Self-Dealing

Section 501(c)(3) organizations are prohibited from engaging in activities that result in “inurement” of the organizations earnings to insiders, such as founders, directors and officers. The essence of inurement is that a person in a position to influence the decisions of an organization receives disproportionate benefits. Find questions and answers on common self-dealing snares such as sharing office equipment, employees and receiving free tickets and other tangible gifts.

In-Depth knowledge on Self-Dealing

The intermediate sanctions rules prohibit tax-exempt organizations from providing more than fair market value economic benefits to their “disqualified persons.” The intermediate sanctions rules apply to all section 501(c)(3) and section 501(c)(4) organizations except for private foundations, which are subject to special, private foundation “self-dealing” rules. All grantmakers that are public charities, a category that includes community foundations and public foundations, are subject to the intermediate sanctions rules. To prevent violations of the intermediate sanctions rules, four steps should be taken.

Because of the legal issues involved, foundations should carefully consider whether foundation funds should be used to cover certain expenses. This is especially true where the foundation is considering paying travel and related expenses for children and other family members who are not currently board members or staff.

What do you do when a grantee—or potential grantee—asks someone on your board or staff to sit on their board? Does such a request constitute a conflict of interest? Are there times when such a situation can actually benefit one or both of the organizations involved?

Accepting and using tickets and other tangible benefits of more than minimal value raises questions for foundation managers. Here's what the general Tax Code rules say is acceptable.