Before a Charity Transfers Money to an Insider: Build the Approval and Correction Record

A charity’s transfer to a founder, officer, family member, or related business can be characterized as compensation, a loan, a grant, a purchase, or an excess benefit. The label on one document will not control if the board process, books, and tax filings tell different stories. Build the approval and fair-value record before funds move, and create a correction plan immediately if the transaction was improper.

Identify every disqualified-person connection

Map ownership, management authority, family relationships, and entities controlled by insiders. Record who proposed the transaction, who negotiated terms, and who abstained. Independent directors should receive the relevant documents before voting, and the minutes should reflect the basis for concluding that the charity received equivalent value.

In Jagannath v. Commissioner, T.C. Memo. 2026-92 (Sept. 24, 2026), the Tax Court considered a $590,000 interest-free promissory note involving a tax-exempt organization and a founder-owned company. Inconsistent accounting records and Forms 990, along with the failure to establish timely correction before the notice of deficiency, supported excise-tax consequences under Internal Revenue Code section 4958.

Document fair value and enforceable terms

For a loan, preserve principal, interest, maturity, security, repayment schedule, collection rights, and evidence that the terms are commercially reasonable. For compensation or a purchase, obtain comparability data and document the services or property received. A note that exists only on paper or changes after scrutiny may not establish equivalent value.

Make the books and Form 990 agree

Reconcile board minutes, general ledger, bank records, financial statements, related-party disclosures, and annual information returns. If accountants receive incomplete or conflicting instructions, correct the source records as well as the return. Consistency does not guarantee correct treatment, but inconsistency can undermine the asserted purpose and timing.

Correction requires more than a promise

Section 4958 has specific correction concepts and potential taxes on both the recipient and participating managers. Obtain current advice about the amount, interest, return of property, and deadline. Preserve actual repayment evidence. A plan adopted after a notice of deficiency may be too late for positions that depend on earlier correction.

For the underlying procedural history and limits, read Jagannath: An Interest-Free Insider Note Produced Section 4958 Tax.

The firm’s Tax practice page explains the scope of representation and how to request a review.

Practical checklist for independent directors

For California charities and their fiduciaries, the safest time to build the record is before a payment, note, lease, or compensation arrangement is approved. Directors should receive enough information to make an independent comparison and should document any abstention.

• Map the insider, family, ownership, and control relationships for every party to the transaction.
• Obtain market terms or comparability data from a source independent of the interested person.
• Use written repayment, security, maturity, collection, and default provisions for any genuine loan.
• Reconcile minutes, contracts, bank records, general ledger, financial statements, and Form 990 reporting.
• If a problem is found, calculate and complete correction promptly and preserve proof of restoration.

What to do next should be directed by current section 4958 advice and the organization’s governing documents. A retroactive label or bookkeeping entry cannot replace actual fair value, independent approval, and timely correction.

Keep the interested person outside the independent decision

Minutes should identify who disclosed the conflict, who left the discussion, the independent data reviewed, the alternatives considered, and the vote. Generic language that the board discussed a transaction may not show informed approval. Preserve drafts and final agreements so later changes to interest, security, or repayment terms are visible.

Assign someone independent to monitor performance after approval. Missed payments, extensions, and collection decisions should return to disinterested directors with updated fair-value information. If correction becomes necessary, record the calculation, actual restoration, and tax reporting. Governance is an ongoing control, not a one-day signature exercise.

Additional record safeguards

The organization should also assess whether managers who approved the benefit face separate exposure and whether insurance, indemnification, or state charity law creates additional questions. Keep that analysis separate from the recipient’s correction obligation. If repayment is financed by another related entity, trace the source so the apparent correction does not create a second insider benefit. Updated valuations and interest calculations should be dated and independently supportable.

Frequently Asked Questions

Is every insider transaction prohibited?

No. But the charity should establish independent approval, fair value, proper purpose, and consistent reporting.

Why is an interest-free note risky?

The absence of market terms and enforceable repayment evidence can support a finding that the insider received excess value.

What proves correction?

Completed repayment or restoration under the governing rules, supported by bank, accounting, and board records—not merely an intention.