Both the IRS excess benefit statute and the private inurement doctrine DO NOT apply to tax-exempt cooperatives. 26 U.S.C. § 4958(c) defines an excess benefit transaction as “any transaction in which an economic benefit is provided by an applicable tax-exempt organization directly or indirectly to or for the use of any disqualified person.” For the purposes of this statute, an applicable tax-exempt corporation includes “any organization which…would be described in 501(3),(4), or (29)…” See 26 U.S.C. § 4958(e). As far as private inurement goes, the general rule is that no one private individual may benefit (i.e. receive earnings) from a charitable organization. (See Treas. Reg. Section 1.501(c)(3)-1(c)(2)). Allowing such inurement would run contrary to notion that many charitable organizations are set up for the benefit of the public, not individuals. However, coops are the exception to this doctrine. Indeed, tax-exempt organizations under 501(c)(12) do not share the same purpose as 501(c)(3)-(4) corporations. Unlike charitable corporations est. via 501(c)(3), coops organized under 501(c)(12) are set up precisely to benefit their members, who are almost always private individuals. Thus, application of the private inurement doctrine to tax-exempt cooperatives does not seem consistent with their established purpose.
James A. L. Buddenbaum has practiced law for more than 25 years with Parr Richey representing municipalities and businesses in utility, healthcare and general business sectors in both regulatory and transactional matters. Jim also has extensive experience in representing businesses in making large property damage and similar insurance claims.
The statements contained here are matters of opinion for general information purposes only and should not be considered by anyone as forming an attorney client relationship or advice for any particular legal matter of the reader. All readers should obtain legal advice for any specific legal matters.