PRIVATE INUREMENT VS. PRIVATE BENEFIT

Code Section 501(c)(3) of the Internal Revenue Code contains the specific requirement that no part of the earnings of an exempt organization inures to the benefit of any private shareholder or individual, thereby giving rise to the rules surrounding private inurement and private benefit. Both rules exist to ensure that charitable assets are preserved for the benefit of the public and are not diverted to private use.

Benefit - In contrast to the private inurement rule, the private benefit rule is not limited to circumstances where the benefits accrue to an organization's insiders. This prohibition includes benefits to "disinterested" persons or entities, or outsiders. However, while private inurement lacks any de minimis concept, the IRS has traditionally allowed some private benefits to inure to outsiders so long as the private benefit is purely incidental to the organizations tax-exempt purposes. A private benefit is considered incidental only if it is incidental in both a qualitative and quantitative sense. To be incidental in a qualitative sense, the activity giving rise to the benefit can be accomplished only by benefiting certain private individuals. To be incidental in a quantitative sense, the private benefit must not be substantial after considering the overall public benefit.