Legal Definitions - inurement

Inurement refers to the act of conferring a private benefit or advantage upon an individual. In legal contexts, particularly concerning tax-exempt organizations (often called non-profits or charities), it specifically describes situations where the income or assets of the organization are used to provide an undue private gain to an individual who has significant influence over the organization or is closely related to it.

The concept of inurement is central to the "inurement prohibition," a fundamental rule for tax-exempt organizations. This prohibition ensures that non-profits operate for the public good and their stated charitable or educational mission, rather than for the private financial benefit of their founders, directors, officers, or other key individuals. If an organization violates this rule, it risks losing its tax-exempt status.

Here are some examples illustrating inurement:

• Example 1: Excessive Compensation

  A charitable foundation dedicated to providing scholarships to underprivileged students pays its executive director an annual salary that is significantly higher than the market rate for similar positions in comparable organizations, along with covering lavish personal travel expenses unrelated to the foundation's mission.

  Explanation: This situation illustrates inurement because the executive director, an individual with significant influence over the foundation, is receiving an excessive private financial benefit (an overly high salary and personal expenses) from the organization's assets. These assets are intended for the foundation's charitable purpose, not for the undue personal enrichment of its leadership.

• Example 2: Sweetheart Deal for Property

  The board of directors of a community art museum, a tax-exempt organization, decides to purchase a new building for its operations. They choose to buy a property owned by one of the board members at a price substantially above its independently appraised fair market value, without obtaining multiple bids or considering other available properties.

  Explanation: Here, inurement occurs because a board member, an individual with influence over the organization, directly benefits financially from the transaction. The non-profit's assets are used to provide an advantageous sale for the board member, rather than solely serving the organization's public mission by acquiring property at a fair and reasonable cost.

• Example 3: Preferential Loans

  A university, which operates as a tax-exempt educational institution, provides a low-interest loan from its endowment funds to its president for the purchase of a personal vacation home. The terms of the loan are far more favorable than what the president could obtain from a commercial lender, and it was not approved through standard, transparent university financial procedures.

  Explanation: This scenario demonstrates inurement because the university president, a key individual with significant control, receives a private financial benefit (a preferential loan) from the institution's assets. This benefit is not available to the general public or other employees on similar terms and serves the president's personal interest rather than the university's educational mission.