The Prohibitions on Private Inurement & Benefit by Tax-Exempt Organizations and Intermediate Sanctions

The Internal Revenue Code (I.R.C.) contains certain restrictions designed to ensure tax-exempt organizations serve public, not private, interests and cannot be used for personal gain. See, e.g., I.R.C. §§ 501(c)(3), (4). These restrictions derive from statutory text in the I.R.C. and have antecedents in common law rules on charity. Id. Among these restrictions are two prohibitions: (1) the prohibition on private inurement, and (2) the prohibition on private benefit. Id. These two prohibitions are distinct requirements derived from different statutory language, yet they overlap substantially in interpretation and enforcement by the Internal Revenue Service (IRS). Id. Violation of either prohibition is grounds for revocation of an organization’s tax-exempt status. Treasury Regulations § 1.501(c)(3)-1(c)(2), (d)(1)(ii). In addition to the prohibitions, the I.R.C. contains excise taxes on certain transactions that can result in personal gain. See, e.g., I.R.C. §§ 4941, 4958, 4960. These excise taxes provide intermediate sanctions short of revocation of the tax exemption. This report discusses three types of excise taxes that differ in who is taxed, which transactions are taxed, how the tax is calculated, and the types of organizations subject to the tax. Application of the excise taxes to § 501(c)(3) organizations can depend on classification of the organization as (1) either a public charity or private foundation and (2) either a supporting organization or supported organization. Id. §§ 4941, 4958. Focusing on the two most common types of tax-exempt organizations, §§ 501(c)(3) and 501(c)(4) organizations, this report explains the prohibitions on private inurement and benefit, how they differ, and how they overlap. This report also explains when and how excise taxes might apply in lieu of or in addition to revocation. It also describes related proposals that Congress has considered to modify the excise taxes, including to (1) expand the types of individuals upon whom the taxes are imposed, (2) expand the types of organizations subject to the taxes, (3) redefine the transactions subject to the taxes, (4) impose the taxes on organizations, and (5) restrict certain defenses against the taxes.