Expert: Harvey Mechanic - 11/8/2008

Question
I belong to a sorority 501c(7) that formed a 501c(3) public foundation. The Sorority and the Foundation conducts fundraisers.  All of the income/expenses for the fundraisers are handled by the foundation.  15% of the  net proceeds stays with the foundation. The balance is donated to the 501 c(7) for community programs and scholarships.  Is this activity permissable?
Does this activity jeopardize the Foundations 501 c(3) status?  Can those individuals who donate to the fundraiser claim a deduction on their tax returns?

Answer
A 501(c)(3) organization may contract with (c)(7) organizations or even for-profit entities but it may not be called a donation. However the funds are supposed to go to exempt purposes which the 501(c)(3) organization must confirm. You need advance approval from the IRS for your method of giving
scholarships if you want assurance that your procedure is not going
to be called illegal by the IRS.

For organizations granting scholarships Schedule H of the IRS
Exemption Application needs to be completed and evidence needed as
on page 24 of Publication 557 at
www.irs.gov/pub/irs-pdf/p557.pdf

See Application for Exemption
www.irs.gov/pub/irs-pdf/f1023.pdf on page 25

The 501(c)(3) organization's exemption application may not have included such purposes and projected expenditures.

Certainly if there is any change in the operations of any IRS
approved 501(c)(3) organization, whether because of an amending of
its bylaws or otherwise, the organization may want to write to the
IRS to have them decide if there is any change to the exemption
status.

Exempt organizations' determination letters state that if its mode
of operation changes it should notify the IRS of the change so that
the IRS can determine the effect on its exempt status. Your
organization certainly can inform the IRS that it wants to engage
in those new activities and see what reply comes. You can see that
standard notification in the sample determination letter at:
www.mcsb.us/Documents/IRS%20501c3%20Approval%200001.pdf
on page three under the heading "Notify Us On These Matters"

Otherwise, the grants going to the (c)(7) may jeopardize the 501(c)(3) organization's status.  Donors may still deduct donations to the 501(c)(3) organization until that is decided unless they are part of an illegal conspiracy.

Harvey Mechanic
Attorney At Law
Harvey108@hotmail.com