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, there is not total clarity on this issue and the answer will depend on the specific facts.  

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 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 Rev. Rul. 76-10 provides 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 if 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).

Section 53.4958-4(a) of the Treasury Regulations provides additional support for this analysis in defining 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 regulation suggests that there should be no violation in most circumstances when a Board member pays the same fee as any other member of the general to attend an organization’s event or educational program.

However, this guidance may not fully resolve the issue if the fees for the public are set well below fair market value and does not necessarily apply to special situations that may raise different concerns, such as providing scholarships and financial assistance to Board members. For these and other reasons, it is always advisable to seek guidance from an attorney or tax professional on your organization’s specific circumstances.

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, and staff 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 carefully tailored to your organization, covering issues such as whether to prohibit such use entirely, allow the use under certain conditions, and/or to require advance notice and oversight by an authorized committee or governing body.

Nonetheless, the question of whether participation is permitted under applicable law is not the only inquiry. As always, organizations must consider how a Board member’s participation in an organization’s will be perceived, especially in situations where capacity is limited and a Board member is taking a spot that may be needed by other members of the community.