IRS 501 code reads, “The organization must not be organized or operated for the benefit of private interests, such as the creator or the creator’s family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. No part of the net earnings of a § 501(c)(3) organization may inure to the benefit of any private shareholder or individual. A private shareholder or individual is a person having a personal and private interest in the activities of the organization. If the organization engages in an excess benefit transaction with a person having substantial influence over the organization, an excise tax may be imposed on the person and any managers agreeing to the transaction.”
Legal judgments on what this regulation means have been nebulous at best because it deals with invisible assets in relative terms. It may be simple to count the dollars one receives, but but not so easy to measure the trust, influence, authority, good will, promises, teaching, gifts, relationship advantages, shame or gratitude that are connected to money received by members of an organization. The term “inurement” is so much of a mystery that WordPress doesn’t even provide spelling for the word.
Although legal considerations matter since a nonprofit organization can lose or fail to obtain tax exempt status for violation of the private inurement code, the greater danger may be a loss of trust and transparency among members/supporters of an organization. The negative results are more felt than proved on a specific budget line and can be harmful to much more than an organization’s tax status designation.
At the core of private inurement is a practice of using the assets of a nonprofit organization for personal gain. It is often limited to examining the tangible investment of nonprofit funds to create exuberant compensation for paid staff of the organization, but a moral interpretation goes beyond legal definitions to suggest that anyone in leadership may unfairly use their intangible power or leadership over members to influence them is such a way that he or she profits financially as a result.
Leadership is a sacred trust that ought not be entangled with suspicion or mixed motives. When considering a profit/nonprofit partnership, there is always the possibility that as members of a community enter business arrangements within the social network, there may be charges of private inurement, or using the organization for personal benefit. This can happen when an auto mechanic, real estate agent, financial planner, construction contractor or Mary Kay representative does business within a congregation or nonprofit organization.
We may argue with a minster or nonprofit CEO who strongly influences their group to contract with their own family members to perform maintenance on properties owned by the nonprofit at a fee that is far beyond normal or for services that are never rendered. We would probably not, however, complain about a son or daughter providing music lessons for a reasonable fee to members of the group (as long as no undue pressure is applied by leaders), or about the leader of a group selling books he or she has authored. When members of an organization freely choose to do business with one another, the normal conflicts of commerce may arise, but the burden of unfair advantage among members should not be an issue.
Care must be taken to level the playing field of opportunity for all and ensure that no one benefits simply because of their position. It is difficult to establish rules since the connection among friends is a primary dynamic of relationship marketing and coexists with more formal relationships and informal power within organizations. One possible strategy is to be sure the organization benefits from any commercial endeavor and then the organization can choose ethically and legally how a leader would be compensated rather than allowing a leader to act independently with unlimited range of profit through the organization.