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Is this a possible conflict of interest?

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Is this a possible conflict of interest?

I am working with an all-volunteer nonprofit that has a possible conflict of interest question.  The president of the board pays a member of his family (who is also on the board) to mow the grass at our facility without putting the job out to bids or seeking other estimates.   The president pays his father (who is also on the board) when his father purchases materials and installs things (e.g. ceiling fans) in our buildings.  Other members of the board are concerned about this, but are afraid to broach the subject. They feel it is a conflict of interest and are looking for guidance on how to handle the situation.

The only way to handle the situation is to face it and deal with it.  It is an obvious conflict of interest when an organization contracts with members of the board or their family members to provide goods or services to the organization.  It is not necessarily illegal, however, if the cost is fair to the organization.

You don’t identify the tax status of your organization, but if it is a 501(c)(3) public charity or a 501(c)(4) social welfare organization, paying too much for these services can be considered an “excess benefit,” with serious tax consequences for those who receive the excess or for those who knowingly approve the excess.  (See Ready Reference Page: “Charities Must Avoid Excess Benefit Transactions”)  There may not be enough involved here for the IRS to get involved, but the “safe harbor” procedures for determining whether the payments are reasonable or not would provide a good guide for your organization to be sure that things are okay.  Unless your board is going to prohibit any conflicted transactions (which in general I don’t think is a good idea), it ought to require that these safe harbor rules be put into place so that everyone can be confident that what they are doing is within the law.

Tuesday, June 28, 2016

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