inerment? innermet? enermunt?
November 1, 2013 7:44 AM   Subscribe

What is the word (if any, apparently) for the misuse of a nonprofit's funds for personal uses?

I could have sworn it was something very much like "inerment," but the internet is not corroborating this at all.

More context: Say a nonprofit organization has a conference in Hawaii. It's okay for that nonprofit organization to pay for the event itself, but not for a board member's plane ticket, hotel, surfing lessons, or whatever.
posted by cmoj to Writing & Language (11 answers total)
I thought the word was embezzlement...
posted by The Blue Olly at 7:46 AM on November 1, 2013 [1 favorite]

posted by phunniemee at 7:49 AM on November 1, 2013

Best answer: I think you're thinking of "private inurement".
posted by hanoixan at 7:50 AM on November 1, 2013 [10 favorites]

AKA inurement of private benefits.
posted by The 10th Regiment of Foot at 7:54 AM on November 1, 2013

Best answer: Depending on exactly what you mean, the word you're looking for is either "inurement" or "embezzlement". Both involve the use of corporate nonprofit funds for personal benefit. The distinction is that "inurement" is the legitimate use of corporate nonprofit funds in ways that violate the IRS code on nonprofit organizations, whereas "embezzlement" is the illegitimate use of nonprofit corporate funds.

For example, it's perfectly fine for a business to pay for its board members to go to Hawaii, put them up at nice hotels, pay for their resort entertainments, the whole nine yards.* But it's not okay for a nonprofit organization to do that, not because there's anything wrong with any of those things, but because nonprofit entities aren't really supposed to be about funneling large amounts of money to specific people, especially people involved in the organization. For-profit businesses, on the other hand, are about precisely that. So what's okay for a for-profit business might be inurement for a nonprofit.

But it's never okay for someone at the business to simply use corporate funds for personal expenses. Doesn't matter really what the expense is, or what kind of entity, you're not allowed to raid the till to pay for your own expenses. That's the company's money. If the company decides to give you money, you can spend it on whatever you want. If the company decides to spend money on you, hey, awesome. But employees--and even executives--generally don't have permission to simply put that trip to Vegas on the company credit card, or give themselves a little bonus because they feel like it. That's embezzlement, and it doesn't matter whether the company is for-profit or non-profit. Rather than just putting the entity's tax status in jeopardy, this is illegal.

So there you go. Depending on what kind of thing you're talking about, this is either inurement or embezzlement. Specifically, if the entity had legitimately authorized certain payments, it might be inurement. If it hadn't, it's always embezzlement.

*Assuming, that is, that all of these expenses are appropriately accounted for and the relevant taxes are paid.
posted by valkyryn at 8:05 AM on November 1, 2013 [8 favorites]

It's okay for that nonprofit organization to pay for the event itself, but not for a board member's plane ticket, hotel, surfing lessons, or whatever.

Why would it not be okay for the non-profit to pay for/reimburse the travel and accommodation expenses of the plane ticket and hotel? It would be perfectly acceptable so long as there is a business reason for these expenses i.e. traveling to and attending the conference. In fact, the IRS requires for-profit and non-profit organizations alike to reimburse employees for such travel and entertainment expenses. (the windsurfing lessons would very likely be a non-reimbursable personal entertainment expense, although it could conceivably be covered if it was used to court a big-time donor or was otherwise substantially related to furthering the business of the non-profit)

To answer your question, it is the doctrine of private inurement, which is relevant to a organization's 501(c) status. Section 501 provides, in part, “no part of the net earnings of which inures to the benefit of any private shareholder or individual” may be exempt under section 501(c)(3). Violation of this doctrine subjects the organization to potential loss of its exempt status.

However, this example doesn't really come under private inurement, in my view. It applies to "insiders" such as directors and officers who are in a position to influence the organization. It is essentially an unjust enrichment theory that will tend to arise from conflict of interest issues. For example, if an insider provides a good or service to the non-profit at a price above fair market value or if the insider has a compensation contract with no pay cap.
posted by Tanizaki at 8:08 AM on November 1, 2013 [1 favorite]

Why would it not be okay for the non-profit to pay for/reimburse the travel and accommodation expenses of the plane ticket and hotel?

It is okay for employees but usually not for board members who are excluded persons under some section of nonprofit law. I am not sure if this applies to all nonprofits or only private nonoperating ones, however.
posted by elizardbits at 9:12 AM on November 1, 2013

elizardbits: "It is okay for employees but usually not for board members who are excluded persons under some section of nonprofit law. I am not sure if this applies to all nonprofits or only private nonoperating ones, however."

This definitely does not apply to professional/membership associations. I'm pretty sure it doesn't apply to operating foundations or public charities, either.
posted by desuetude at 10:37 AM on November 1, 2013

Best answer: Tanizaki is right: Inurement refers to the benefits received by insiders. But the other things being posted are, for the most part, misconceptions about non-profit status, largely born of a Puritanical view of public service.

Paying expenses for board members is not barred under IRS law. Even paying board members a salary or stipend is not barred under IRS law, although it is often barred under the non-profit's bylaws. What is barred under IRS law is for the proceeds of the non-profit to be distributed to the insiders (which includes founders, board members, principal staff) -- because then the organization is no longer non-profit. (To be clear, a non-profit can still make a profit; it just can't distribute it to the people who run the organization. It can only use the profit for the organization's benefit. Otherwise board members are essentially shareholders, and the organization is a for-profit corporation. This is pretty simplified, but that's the gist.)

Here's an example: A non-profit foundation is established by Mr. and Mrs. Wilson to provide college scholarships. Mr. and Mrs. Wilson donate $100,000 to the foundation, and receive a tax deduction for their donation. If those scholarships were awarded to Mr. and Mrs. Wilson's children, this would be personal inurement, and would jeopardize the foundation's non-profit status. The Wilsons can't evade tax law this way. However if those scholarships were awarded to students who are unrelated to the Wilsons, the recipients could spend the scholarships on anything the foundation permits them to. If the foundation doesn't specify what the money must be used for, the recipients could go to Hawaii and take surfing lessons with the money so long as they met the other criteria (e.g. must be enrolled in college).

The Wilson Foundation holds a conference in Hawaii, at which board members from three other states converge for three days of long-term planning meetings. There is nothing about paying for a board member's hotel and other travel expenses that constitutes inurement. All totally legit, although donors to the foundation might question the wisdom of holding the conference in Hawaii. (Wisdom and legality aren't the same.)

On the question of surfing lessons, it is actually probable that this kind of expense is legitimate and wouldn't violate the non-profit status of the organization; imagine if instead of surfing lessons in Hawaii, it was just a potted plant given for five years of service. That certainly wouldn't raise any red flags. The only difference is the appearance of impropriety, and the questions to ask would be, Who decided this was an okay benefit to provide? Was it in any way associated with the organization's mission, e.g. is the organization a youth-sports promotor or a marine-protection organization or similar? How are the board members chosen, and what is their relationship to the founders of the organization? And again, the wisdom of paying for surfing lessons would be different from the question of the legality.

However, if the "conference" is attended by the "board" which consists of Mr. and Mrs. Wilson and their children, and the "meetings" have subjects like "corporate bonding" and consist only of surfing lessons and dinners out, then the entire thing would be considered "inurement" because it's not legitimate non-profit business, but instead a sham for a tax-free vacation for the Wilson family. The IRS would likely yank their non-profit status, make them pay back taxes, and fine them a sizable amount. Might be a criminal violation, too.

And as Tanazaki says, if the surfing lessons were provided by a board member, who received three times the market rate for providing them, that's inurement because the board member who likely influenced the decision to pay this much benefitted from that decision. (Same is true if the board member's lawn care service mows the lawn outside the women's shelter for more than the going rate -- it doesn't have to be egregious or ostentatious to be inurement.)

IRS involvement (and thus the question of "inurement") only comes in if the organization appears to not actually have an appropriate mission, or to not actually advance that mission, and instead appears to exist to evade taxes and provide for the benefit of the organization's insiders (board members, employees, even some beneficiaries).

Hope that clears things up.
posted by Capri at 12:50 PM on November 1, 2013 [2 favorites]

My apologies to anyone named Wilson who is involved in legitimate work. I picked this name out of the air. Some of my best friends are named Wilson. Honestly.
posted by Capri at 12:54 PM on November 1, 2013

Response by poster: "Inurement" is indeed the word I was looking for.

My example did muddy the waters a little bit, but I am not anyone's lawyer and glad of it.
posted by cmoj at 1:37 PM on November 1, 2013

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