Here’s an all-too-frequent scenario in nonprofit organizations that places the organization at risk to be assessed excise tax payments by the IRS. A board member of an Organization purchases land adjacent to the nonprofit knowing that the it is looking to either purchase or lease adjacent properties. The board member then leases the property to the Organization for fair market value. The lease is voted on by the full board and everyone is aware of the lease cost. The board would have paid any other potential owner the same amount because it was reasonable. The board was also fully aware that the property was owned by one of its own members. By entering into this lease agreement the board has just compromised its tax-free status and could be assessed an excise tax for this arrangement.
These types of exchanges are known as self-dealing transactions and are subject to excise taxes to be paid by every individual involved in the decision. Every individual aware of the self-dealing transaction, not just the NFP and the board member/property owner is subject to this rule. The tax code states that this board member was a “disqualified person” outside the integrity of the tax-free status afforded the Organization. The rules on “self-dealing transactions” are clearly delineated in Chapters 41 and 42 of the Tax Code.
A “disqualified person” is defined as:
- Substantial contributor,
- An owner (>35%) of a company that is a substantial contributor,
- Nonprofit managers (can include other board members),
- Family members of the managers and owners of these companies
- Other foundations controlled or related to the nonprofit.
Get advice from your CPA regarding potential transactions with anyone who can fit the “disqualified person” definition.
What actions have you seen that might fall within these self-dealing transactions? Again, seek consultation when your organization is considering a transaction with a related party (someone connected to the organization.)
The certified public accounting firm of Cox and Associates CPAs has been serving churches and nonprofit organizations since 1996. Our goal is to achieve excellence in the provision of tax, accounting, auditing, financial education, consultation, and other related businesses services to our clients. Call us with your questions at (281) 399-8153.