One of the generous donors of your animal rescue organization donates an immaculately maintained BMW for its use. While you appreciate the gesture, what your organization really needs is cash for cat food, not a fancy car. One of the members of the board of directors, however, would like to purchase it for her teenage daughter – and she is willing to pay a fair price.
Non-Profit Organizations and Fair Market Value of Property
Non-profit organizations are called “non-profit” because all revenues are used for the purpose of running the organization. Unlike a “for profit” organization, a non-profit is prohibited from distributing its revenue to its board of directors, officers, members or any private individuals. While formed under state law, a nonprofit can apply for 501(c)(3) tax-exempt status with the Internal Revenue Service. An excess benefit transaction occurs when a 501(c)(3) organization sells property to a board member, employee or other private party for less than fair market value. So, if your non-profit sells the donated BMW for less than it is worth, it violates the IRS rule that prohibits such transfers of assets to board members and others. The IRS may assess a penalty on the board member and other managers involved in the transaction. The non-profit organization itself could face revocation of its tax-exempt status, although this is unlikely since the IRS can punish the individuals who participated in the transaction. If the non-profit's tax-exempt status is revoked, its revenues become taxable in the same manner that any for profit business would be taxed.