Our small 501(c)(3) nonprofit organization holds an annual free public event with the dual purpose of drawing in new members and raising funds for another charity. Attendance is usually spilt about 50/50 between club members and the general public. We raise funds through a silent auction and a raffle of donated items. We usually use $1000 of club funds for some advertising but mainly to pay for entertainment, and we raise 2-3 times that amount to donate to the other charity. A board member is telling us that we can no longer do this because it is a form of private inurement. He believes we are not allowed to spend any money if it has any direct benefit to our members. Is he right?
That sounds like an extraordinarily narrow interpretation of the private inurement rules. Assuming that you operate a legitimate charitable program throughout the year and have more than a handful of members, it is hard to imagine that the IRS would challenge your exempt status because some of your members enjoy the entertainment at a membership outreach and fundraising event. (See Ready Reference Page: “Charities May Not Confer Private Benefits”) Members of charitable organizations participate in fundraising events all the time and enjoy the entertainment on the same basis as other participants. Their benefit is incidental to the purpose of the event and the event itself is incidental to the charitable program of the organization. As long as the event is only once a year and the outlay is only about $1000, I would say you should keep on doing it if you think it is fulfilling your goals. And it is perfectly okay to have some fun while you are at it.