Chapter 9 - § 9.3 • PROHIBITION OF PRIVATE BENEFIT

• Jurisdiction: Colorado

§ 9.3 • PROHIBITION OF PRIVATE BENEFIT

§ 9.3.1—General Rules

The prohibition of private inurement, as discussed in § 9.2 above, is deemed a part of the Code's broader prohibition against private benefit. See 2001 EO CPE, "Private Benefit Under I.R.C. § 501(c)(3)." The private benefit doctrine applies only to charitable organizations under I.R.C. § 501(c)(3). While there is no explicit reference to "private benefit" in the Code, private benefit is prohibited because a charitable organization must operate "exclusively for religious, charitable, scientific" and other specified purposes which, generally, benefit the public at large. I.R.C. § 501(c)(3) (emphasis added). The Treasury Regulations provide that an organization will be regarded as "operated exclusively" for exempt purposes only if the organization engages "primarily in activities which accomplish one or more exempt purposes." Treas. Reg. § 1.501(c)(3)-1(c)(1) (emphasis added). An organization is not engaged primarily in exempt purposes if "more than an insubstantial part of its activities" is not in furtherance of an exempt purpose, id., or if the organization pursues a single nonexempt purpose that is substantial in nature. Better Business Bureau v. United States, 326 U.S. 279 (1945). In addition, an organization is not organized or operated exclusively for exempt purposes unless it serves public rather than private interests. Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii).

The broad regulatory rules prohibiting private benefit leave open the practical question of the quantum of private benefit necessary to violate the rules. Thus, in contrast to the absolute prohibition of even a small amount of private inurement with respect to an insider, the private benefit doctrine applies to all non-insider third-party recipients of benefits and requires weighing the benefits in question to determine if they are substantial enough to violate the rules. See § 9.3.3 below.

§ 9.3.2—Incidental Benefits Tests

The U.S. Supreme Court ruled that if private interests benefit incidentally as a result of an organization's charitable activities, the organization's exemption will not be jeopardized. Better Business Bureau v. United States, 326 U.S. 279 (1945). The Tax Court has defined prohibited private benefits as "nonincidental benefits conferred on disinterested persons [that] serve private interests." Am. Campaign Acad. v. Comm'r, 92 T.C. 1053, 1069 (1989). Recognizing that some benefit to private individuals frequently...