Private Inurement and Excessive Benefit Transactions

Inurement happens when a transaction or exchange occurs and an individual with a personal interest (an insider) in the exempt organization activities acquires economic gain through the use of funds or assets of that exempt organization.

What is an insider?

An individual who has significant influence over the organization. Insiders could include the minister, church board members, officers, founders, major donors, family members of any of the above, and in certain circumstances, employees.

What is excessive benefit?

Excessive benefit occurs in a transaction or exchange between a tax-exempt organization and one of its "insiders" that furthers private interest, rather than the public interest. (IRC Section 501(c)(3); IRS Treasury Regulation 1.501(c)(3)-1(c)(2)).

Examples of prohibited inurement and excessive benefit transactions:

The most common example is: "excessive compensation", which the IRS condemns through intermediate sanctions (significant excise taxes) for up to 325 percent times the excess benefit.

More examples include the payment of dividends, the payment of unreasonable compensation to insiders, and transferring property to insiders for less than fair market value.

Outcomes of private inurement:

Private inurement is an absolute term. It is strictly prohibited in all nonprofits. There is no de minimis (of minimum importance) restriction.

At the very least an organization may lose its nonprofit status. Also, the IRS may impose an excise tax (immediate sanctions)on any insider who improperly benefits from an excess benefit transaction, as well as an organization managers, leaders, board members who allowed the excessive benefit.

An insider who benefits from an excess benefit transaction is also required to return the excess benefits to the organization. Detailed rules on excess benefit transactions are contained in the Code of Federal Regulations, Title 26, sections 53.4958-0 through 53.4958-8.

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