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Nonprofit Law/501(c)(3) impropriety

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Question
We have a 501(c)(3) that has a past board member now as executive director and is taking a salary. She is pushing for less oversight and has convinced the other board members (mostly her friends and nonbusiness homemakers) to now  make her also president of the board. This was presented to the board by her husbands partner who is an attorney. Her husband is a CPA and trustee for a clients foundation. He has been giving money to the 501 from the trust, the last few years, in the exact amount of his wife's salary.

This conflict of interest concern has been brought up to the board by the current president who has been scrutinizing the executive directors appropriateness of compensation and requesting more transparency. This appears why she has talked the board into making her the president of board and the executive director (the only paid position in the charity)

Is this impropriety or am I over reading things?

Thank you

Answer
 A conflict of interest is present whenever a director, and in
some states an officer)  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. 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 has published at
www.irs.gov/irm/part7/irm_07-025-003-cont02.html#d0e4718
---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--

The acceptance of funds from a foundation in the exact amount of the salary of someone who is related to an insider of that foundation puts the individual recipient of the funds, who is an officer, in a position that may be a conflict of interest that would be improper or even illegal.
I have in my profile that this free forum is only for general questions relating to IRS federal exemption issues of 501(c)(3) organizations.  The above is the IRS position and the states generlaly follow the IRS but you can look also to Ohio law.  I am assuming your nonprofit is a corporation and, therefore, you may want to read the Ohio Nonprofit Corporation law, revised as of 2011 which is available at
http://goo.gl/i1nrl
and specifically section 1702.301 entitled, "Interest of director or officer in contract."
http://law.justia.com/codes/ohio/2011/title17/chapter1702/section1702-301/

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

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

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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 Harvey108@hotmail.com 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 "site:allexperts.com/q/nonprofit" without the quotes and then add your search terms before hitting enter.

Experience

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.

Education/Credentials

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

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


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