The concept of inurement takes the notion of private benefit further. Code section 501(c)(3) states that no part of an organization’s net earnings may inure to the benefit of a private shareholder or individual. This means that a 501(c)(3) organization is prohibited from allowing its income or assets to accrue to insiders. 

Examples of prohibited inurement include paying dividends or unreasonable compensation to insiders, and transferring property to insiders for less than fair market value.

The prohibition of inurement to insiders is absolute. Any amount of inurement is grounds for loss of tax-exempt status. In addition, the insider involved may be subject to excise tax.

In contrast, if the activities of an organization privately benefit someone who is not an insider, that benefit must be substantial in order to jeopardize the organization’s tax-exempt status.

Prohibited inurement or private benefit does not include reasonable payments for services, other payments that further tax-exempt purposes, or payments for the fair market value of real or personal property.

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