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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/Grant writing

Nonprofit Law - Conflict of Interest/Grant writing

Expert: Harvey Mechanic - 11/5/2009

Question
QUESTION: Hello, I am the president of the board of a non profit theatre. We recently had a shake up on the board and need to recruit new members. I would like to recruit the person who has been writing our grants as our Development committee chairperson, however, several folks expressed concern that this would create a conflict of interest. The reason they cite is that we pay this person a percentage of the grant for her effort. This "fee" is written into the grants and she only gets paid if we get the grant. I understand that if she were on the board, she could not be involved in deciding her fee, but does the fact that we pay her preclude her from being a member at all?

ANSWER: I have in my profile that this free forum is only for relevant IRS federal exemption issues of 501(c)(3) organizations. I am assuming that your group is a 501(c)(3) organization and not a private foundation. The IRS has no prohibition specifically as to members of the Board receiving a contingency payment or commission payment. However, the IRS is concerned as to such payment schemes to anyone. The IRS does not allow 501(c)(3) organizations to give someone more compensation than is reasonable.

The IRS looks at many factors if it wants to allege that someone
is getting excess benefits. The first factor is how many hours
weekly the person is working for the 501(c)(3) organization and
then what the normal salary would be for someone who is qualified
for such a job in that area of the country.

At
http://www.irs.gov/irm/part4/ch52s04.html#d0e660170
The IRS has:
---Start of Excerpt--
To determine if they are reasonable consider factors such as:
     Duties performed
     Amount and type of responsibility
     Time devoted to duties
     Special knowledge and experience
     Individual ability
     Previous training
     Compensation paid in prior years
     Prevailing economic conditions
     Living conditions of the particular locality
     The type of activities carried out by the organization and
its size.
---End of Excerpt--

Form 990 asks whether the organization followed an IRS-sanctioned
process for establishing a rebuttable presumption of reasonable
compensation of top management officers, officers and key
employees. The process includes a review and approval by
independent person, comparability date, and contemporaneous
substantiation of the deliberation and decision.

Rev. Rul. 69-383, 1969-2 C.B. 113, provides that a fixed
percentage compensation plan of an exempt hospital does not
result in prohibited private inurement if: (1) the compensation
plan is not merely a device to distribute profits to persons in
control or to transform the organization's principal activity
into a joint venture; (2) the compensation plan is the result of
arm's-length bargaining; and (3) the compensation plan results in
reasonable compensation by comparing the amounts paid to amounts
received by physicians at similar hospitals having comparable
responsibilities and patient volume. Whether these criteria are
met, depends upon the facts and circumstances of each case.
Cited on page 3 of
www.irs.gov/pub/irs-utl/topicc00.pdf
"Physician Incentive Compensation"

Your state may have other regulations. 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: My state is Pennsylvania. Thanks

Answer
You are welcome.

Search (Control-F)
on
http://snipurl.com/4663n for 5301 at about 40% of the way down
that page to go to section 5310 which is the start of the
Pennsylvania Statutes for Nonprofit Corporation law.

Especially, as to interested directors
http://bit.ly/1J5FQr

and compensation of directors
" § 5730. Compensation of directors.
       Except as otherwise restricted in the bylaws, the board of
    directors shall have the authority to fix the compensation of
    directors for their services as such, and a director may be a
    salaried officer of the corporation."
http://bit.ly/ZvK03

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

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