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Nonprofit Law/501(c)(3) Founder/Director's Book Marketing Expenses

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Question
Hello Mr. Mechanic,

I am a board member of a 501(c) nonprofit.  One of the organization's founders has written a book related to the organization's mission, but the book rights and revenue will be her personal income.  Because the book supports the mission and is expected to create significant goodwill for the organization, is it legal for the board to approve the payment of expenses incurred to market the book by the nonprofit?

Thank you so much for your time.

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 confl icts 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--

See section 5233 at:
http://law.justia.com/california/codes/corp/5230-5239.html
..."a self-dealing transaction means a transaction to
which the corporation is a party and in which one or more of its
directors has a material financial interest..." and further down we
see an element that, if not present, could cause concern with the
Attorney General of California, "Prior to consummating the
transaction or any part thereof the board authorized or approved
the transaction in good faith by a vote of a majority of the
directors then in office without counting the vote of the
interested director or directors, and with knowledge of the
material facts concerning the transaction and the director's
interest in the transaction."

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

Expertise

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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