What to Know About Inurement and Private Benefit

In May 2025, the IRS released TG3-8 to clarify the disqualifying activities for 501(c)(3) organizations, specifically addressing the differences between inurement and private benefit. Understanding these concepts is crucial for maintaining tax-exempt status, and TG3-8 closely examines how nonprofits manage them and how to better comprehend the associated rules.

Inurement refers to the prohibition against any organization's earnings benefiting private individuals, particularly insiders. Insiders include founders, officers, board members, or anyone with a close connection to or influence over the organization. It's important to note that any amount of inurement, regardless of how minor, can lead to the loss of tax-exempt status. The IRS takes a strict stance on this issue. Examples of inurement include paying insiders excessively, allowing them to use nonprofit property for personal reasons, or engaging in favorable contractual arrangements.

The IRS investigates these matters through forms such as the 1023 and 990 and draws upon several cases to demonstrate the severity of these issues. For instance, in Rev. Rul. 69-383, the IRS determined that compensating a radiologist with a fixed percentage of departmental income was not considered inurement, provided the arrangement was made at arm's length, the compensation was reasonable, and the radiologist did not have control over the hospital. Conversely, in Basic Bible Church v. Commissioner, a church that used 96% of its funds to benefit the founder and his wife had its tax-exempt status revoked. In another case, Housing Pioneers, tax benefits directed to a partnership controlled by insiders were found to be inurement and not permissible.

Private benefit, on the other hand, is broader than inurement. The IRS assesses whether anyone—beyond just insiders—receives more than an incidental benefit from the nonprofit's activities. If the private benefit exceeds what is necessary to achieve the exempt purpose, that can pose a problem. The IRS applies a qualitative and quantitative test, examining not only the amount of benefit but also the reasons behind it.

Several cases illustrate what constitutes private benefit. In Rev. Rul. 67-367, a scholarship fund that exclusively benefited pre-selected individuals nominated by participants in the program was deemed to serve private interests without a public charitable purpose. Similarly, in Rev. Rul. 69-175, a nonprofit established to transport only members' own children via school buses was found to fulfill a personal obligation rather than a public charitable or educational purpose.

An example that was not considered private benefit is Rev. Rul. 70-186, where a nonprofit improved a public lake for recreational use. Although lakefront property owners received incidental benefits, the organization mainly served the public by maintaining a widely used public resource, which the IRS classified as a charitable activity.

Interestingly, not all private benefits are disqualifying. The IRS allows some private benefits as long as they are incidental and necessary to fulfill the organization's mission. For example, in Rev. Rul. 72-559, law students and recent graduates provided free legal services to low-income residents. The personal gain of the interns did not undermine the organization's primary purpose of aiding the poor and distressed, as the public benefit outweighed the private gain from the students' experience.

For anyone involved with a 501(c)(3), TG3-8 serves as a strong reminder that the IRS scrutinizes how resources are utilized. Inurement is always a dealbreaker, while private benefit is more nuanced. The key is ensuring that your organization serves the public interest rather than just benefiting individuals or groups connected to it.

The information provided in this blog post is for general informational purposes only and does not constitute legal advice. Laws and regulations can vary by jurisdiction and may change over time. For specific questions about your situation or legal advice, you should consult a licensed attorney in your area.