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About Harvey Mechanic
Expertise
US Federal tax issues of nonprofit 501(c)(3) public charities only. Establishing and maintaining legal requirements for such non-profit organizations in the United States, including Internal Revenue service filings and requirements. I will not be working on this free forum to answer questions about Nonprofit's unrelated or for-profit businesses or how to fill out forms. This forum is only for general questions about federal tax law, not as the law applies to your specific situation. To search my previous answers you can do a Google search:
site:allexperts.com/q/nonprofit
[with your other search terms appended].

Experience
I have been practicing law and especially the law of nonprofit organizations since 1990 when I was admitted to the New York Bar.

Education/Credentials
B.S. Columbia University in New York City, 1970

J.D. (Law Degree) Brooklyn Law School, 1990 -- Cum Laude

You are here: Experts > Real Estate > Tax Planning: U.S. > Nonprofit Law > Conflict of interest

Nonprofit Law - Conflict of interest

Expert: Harvey Mechanic - 10/24/2009

Question
QUESTION: Could you give me the regulations on Conflict of Interest. The Board is hiring someone to do particular work. There is no one outside the board that is willing to do the work. A Board member is willing to do the work. Is this a Conflict?

ANSWER: A conflict of interest is present whenever a director has a
material personal interest in a proposed contract or transaction
to which the 501(c)(3) organization may be a party. Therefore,
in the situation you present, there is a conflict of interest,
but then the question is whether it results in a conflict of
interest that is illegal. Some conflicts do not result in any
illegality. We would need to look at the decisions of the
organization or the Directors to decide if their actions are
illegal. This forum is only for federal tax questions regarding
501(c)(3) public charities as I have explained in my profile. The
IRS only is concerned if the 501(c)(3) organization is spending
more money than it should. Sometimes the 501(c)(3) organization
is actually getting a better deal when it contracts with an
insider.

Some organizations have already adopted conflict of interest
policies and, certainly you would need to consult that document
also if it exists.

The IRS has published at
www.irs.gov/irm/part7/ch10s05.html#d0e92076
---Start of Excerpt--
Where an exempt organization engages in a transaction with an
insider and there is a purpose to benefit the insider rather than
the organization, inurement occurs even though the transaction
ultimately proves profitable for the exempt organization. The
test is not ultimate profit or loss but whether, at every stage
of the transaction, those controlling the organization guarded
its interests and dealt with related parties at arm's-length. See
Leon A. Beeghly Fund v. Commissioner, 35 T.C. 490 (1960).
(Inurement occurred when organization entered a transaction to
benefit the stockholders of a particular business corporation,
not to benefit the charity, even though corporation suffered no
financial loss.)
---End of Excerpt--

Generally, under state law, the interested director should
disclose to the Board the particular conflicts annually and
before any vote and then should not vote in the matter, but
I suggest you check your particular state's law as to the details.
Even though this forum is not for such state law issues, if
you give me your state I may be able to direct you.

Harvey Mechanic, Attorney at Law -
Harvey108@hotmail.com

---------- FOLLOW-UP ----------

QUESTION: Our non-profit by-laws do not mention 'conflict of interest' but we were afraid State law (California) might consider it and we would lose our non-profit status.

Answer
Section 5227 of the California Corporations Code has: "Not more
than 49 percent of the persons serving on the board of any
corporation may be interested persons.... For the purpose of this
section, "interested persons" means either: Any person currently
being compensated by the corporation for services rendered to it
within the previous 12 months, whether as a full or part-time
employee, independent contractor, or otherwise, excluding any
reasonable compensation paid to a director as director."
http://law.justia.com/california/codes/corp/5220-5227.html

See section 5233 at:
http://caselaw.lp.findlaw.com/cacodes/corp/5230-5239.html
..."a self-dealing transaction means a transaction to
which the corporation is a party and in which one or more of its
directors has a material financial interest..."

5236. (a) A corporation shall not make any loan of money or
property to or guarantee the obligation of any director or
officer, unless approved by the Attorney General;
http://snipr.com/ay5nr

Harvey Mechanic, Attorney at Law -
Harvey108@hotmail.com

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