Nonprofits and Prohibited Inurement (?)

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Cory D. Halliburton

Cory D. Halliburton



Cory Halliburton serves as general counsel and business adviser to a nationwide nonprofit / tax-exempt client base, as well as for multi-state professional service companies. He is a results-oriented attorney, with executive-level strategy and an understanding of the intersection of law and business judgment. With a practical upbringing, he pushes for process-driven results in internal governance, strategy and compliance with employment law, and complex or unique contracts and business relationships.

He dedicated the first ten years of his practice to mainly commercial litigation matters in West Texas and the Dallas-Fort Worth Metroplex. During that experience, Mr. Halliburton transitioned his practice to a more general counsel role, with an emphasis on nonprofit and tax-exempt organizations, advising those organizations through formation, dissolution, litigation, governance, leadership succession, employment law, contracts, intellectual property, tax exemption issues, policy creation, mergers and other. He has served as borrower’s counsel for tax-exempt bond and loan transactions near $100 million aggregate; some with complex pre-issue construction, debt payoff and other debt financing challenges.

Mr. Halliburton also serves as outside legal and business advisor for executive professionals in multi-state engineering firms, with a focus on drafting and counsel on significant service agreements, employment law matters, and protection of trade secrets.

It’s always wonderful when Congress includes in a statute a word that practically no one – except maybe tax attorneys – might use in their lifetime, much less in day-to-day parlance:


When was the last time you used the word “inure” in an everyday conversation?

Never, I predict.

However, the word “inure” is one of the most critical words in the nonprofit or tax-exempt space. In this regard, section 501(c)(3) of Title 26 of the Internal Revenue Code (“Code”) affords exemption from federal income tax to “Corporations [and others] . . . organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, . . . no part of the net earnings of which inures to the benefit of any private shareholder or individual . . . [.]. See 26 U.S.C. § 501(c)(3).

In common usage, “inure” means, basically, to vest or granting a right of enjoyment. And, “private shareholder or individual,” as used in section 501(c)(3) of the Code, means, basically, control persons – officers, directors, and those in managerial control of the organization.

Under section 501(c)(3) of the Code, the prohibition of “inurement” to any private shareholder is absolute.

In my near 17 years of law practice dedicated to nonprofit and tax-exempt organizations, I believe one of the best descriptions of the “no inurement” requirements of section 501(c)(3) was scribed in the case of Family Trust of Massachusetts, Inc. v. United States, 892 F.Supp.2d 149 (D.C. Dist. Ct. 2012). There, the court in the District of Columbia described what is meant by the “no inurement” provision of section 501(c)(3) of the Code:

The public-benefit requirement highlights the quid pro quo nature of tax exemptions: the public is willing to relieve an organization from the burden of taxation in exchange for the public benefit it provides, because for every dollar that a man contributes to these public charities, educational, scientific, or otherwise, the public gets 100%.

Based on the theory that the Government is compensated for the loss of revenue by its relief from financial burdens which would otherwise have to be met by appropriations from other public funds, and by the benefits resulting from the promotion of the general welfare.

In essence, anything less than “100 percent” would deny the public of at least some tax revenue to which it is entitled, and, therefore, “no part of the net earnings . . . which inures to the benefit of any private shareholder or individual” is permitted.

Id. at 155-156 (emphasis added).

Insights. Potential prohibited inurement can come in many forms in arrangements with “private shareholders or individuals,” including payment of more than reasonable compensation, payment of excessive rent, receipt of less than fair market value in sales or exchanges of property, inadequately secured or termed loans, unaccounted for credit card charges and/or expenses paid for or reimbursed by the exempt organization. And, an organization’s attempt after the fact to demonstrate that an undocumented or excessive transaction is a typical business arrangement is not likely to prevent a finding of inurement that is prohibited under section 501(c)(3) of the Code. In any event and at all times, organizations who enjoy exemption from federal income tax under section 501(c)(3) of the Code are wise to keep a keen eye on any situation, transaction, or arrangement that could constitute prohibited “inurement.” And, even with all this, I still doubt I will use the word “inure” in my discussions with my kiddos.