Under the Internal Revenue Code, a taxexempt organization cannot use its assets for the private benefit of corporate insiders, such as the founder, officers and directors, other key employees and their family members (commonly known as the “private inurement rule”).
The Internal Revenue Service has long held that one of the best ways for an organization to ensure it is complying with the private inurement rule is to:
- Adopt a conflict-of-interest policy;
- Regularly monitor compliance with the policy; and
- Ask each individual covered by the policy to disclose, on an annual basis, any relationships with people doing business with the organization that could give rise to a conflict of interest.
Although nonprofit organizations are not required to have a conflict-of-interest policy in order to qualify for federal taxexemption, the IRS considers having such a policy a good governance and accountability practice.