The Private Inurement Prohibition, Excess Compensation, Intermediate Sanctions, and the IRS’s Rebuttable Presumption: A Basic Primer for 501(c)(3) Public Charities

Executive Summary

The private inurement prohibition precludes individuals who have close relationships with and the ability to exercise control over a 501(c)(3) public charity from benefiting unfairly or unreasonably from that charity's income or assets.

The most common type of private inurement is excessive compensation paid to insiders. There are, however, many other forms of private inurement that can also result in the revocation of a charity's tax-exempt status and/or in the imposition of financial penalties known as "intermediate sanctions." The courts and the IRS have consistently ruled that any unreasonable benefit or inurement, however small, is impermissible.

The IRS has significantly increased its enforcement efforts in the area of excessive compensation and recently assessed millions of dollars in penalties for these types of violations. In addition, the IRS has indicated that it will now include excess compensation analyses in every future audit it conducts. To help charities comply with this sometimes complex area of the law, the IRS has outlined steps a charity can take to establish a "rebuttable presumption" that payments to insiders are presumed to be reasonable and not excessive.

Publication Date: June 2009