident.197.3 An organization formed to benefit children with special medical needs failed to qualify for exemption where it was operated for the benefit of one individual.197.4 An organization formed for the benefit of a specific child with autism, with the child's parents as its sole officers, failed to qualify for exemption.197.5
(k) Business Referral Operations
A nonprofit organization may seek recognition of exemption, usually as an educational entity, where, although it provides some educational benefits, its principal purpose is to serve as a means for generating business opportunities for its insiders. For example, an organization represented to the IRS that its educational activity was the conduct of workshops to provide first‐time homebuyers with information to help them achieve home ownership in an informed manner. In fact, the entity was operated by a team consisting of two real estate agents, a mortgage banker, an insurance agent, and a lawyer. Fees were not charged for the workshops; the operation was funded by the team members. Finding the organization to be a “medium to enrich the private businesses” of its insiders, the IRS found private inurement as the consequence of client referrals to the insiders' private business ventures.197.6
Likewise, an organization providing services for foreclosure mitigation was found by the IRS to be a “conduit” linking potential customers to its founders in the nature of a “consulting referral service.”197.7
(l) Still Other Forms of Inurement
Promotion of the career advancement of an individual (an insider) within a nonprofit entity was ruled by the IRS to be a form of private inurement; an entity seeking classification as a charitable and religious organization was supporting the candidacy of its pastor for the position of a bishop of a church and denied recognition of exemption on this basis.197.8
*§ 4.6 ESSENCE OF PRIVATE BENEFIT
p. 108. Insert as fourth complete paragraph:
Recent IRS rulings illustrating application of the private benefit doctrine include a nonprofit organization operating a “time banking community network,” which facilitated the exchange of volunteer services among its members, that was ruled to be serving the private interests of its membership;219.1 an entity involved in research, manufacture, and retailing of pharmaceuticals in conjunction with a for‐profit corporation owned by its founder;219.2 and a softball umpires association that failed to qualify for exemption because it operated primarily to certify umpires and aided its members in their employment.219.3
*p. 109. Insert following first paragraph:
A nonprofit corporation was formed to provide healthcare to an underserved population in a rural area. This organization was formed by the owners of a for‐profit medical practice, which plans to lease space in the nonprofit entity's facilities. Tenants will be for‐profit businesses, including the medical practice. These owners of the practice and related parties are on the nonprofit organization's governing board, constituting a majority. This organization represented to the IRS that it anticipates that the monthly rental payments from the for‐profit businesses could be reduced “considerably” because of receipt of contributions and grants. But, ruled the IRS, that type of rent structure will result in private benefit to the businesses and, in the case of the medical practice, private inurement.222.1 The organization tried again, noting that this rural area is a Health Professional Shortage Area. It advised the IRS that its goal is to incentivize businesses in the healthcare industry to provide care for those in need. It proposed that it rent space and provide services in an amount “high enough to not only cover costs but to produce a profit.” But that cannot be done either, the IRS ruled, because then the organization is operating in a commercial manner.222.2
p. 109, second paragraph. Insert as fourth and fifth sentences:
The IRS ruled that a public charity may restore a tax‐exempt social club's historic building, where the public will be given substantial access to the facility, with the resulting private benefit to the club and its members being incidental.225.1 In what appears to be its most generous interpretation of incidental private benefit, the IRS ruled that a public charity may provide its research results to a major for‐profit global media corporation for fees, format the information specifically for the company, license rights to derivative works to the company, allow the company to use the charity's information for its internal business purposes, agree to not deliver information to the company's competitors, and agree that the company may have a perpetual license to use the information, with this package of private benefit considered incidental.225.2
§ 4.9 EXCESS BENEFIT TRANSACTIONS
(a) General Rules
p. 128. Insert as fourth paragraph:
In one instance, the IRS's chief counsel's office concluded that the first‐tier excise tax due under these rules, in connection with an automatic excess benefit transaction,360.1 should not be abated, because the disqualified person (a limited liability company) did not exercise ordinary business care and prudence when it relied on the oral advice of a public charity's legal counsel.360.2 The IRS stated that the disqualified person failed to offer any evidence showing that its reliance on the advice of legal counsel was reasonable. There was no information about the lawyer's expertise, there was no evidence that the LLC provided necessary and accurate information to a lawyer, the LLC itself did not seek legal advice, there was no information indicating that the LLC considered legal advice when pursuing the transaction (a loan), and the LLC did not provide any facts indicating the circumstances that would tend to support a finding of reasonable cause.