Nonprofit Law/Large bank account - new president wants to spend it
Our 501 (c) (3) group has a bank account with over $10k that was raised through plant sales from donated plants, an endowment from the founder, and membership fees. We maintain memberships with like organizations for the benefit of our members and often trade services or volunteer work quid-pro-quo so the club does not pay directly for use of facilities for meetings.
Recently, a new "slate" was presented to the membership where a new board was created. The new president discovered the amount upon release of bank statements to the new board. In our 1st meeting, she tried to get the new board to approve using that money to rent a new facility for a holiday party (one has already been reserved and paid for and is for members only for insurance purposes) and allow friends and family to attend. This facility is a rec room at HER condo and the monies would go to her HOA.
I feel this is a conflict of interest, first of all, and members would have to also pay for parking (which she also suggested be paid for with our club monies). All our money, to date, has always been used for scholarships or admission fees to events where we have a booth in order to garner more members. Non of the volunteers at these events are compensated or reimbursed for parking. She wants to change, this as well. I am concerned that this is going to be a slippery slope and the bank account will dwindle under her tenure. I am very worried about misappropriation of funds but am not 100% clear on what we can and cannot use our money for.
Our new treasurers are both very familiar with charitable organization book keeping and while I am confident they would not do anything to compromise the clubs accounts, I do not have that same feeling with out new president, especially since she did nothing about talk about spending it for the 2 1/2 hrs we met for our first board meeting (plus she did not invite any members which also makes me suspicious).
A 501(c)(3) organization is to have exclusively charitable, religious or educational activities. It appears that your organization wants to have a holiday party and that is fine, but the expenses should come not from the general fund, but specifically from admission fees. If your organization does not want the expenses to come from admission fees computed for the event, then membership fees may be used, but then the members would not be able to deduct, as a charitable donation, the portion that they are receiving in value.
As to charitable deductions, see IRS Publication 526 "Charitable
Donations" which is available at:
on page 6 middle column under the heading "Contributions
You Cannot Deduct" is "3. The part of a contribution from which
you receive or expect to receive a benefit"
on page 4, first column, "You may be able to deduct membership
fees or dues you pay to a qualified organization. However, you can
deduct only the amount that is more than the value of the benefits
you receive. You cannot deduct dues, fees, or assessments paid to
country clubs and other social organizations. They are
not qualified organizations."
As for the question about conflict of interest, it appears that the new president does have a conflict of interest. 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
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--
--- 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
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. I have in my profile that this free forum is only for general questions about IRS federal exemption issues of 501(c)(3) organizations. However, I will direct you to California Corporations code section 5233 at:
..."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."
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.