Q&A #99 – Do non-spouse romantic relationships raise conflict of interest issues?

Question: I serve on the Board of a 501(c)(3) organization, and we recently learned that one of our Board members is in a romantic relationship with a service provider who works for the organization as an independent contractor. As of now they are not married. Is this considered a conflict of interest?

Answer: While a non-spouse romantic relationship would ordinarily fall outside of the scope of the conflict of interest rules in the federal tax code, and may or may not be addressed by your organization’s conflict of interest policy and applicable state nonprofit corporation statute, it would be prudent to treat this situation like any other conflict of interest. Regardless of the legal formalities, these types of relationships can certainly lead to the perception that there is a conflict and should be treated as such to avoid the risk of damaging your organization’s reputation.

The main tax rules governing nonprofit conflicts of interest are the excess benefit transaction rules for public charities and the self-dealing rules for private foundations. These rules consider “family members” of Board members, officers, and similar insiders of the organization to be “disqualified persons,” which generally means that compensation paid to a family member of a director or officer gets the same scrutiny as if the compensation were paid to the director or officer directly. However, the term “family” is narrowly defined and doesn’t extend to non-spouse romantic relationships.

Since many nonprofits adopt conflict of interest policies based on these federal tax rules (such as the sample conflict of interest policy provided by the IRS in the Form 1023 instructions), the issue of conflicts arising from personal relationships besides “family” is very often not addressed.

State nonprofit corporation statutes vary widely in their approach to conflict of interest transactions, with some extending only to include business relationships, and others (such as Virginia) applying broadly to any relationship that “would reasonably be expected to affect adversely the objectivity of the director.” The latter would arguably encompass a wide range of personal relationships beyond family (for example, (romantic, close friendship, professional network, and business relationships), so make sure to review your state nonprofit corporate statute. 

Nonetheless, the perception of a conflict of interest can be just as important as the legal definition. Hiring a Board member’s spouse poses similar risks to public trust and an organization’s reputation as hiring a Board member’s romantic partner, particularly if the full Board is unaware of the circumstances and does not use best practices to manage the conflict (some of these best practices are described in Q&A # 54 and Q&A # 55).

Planning Tip – Make sure that your organization’s annual conflict of interest disclosure statements include a broad catch-all question designed to surface and bring attention to sensitive situations that may not be strictly covered by the conflict of interest policy. For example: “Are you aware of any other circumstances that may lead to the perception of a conflict of interest?” or simply “Please disclose any other actual or potential conflicts of interest not listed above.” A broad catch-all question helps to ensure that perceived conflicts are disclosed and not missed due to technicalities.

Directors, officers, and other organization leaders should be encouraged to err on the side of transparency and disclose any and all close personal relationships they have with persons receiving compensation from the organization, whether or not they are considered family members. Organizations should consider revising their conflict of interest policies and annual disclosure statements if these documents do not adequately address these types of sensitive situations.

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