Can a nonprofit make loans to officers or directors?

Summary:

Some state laws forbid it. Avoiding 'intermediate sanctions' will require some care in any case.

Susan A. Davis,
attorney at law in
Scottsdale, AZ (susan.a.davis@azbar.org) wrote to CharityLaw (a service of http://www.charitychannel.com) on June 20, 2001:
I am looking for resources for revising the bylaws of a nonprofit in the
areas of board conflict of interest and loans of corporate funds to
directors as well as outside parties. The charity wants to be able to
make loans with appropriate safeguards. Can anyone point me in
some directions?

She received several useful replies:
From Stephen Nill, CEO, The Charity Channel (stephen_nill@charitychannel.com):
I'd be very hesitant to permit the funds of a nonprofit organization
to be loaned to a disqualified person, i.e. another board member. The
funds are supposed to be dedicated to the exempt public purpose, and not as
a private bank for board members. Also, the issue arises as to whether or
not the board meets its fiduciary responsibilities under applicable state
law if it loans money to private parties -- such a question needs to be
answered before going forward. (I'm not saying that this will necessarily
be a bar -- I'm just saying thats it's something to pay attention to.)

If you do go forward with this, you'll of course need to deal with the
Intermediate Sanctions rules and draft the board policy to mirror the rules
-- especially the safe harbor requirements designed to shift the
presumption in favor of the board and disqualified person. Folks
interested in downloading the temporary regs on this can do so from the
CharityChannel GuestShare site, at
http://charitychannel.com/guestshare/IRS/IS/default.htm.

For what it's worth, I routinely prohibit in the board policies I draft
private loans to board members (and other disqualified persons) and to
outside individuals. Sorry, I don't have any sample language at hand going
the other way. I would approach it, though, as with any transaction with a
disqualified person where there is a concern that the transaction might
trigger excise taxes on board members or on the disqualified person engaged
in the transaction itself -- a topic that we've discussed here before and
which can be reviewed from the CHARITYLAW archives at
http://CharityChannel.com/forums.

From Lisa A. Runquist of
Runquist & Zybach LLP
in
Los Angeles (lisa@runquist.com):
If you have not already done so, I would recommend that you 1) check out
the area of intermediate sanctions (you can start with the article I
have on my web page -- http://www.runquist.com
-- if you like) and 2) that you take a look at the
conflict of interest policy that the IRS has prepared (also on my web
page as an attachment to the article on how to keep your exempt
organization out of trouble with the IRS).

From Barnaby Zall of the
Law Offices of Barnaby Zall in
Rockville, MD:
Not to mention that many state laws prohibit NPOs from making loans to
officers and directors. E.g. DC Code 29-505(6), NY NPCL 716.

Steve Nill always adds this CharityLaw Caveat: "Though discussions on specific legal problems are permissible and expected in this forum, remember that no posting here shall constitute legal advice, and you should never rely on any contribution to this, or any, Internet discussion forum on important legal questions. Indeed, no Internet discussion forum is a substitute for the careful legal advice of a competent attorney at law."