Note from the Accountant: Most of the following is cautionary. Once you’ve read through this message, maybe we can talk again by phone, and discuss how the Foundation might accomplish its very worthy charitable and family-oriented goals, while remaining in compliance and avoiding red flags.
o Impact on donor: For an individual to qualify for a charitable contribution deduction, there are several criteria, including that no goods or services may be received by the donor in exchange for the donation. The IRS could construe that a payment of a specified amount, which entitles the payor to a board position that includes financial benefits (reimbursement of travel), is a payment in exchange for goods/services and would not allow the deduction.
o Impact on the organization: This practice could also create issues for the Foundation – it may be seen as “selling” board positions, rather then electing individuals based on their qualifications and abilities to govern, and may be taxed as unrelated business taxable income (UBTI).
o One of the most common reasons nonprofit organizations lose their exempt status is private inurement. And any prohibited benefit inuring to a private interest (individual or entity) will jeopardize the organization’s exempt status.
o A 501(c)(3) organization must use every dollar of its assets and income to benefit the public/achieve its exempt purpose. Payments not in furtherance of the approved exempt purpose will be treated as “taxable expenditures.”
o If the reimbursement of travel expenses is found to provide a prohibited benefit to the individual, and/or to be not in furtherance of the Foundation’s exempt purpose, exempt status could be at risk. The Foundation should reimburse only those expenses that are incurred by an individual in the performance of Foundation business.
o Substantial contributor to the foundation,
o Foundation manager (officer, director or trustee, or any individual having similar powers and responsibilities)
o Owner of the foundation’s substantial contributors,
o Family member of individuals described above, and
o Entity owned by any of the above.
o Sale, exchange, or leasing of property,
o Lending of money or other extension of credit,
o Payment of compensation or reimbursing payment or reimbursement of expenses to a disqualified person,
o Furnishing of goods, services, or facilities,
o Transfer of foundation income or assets to, or for the use or benefit of, a disqualified person, and
o Agreement to make a payment of money or property to a government official.
o Loan by a disqualified person to a foundation, if no interest is charged,
o Payment of expenses of a disqualified person by the foundation, if the expenses are incurred in the performance of foundation business.
Other Notes and Questions:
Regarding some of the issues/rules mentioned above, there is no bright line – the IRS’ treatment will depend on the “facts and circumstances.” To avoid IRS scrutiny and the harsh penalties and sanctions that exist for private foundations, creating the best set of facts should be the goal.