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Nonprofit Law/Can nonprofit lease from board member?

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Question
Can a 501(c)(3) nonprofit corporation lease property from its president or another one of its board members?  If so, how is an appropriate lease amount determined (one that is satisfactory to the IRS)?

Answer
  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. We would need to look at the decisions of the organization or the Directors to decide if their actions are illegal.

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--

--- Start of Excerpt ---
an organization may represent that services will be provided at a significant discount to the organization. When an organization contracts with interested board members, the circumstances may demonstrate that the organization does not have a purpose to benefit the insiders. Sales or services by the board members' businesses to an organization at a significant discount, at or below cost, would help to justify the selection based on the economic benefit to the organization....Transactions at fair market value with board members may be allowed. But the determination to do business with a board member or other interested party with control must be made by an independent disinterested board. It is
not unusual for a board member to offer his own business services to the organization. However, if the board member is not selected by a disinterested board, then a transaction that would provide
services even at low market rates is problematic.
---End of Excerpt---
www.irs.gov/pub/irs-tege/eotopicb96.pdf on pages 22-23

The best evidence for a real property lease would be an appraisal by a disinterested professional appraiser.

I have in my profile that this free forum is only for general questions about IRS federal exemption issues of 501(c)(3) organizations. Your matter is also controlled by state law and states may differ somewhat with how they would treat such issues. Even though this forum is not for such state law issues, I will direct you to your Idaho Nonprofit Corporation law:
http://law.justia.com/codes/idaho/2014/title-30/chapter-3/ and 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.

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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