1990 EO CPE Text
C. OVERVIEW OF
INUREMENT/PRIVATE BENEFIT ISSUES IN IRC 501(c)(3)
1. Preface
An apocryphal domestic relations case has a judge inquiring of the elderly plaintiff about why, after some fifty years of marriage, she was now seeking a divorce. "Well, your honor," she replied, "enough is enough!"
In the charitable area, some private benefit may be unavoidable. The trick is to know when enough is enough.
2. Introduction
IRC 501(c)(3) provides exemption from federal income tax for organizations that are "organized and operated exclusively" for religious, educational, or charitable purposes. The exemption is further conditioned on the organization being one "no part of the net income of which inures to the benefit of any private shareholder or individual." This article examines the proscription against inurement and the requirement that an organization must be organized and operated exclusively for exempt purposes by serving public rather than private interests.
3. The Prohibition Against Inurement of Net Earnings
A. What Is Inurement?
The statutory prohibition against inurement of net earnings first appeared in 1894. The provision has been carried forward without significant Congressional comment or debate through successive revenue acts and codifications. See "The Concept of Charity" in the Exempt Organizations Annual Technical Review Institutes for 1980 beginning at page 7. While the provision speaks of "net earnings," it is not interpreted in a strict accounting sense to mean the remainder after expenses are subtracted from gross earnings. Any unjust enrichment, whether out of gross or net earnings, may constitute inurement. See People of God Community v. Commissioner, 75 T.C. 127 (1980).
Regs. 1.501(c)(3)-1(c)(2) explains the prohibition against private inurement as follows:
