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Nonprofit Law/conflict of interest


Hello, We are planning to open an art studio for AIDS victims.  We have one unpaid director, who would like to display his art work for sale in the art studio for future sales, and upon selling his work; he will donate 25% of his proceeds back to our nonprofit organization.  Will it be considered a conflict of interest? Thanks

 A conflict of interest is present whenever a director, and in some states an officer) or a close relative of that person has a material personal interest in a proposed contract or transaction to which the 501(c)(3) organization may be a party. Some conflicts do not result in any illegality, especially if the Board, without that director voting, approves the contract with that unpaid director.

If your organization is a California Nonprofit Public Benefit Corporation see  starting at section 5002 which is the California Nonprofit Corporation's law and specifically starting at 5110 is the law for Nonprofit Public Benefit Corporations.
California refers to "self-dealing" transactions and you would read about the treatment at section 5233.

Worse than your issue about conflict of interest or self-dealing is the IRS issue called inurement. Internal Revenue Code section 501(c)(3) which is available at: (on page 2, first column) has, in part, that the 501(c)(3) organization must be "operated exclusively for religious, charitable ...or educational purposes ... no part of the net earnings of which inures to the benefit of any private shareholder or individual".

The IRS has published at
---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.
---End of Excerpt--

So the question is whether you are treating other artists with the same or worse contract terms (for the organization).

You did not ask, but the art studio may be what the IRS refers to as "unrelated business". IRS Publication 598 "Tax on Unrelated Business Income of Exempt Organizations" at
explains that,  if products or services are not directly related to the charitable, educational, religious or other purpose or function constituting the basis for its exemption (other than for production of income), then the activities are generally taxable.

Their exact wording is found in the middle column of page 3 "Unrelated business income is the income from a trade or business that is regularly carried on by an exempt organization and that is not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity."

The IRS has declared, "Nonprofit organizations that are granted Federal tax exemption based on their mission-related purposes are allowed by the IRS, within certain limits, to generate income from unrelated business activities." on pdf page 1. But, the organization could, if it has more unrelated activities than the IRS's vague "certain limit", be jeopardizing its exemption.

Harvey Mechanic, Attorney at Law -

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.  

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Harvey Mechanic


DO NOT GIVE ME INFORMATION THAT YOU WANT KEPT CONFIDENTIAL. I am an attorney and I volunteer time to answer general questions about U.S. Federal income tax issues of nonprofit 501(c)(3) public charities only. Those questions could be about 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 possible 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. If you do not make your question public then I will not be spending much of my donated time on answers that would not benefit the public. If you have other questions, please contact me at I will reply from my email. In any case, do not reveal confidential information to me until after I have contracted with you to provide personal legal services. My responses on this forum are intended to be general statements of law, should not be relied upon as legal advice, and do not create an attorney/client relationship. For me to consider your individual situation and how the law applies, I would need to gather extensive information about the situation. To search my previous answers you can do a Google search by "" without the quotes and then add your search terms before hitting enter.


I have been practicing law and especially the law of nonprofit organizations since 1990 when I was admitted to the New York Bar and I have maintained my status with the Bar since that time.


B.S. Columbia University in New York City, 1970

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

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