The Scintilla of Individual Profit: In Search of Private Inurement and Excess Benefit
Posted: 25 Apr 2000
The prohibition against private inurement has been the linchpin of the law of charitable tax exemption since the first corporate tax. And yet the prohibition remains elusive and undefined. With the manifestly business-like operations of tax exempt organizations and the recent imposition of personal liability for violations of the prohibition, via IRC 4958, it is more important than ever that private inurement be identifiable and understood according to a stated principle. A detailed study of the manifestations of private inurement suggests that the heretofore unstated principle prohibits the synonymity of individual and entity wealth such as is appropriate between a partner and partnership or shareholder and corporation. Three generic forms of private inurement are identified and explained as strict accounting private inurement, incorporated pocketbook private inurement, and joint venture private inurement. Each of four modern theories regarding tax exemption relies, in one form or another, upon the prohibition against private inurement for its validity. Those theories are espoused by Professors Henry Hansmann, Rob Atkinson, Nina Crimm, Mark Hall and John Columbo. The adoption of the excess benefit scheme and the Service's apparent approval of gainsharing compensation methods suggests that profit taking is not inherently inconsistent with charitable tax exemption and thus calls into question the correctness of modern theory. Professor Evelyn Brody's work on the manner in which agency costs are similarly incurred by both nonprofit and for-profit entities seems to support the article's conclusion that profit taking, per se, is not inherently inconsistent with charitable tax exemption. After defining the generic forms of private inurement, the article builds upon Professor Brody's implication and concludes that gainsharing and other forms of profit-sharing designed to reduce inevitable agency costs of charitable operations is not inconsistent with charitable tax exemption.
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