Q&A #125 – Are in-kind contributions by Board members considered conflict of interest transactions?
Question: A Board member of a 501(c)(3) nonprofit organization has offered free use of office space inside the Board member’s place of business without seeking reimbursement for any portion of the lease payments, utilities, or other occupancy expenses. Is this considered a conflict of interest transaction that needs to follow the process in the organization’s conflict of interest policy?
Answer: Nonprofit conflict of interest policies are generally aimed at ensuring the organization’s assets are not used to provide excessive benefit to the people who run the organization. While purely donative arrangements (such as providing free office space to the organization) are not typically considered conflict of interest transactions, it is best to err on the side of full disclosure and review by independent Board members because individuals sometimes benefit from these transactions in ways that are not immediately apparent.
Consistent with the tax rules governing conflicts of interest involving 501(c)(3) public charities (mainly the “private inurement” rule and the “excess benefit transaction” rules), the core purpose of a conflict of interest policy is often described as protecting the organization’s interest “when it is contemplating entering into a transaction or arrangement that might benefit the private interest of an officer or director of the organization,” as stated in the IRS sample conflict of interest policy from the Form 1023 instructions.
Consequently, conflict of interest policies need to clearly cover compensation arrangements, loans, asset sales, and other similar transactions in which “interested persons” are in a position to receive a benefit. The review and approval processes described in Q&A #54 and Q&A 55 are intended to ensure any such benefit is not excessive.
Straightforward, traditional donations are generally not within the scope of a conflict of interest policy (although certain donations, like gifts of stock and other property, may require special attention under the organization’s gift acceptance policy). The same analysis applies to volunteer efforts and the donation of time and services.
However, certain in-kind contributions are different because they often have the potential to provide a hidden benefit to the contributor and/or raise a perceived conflict of interest in the eyes of the public. Providing free office space to the organization is one relatively common in-kind contribution that deserves closer scrutiny.
For example, if the arrangement is structured in a way that relieves the contributing Board member of a debt or obligation (such as if property is given to the organization subject to a mortgage or an office lease is assigned to the organization) then the arrangement would certainly provide a benefit that warrants close review by independent Board members, even if the transaction does not involve any payment by the organization.
Further, it is possible that operating the organization from the office of a Board member’s business could indirectly benefit a Board member by raising the profile of the property or bringing more potential customers to the business, as in the case of P.L.L. Scholarship Fund v. Commissioner, 82 T.C. 196 (1984) that we discussed in a recent article.
And, as always, public perception and the organization’s reputation should be top of mind. Even if having the donated office space is in organization’s best interest (as it often is), the organization should consider whether the arrangement might give the impression that the organization is improperly intertwined with the business(es) with whom it shares the space.
Planning Tip – While it is usually recommended that nonprofit organizations avoid including extraneous details in their Board meeting minutes, the review and approval of conflict of interest transactions is an area where details are very important. Among other details, do not neglect to describe the research that the independent Board members undertook to determine that the transaction was in the organization’s best interests and include the reasoning that led to this conclusion.
Conflict of interest policies should not discourage organizations from entering into favorable transactions with Board members. But erring on the side of full disclosure and review by independent Board members protects the organization by ensuring that potential complications are given proper consideration.
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