[ptest1]

(I also work in the nonprofit space)

In this case, ISOC should almost certainly lose their 501(c)3 status, as the transaction is unrelated business income, and may or may not have been sold at fair market value (I don’t believe it was). In either of these cases, the penalty is at minimum the removal of their 501(c)3 status.

I believe they may be preempting this by converting themselves to a “B Corp.”

The case of ICANN is more interesting. I believe they knew what was going on here, and facilitated this transaction to their former CEO. In this case, the IRS has good reason to revoke ICANN’s 501(c)3 status, as this transaction was self-dealing.

[pge]

Unrelated business income does not cause a loss of 501(c)3 status, it's just that the unrelated income is not tax exempt (i.e. the org which otherwise does not pay taxes on income has to pay income tax on the unrelated income).

Also, if I understood correctly, it is PIR that is considering becoming a B Corp, which they can do since they cannot remain a 501(c)3 now that they are owned by a for-profit entity.

Last, it would be very difficult to prove this wasn't a fair market value transaction. There was an investment banker involved (Goldman), so I assume they shopped to a number of different parties, in which case it's hard to argue that the price paid (assuming it was one of the highest bids) is not the FMV.

As I said in my original comment, I don't like the transaction, so don't take this as a defense of the appropriateness of selling it to a for-profit. But I think it is difficult to challenge on the basis that the transaction itself was illegal.

[ptest1]

Excessive unrelated business income causes a loss of public charity status due to failing the public support test. In this case it’s moot because ISOC is giving up on their status regardless. I was wrong saying 501(c)3 status is lost- instead, the organization becomes a private foundation with accompanying restrictions and regulations (e.g. disbursement requirements).

In the case of ICANN, I can see the IRS dropping 501(c)3 status. While the final purchase price of the .org asset may or may not have been at fair market value (as you note, having GS involved gives credibility), it’s undeniable that ICANN made it possible by lifting price hikes. I don’t see how it isn’t self-dealing, unless ICANN truly had absolutely no idea their former CEO was going to acquire .org. I think it’s more likely that they were convinced to lift the price hikes by their former CEO.

[pge]

you raise an interesting point that caused me to look deeper into the 990s filed by ISOC and PIR. So, I share this in case you are curious (or getting sucked down this rathole like I am:)).

In 2017, ISOC created the Internet Society Foundation (like PIR a wholly owned subsidiary of Internet Society). PIR was a cash machine, generating ~$75M in cash, which they recorded as having been paid out in grants. ISOC split that so that ~30M showed up as revenue on Internet Society's 990, and $43M showed up on the newly created Internet Society Foundation's 990 as revenue. This may have been to avoid ISOC failing a public support test? (I'm operating at the limits of my understanding at this point and haven't taken the time to dig into this question). I am going to speculate that the proceeds from the sale of PIR will also go into the Foundation.

Interestingly, the ISOC 990 does not show their ownership in PIR as a material asset on the balance sheet. One would think that a wholly owned sub that has $90M+ in revenue and throws off $75M in cash would be treated as an asset of value? It's possible there is something about non-profit accounting that makes this okay under GAAP - not something I know much about, but it caught my eye.

I don't know how to evaluate the self-dealing question - I have dealt with some of the other issues here (eg disposition of non-profit assets, unrelated income, etc) as a non-profit founder, board member, or treasurer, but I have never wrestled with a self-dealing issue (thankfully!), so I don't know what the courts would look for there.

Edit: source here is 2017 990s for Internet Society, Internet Society Foundation, and Public Interest Registry, pulled down from Guidestar. 2017 is the most recent year available for all three.

[noobermin]

Since you seem like an expert, can you comment on the self-dealing aspect of this?

[vaporland]

And as you likely know, there is a 200% penalty for self-dealing.

If you extract a billion dollars from a non-profit for self-dealing purposes, you owe the IRS $2 billion.