Social Impact Bonds and the Private Benefit Doctrine: Will Participation Jeopardize a Nonprofit’s Tax-Exempt Status?

In August 2012, the first social impact bond in the United States was implemented, introducing a revolutionary framework that aligns the incentives of the participants and provides nonprofits with a steady source of long term funding to scale up social projects. In the prevailing social impact bond structure, private investors essentially place a bet with a government agency that the selected nonprofits will accomplish measureable goals through a comprehensive project designed to reduce public costs. If the program fails to reach these goals, the investors lose the bet and their entire financial commitment to the social impact bond. If the program succeeds, the government agency repays the initial investment plus a profit margin to the investors. This Note examines social impact bonds from a nonprofit’s perspective and answers the question whether the profit margin that the private investors may achieve would qualify as an impermissible private benefit that would allow the IRS to revoke a participating nonprofit’s tax-exempt status