The so-called “private benefit doctrine” prohibits 501(c)(3) organizations from providing a “substantial” benefit to private parties. Much has been said and written about what constitutes a substantial benefit; for purposes of this blog, I will simply provide an example to illustrate the point. An organization that presents musical performances, for example, may generally qualify under 501(c)(3). But if it (i) pays its performers twice fair market value, (ii) arranges for all performers to sign a subsequent contract with a for-profit arts company or (iii) if it only performs for one wealthy family, then it would violate the private benefit doctrine by providing a prohibited substantial benefit to (i) the actors, (ii) the for-profit company or (iii) the wealthy family.
In PLR 201125045, the organization’s mission was to “foster intercultural understanding to the world through cultural exchange” and it sought 501(c)(3) status on the basis that it furthers an educational purpose through its promotion of cultural exchange. The organization operated a website that enabled a “global community of members to establish personal profiles”, create friendships online and meet individuals willing to offer free accommodations during personal travel. Unfortunately for the organization, the IRS determined that the the organization did not qualify for 501(c)(3) status because its primary purpose was providing free accommodations to its members during personal travel, which violated the private benefit doctrine. This is similar to circumstance (ii) above; it behooves a 501(c)(3) organization to examine its activities and transactions through the lens of the private benefit doctrine.