In a new Technical Guide (TG 3-8), the IRS TE/GE division discusses disqualifying and non-exempt activities, inurement, excess benefit transactions, and private benefit under IRC Section 501(c)(3). Technical Guides (TGs) are comprehensive, issue-specific documents that update and combine Audit Technique Guides (ATGs) with other technical content that, once completed, replace prior ATGs.

TG 3-8 addresses the concepts of inurement and private benefit under IRC Section 501(c)(3) and the differences between the two. An otherwise qualifying organization will be disqualified from exemption if it impermissibly benefits private interests, either through inurement of its net earnings to certain "insiders" (inurement) or by more than incidentally benefiting the interests of persons who, though not "insiders," do not comprise a charitable class (prohibited private benefit).

The TG further clarifies the difference between private inurement and private benefit; although closely related, they are, the TG notes, separate and distinct concepts that are often conflated and used interchangeably. Inurement is the use of an IRC 501(c)(3) organization's net earnings to impermissibly benefit an insider; for instance, by paying unreasonable compensation to an insider, or conferring a greater-than-fair-market-value benefit to an insider in exchange for goods, property or services.

Private benefit is not limited to insiders and is permissible if it is qualitatively and quantitatively incidental to furthering an organization's tax-exempt purposes. To be qualitatively incidental, private benefit must be a necessary by-product of an activity that benefits the public and accomplishes exempt purposes; in other words, the organization cannot provide that benefit to the public without necessarily benefiting certain individuals. To be quantitatively incidental, private benefit must not be substantial relative to the public benefit.

The IRS has the discretion to revoke an organization's IRC Section 501(c)(3) tax exemption if it provides a prohibited private benefit and/or engages in any kind of inurement.

The TG also describes excess benefit transactions under IRC Section 4958, a concept closely related to inurement. An excess benefit transaction is one in which an IRC Section 501(c)(3) or 501(c)(4) organization directly or indirectly confers a benefit on a "disqualified person" (similar to an "insider" under inurement rules) and the value of that benefit exceeds the value of the consideration (including performance of services) provided by the disqualified person. Under IRC Section 4958, a disqualified person who receives an excess benefit is subject to a 25% excise tax on the excess benefit and may be subject to an additional 200% excise tax on that benefit if the disqualified person does not timely correct the excess benefit transaction. These excise taxes are known as "Intermediate Sanctions" because, unlike the private benefit and inurement rules, they provide the IRS with the ability to impose an intermediate penalty between revocation of exemption and an admonishment/advisory letter.

The TG concludes with "Examination Techniques," which provide insight into IRS TE/GE examination priorities and processes involved in the examination of private inurement and private benefit transactions, including techniques revenue agents can use to identify private inurement and private benefit. For instance, the technical guide suggests that agents review an organization's Forms 1023 and 990, salaries, fringe benefits, and contracts for services, the status of the person as an insider or outsider, the composition of an organization's assets, transactions with related entities, fundraising agreements and whether a benefit provided to an individual outweighs the benefit to the public.

The IRS also recently released two additional TGs:

• TG 3-27 covers foundation classification under IRC Section 501(c)(3), specifically foundations classified as other public charities under IRC Sections 509(a)(1) and 170(b)(1)(A)(iv), (v), (ix) and IRC Section 509(a)(4).
• TG 70 covers non-exempt charitable trusts and split-interest trusts.

Implications

Though the newly released TGs do not provide any new guidance, they do provide in-depth technical guidance on prohibited private benefit and inurement, excess benefit transactions, foundation classification, and non-exempt charitable and split-interest trusts. These guides are helpful resources for exempt organizations and can be used to better understand and comply with the requirements for maintaining tax-exempt status.