AboutHarvey 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
Question Is it legal for a 501c3 hospice to contract with the president of the board's daughter for physical therapy services? It amounted to about 200k. The president of the board is a compensated employee as well. Is this a conflict of interest or self-dealing?
Answer A conflict of interest is present whenever a director has a
material personal interest in a proposed contract or transaction
to which the corporation 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.
Harvey Mechanic
Attorney at Law
Harvey108@hotmail.com
