forbids the use of the income or assets of a tax-exempt organization to directly or indirectlyunduly benefit an individual or other person that has a close relationship with theorganization or is able to exercise significant control over the organization.The essence of the inurement proscription is found in the language of Code § 501(c)(3),
which provides that no part of a 501(c)(3) organization’s net earnings can inure to the
benefit of any private shareholder or individual. Although this would clearly prohibit thedistribution of dividends to those in control of the organization, the inurement prohibition ismuch broader than that in application. Most exempt organizations
including 501(c)(3) and501(c)(6) organizations
are subject to the inurement prohibition.The goal of the inurement prohibition is to prevent siphoning off
of an exempt organization’s
those in control of the organization.
In this context, “control” may be
direct (as in the case of formal directors) or indirect (such as control over others who areofficers or directors). Any time assets of the organization flow through to benefit the
organization’s insiders, whether directly or directly, inurement is an issue.
The inurement restriction is absolute: An organization that violates this prohibition will notqualify (or will cease to qualify) for tax exemption regardless of whether it otherwise meetsthe appropriate statutory requirements for exemption. Because of the harsh nature of thisrule, it has historically been enforced only in the most egregious circumstances.Because the inurement prohibition was rarely used, Congress enacted a related set of rules
that would provide an “intermediate” sanction.
The intermediate sanction rules are
“intermediate” in the sense that it is not as severe as outright revocation of tax exemption
but does penalize the organization. The intermediate sanction regime is discussed in our section on
. In cases involving inurement, the IRS may impose the intermediate sanction penalties inlieu of or in addition to the revocation of tax exempt status. The IRS has publishedstandards to determine how it will decide whether to revoke the 501(c)(3) status of anorganization that has engaged in a transaction that constitutes both inurement and excessbenefit. These standards provide that the IRS will consider all relevant facts andcircumstances in making a determination of whether to revoke the tax exempt status of anorganization that engages in an excess benefit transaction that constitutes inurement.Factors the IRS will consider include:
The size and scope of the organization’s regular and ongoing activities that further
exempt purposes before and after one or more excess benefit transactions occurred;
The size and scope of one or more excess benefit transactions relative to the size and
scope of the organization’s regular and ongoing exempt functions;
Whether the organization has been involved in repeated excess benefit transactions,