Q&A #178 – Are Board members allowed to participate in a 501(c)(3) organization's programs?
Question: My 501(c)(3) organization hosts a popular training program that includes a series of in-person workshops with limited capacity. Attendees pay a fee to attend. Is it a conflict of interest or a violation of law for Board members to attend the workshop if they pay the same fee as everyone else?
Answer: Internal Revenue Service (IRS) guidance suggests that, in general, Board members and other disqualified persons may participate in a 501(c)(3) organization’s programs without violating the inurement, excess benefit transaction, and other conflict of interest rules so long as they participate in the same manner as the general public. However, caution is warranted because this guidance is limited and may not apply to all situations.
Under federal tax law, conflicts of interest involving financial transactions or arrangements with directors, officers, and other insiders of 501(c)(3) public charities are governed by the rule against “private inurement” and the “excess benefit transaction” rules (also sometimes referred to as the “intermediate sanction” rules). 501(c)(3) private foundations are subject to more stringent rules prohibiting “self-dealing.”
In general, these rules provide that a charity’s resources cannot be used for the personal benefit of Board members and other “disqualified persons” outside of the terms of a fair market value transaction for reasonable compensation (subject to additional restrictions that may apply to private foundations under the self-dealing rules, and to all 501(c)(3) organizations under the private benefit rule).
There is surprisingly little official guidance specifically addressing the participation of Board members in an organization’s charitable, educational, and other programs. However, there are IRS materials and analogous guidance suggesting that participating in certain widely available programs in the same manner as the general public does not violate inurement, excess benefit transaction, and other conflict of interest rules.
For example, an EO CPE text from 1990 (IRS training materials for IRS staff working on exempt organizations issues) states the following in an overview of inurement/private benefit issues:
“A member of an exempt hospital's governing body can be admitted to the hospital on the same basis as any other member of the community. A donor to the public library can check books out of the library. A church officer can attend functions held or sponsored by the church.”
There is similar guidance in the 501(c)(3) private foundation context. For example, IRS Revenue Ruling 76-10 holds that a disqualified person is permitted to use of a foundation’s meeting room on the same basis that it is made available to other community and civic groups if the use is functionally related to the foundation’s exempt purposes. See also IRS Rev. Rul. 76-459 (a disqualified person’s use of a private road owned by foundation is not self-dealing where the road is made available on a basis that is no more favorable than the basis on which it is made available to the general public).
Additional support for this analysis is implied by Section 53.4958-4(a) of the Treasury Regulations. This regulation defines an “excess benefit transaction” as “any transaction in which an economic benefit is provided by an applicable tax-exempt organization directly or indirectly to or for the use of any disqualified person … exceeds the value of the consideration (including the performance of services) received for providing the benefit.” This suggests that there should be no violation in most circumstances when a Board member pays the same fee as any other person from the general public to attend an organization’s event or educational program, since the fees charged to the public are often indicative of fair market value terms.
However, notwithstanding this guidance, allowing Board members to use or participate in an organization’s programs on the same basis as the general public may not be appropriate for every situation.
Programs that provide more direct benefits to recipients, such as scholarships or financial assistance, are subject to special rules and considerations. These kinds of programs are more likely to be considered an excess benefit transaction if provided to Board members or their family.
Similarly, if an organization charges very low fees for its fee-for-service programs (i.e. well below fair market value) to make its services more accessible to the general public, it could be considered a violation to extend those preferential terms to Board members or their family.
Planning Tip – If your organization has programs that are widely available to the general public, it is important to develop policies and guidelines addressing the potential use of these programs by Board members, officers, employees, staff, and other volunteers of the organization, as well as their family members. Be aware that these sensitive issues are usually not sufficiently addressed in most off-the-shelf conflict of interest policies. These matters will need careful thought that is tailored to your organization’s circumstances and the specific legal and perception issues raised by the programs. This policy should address matters such as whether to prohibit this use or participation entirely, allow it under specified conditions, and/or to require advance notice and oversight by a Board authorized committee or governing body.
Perhaps most importantly, organizations must also consider how a Board member’s participation in an organization’s activities or programs will be perceived. This is especially true in situations like the one raised in this Q&A, where capacity to attend an educational program is limited and a Board member is taking away a spot that could have been provided to other members of the community. This could be seen as providing an unfair advantage or preference to Board members, even if they are otherwise participating on the same basis as other attendees.
Because of the sensitive nature and complex issues raised by these situations, it is always advisable to seek guidance from an attorney or tax professional on your organization’s specific circumstances.
