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Nonprofit Law/501c3 Donating to a for profit

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Question
Our 501c3 would like to have a small fundraiser for a taxable nursery/pre-school. Raising funds toward education and development of children is in our charter. Would the preschool have to pay taxes on the amount we raise? We do not expect more than $5000-$7000, most likely less.

Answer
A 501(c)(3) organization is not permitted to raise funds for a taxable entity.  However, a 501(c)(3) organization may raise funds for youth educational and grant the funds for that particular purpose to a for-profit entity to engage in those particular activities.  However, the IRS may scrutinize the grant if the taxable entity is related to the 501(c)(3) organization either directly or indirectly. For example, see http://www.irs.gov/pub/irs-tege/eotopica93.pdf
starting on pages 11 "Private Facility Owners" which discusses prohibited private benefit and excessive control of the booster organization by such private facility owners.

Also of concern to the IRS might be the 501(c)(3) organization's pre-selection of a small group of beneficiaries.  See pdf  page 13 of
http://www.irs.gov/pub/irs-pdf/p3833.pdf under the heading
"Charitable Class
--start of excerpt  ---
The group of individuals that may properly receive
assistance from a charitable organization is called a charitable
class. A charitable class must be large or sufficiently indefinite
enough that  the community as a whole, rather than a pre-selected
group of people, benefits when a charity provides assistance.
--end of excerpt  ---
More details are found starting at pdf page 6 of
http://www.irs.gov/pub/irs-tege/eotopick99.pdf

I have in my profile that this free forum is only for general questions relating to IRS federal exemption issues of 501(c)(3) organizations. As for the tax question as to whether the grant is income to the for-profit entity, that is beyond the scope of this free forum.  I would be willing to work on the for-profit's tax matters, but I would need to spend a substantial amount of time and that would be beyond the scope of my offer of free services.  If they want to inquire about hiring me for such work, please have them contact me directly to the email address below.

Harvey Mechanic, Attorney at Law -
Harvey108@hotmail.com

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.  

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Harvey Mechanic

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I am an attorney and I volunteer time to answer general questions about U.S. Federal income tax issues of nonprofit 501(c)(3) public charities only. Those questions could be about establishing and maintaining legal requirements for such non-profit organizations in the United States, including Internal Revenue service filings and requirements. I will not be working on this free forum to answer questions about Nonprofit's possible unrelated or for-profit businesses or how to fill out forms. This forum is only for general questions about federal tax law, not as the law applies to your specific situation. If you do not make your question public then I will not be spending much of my donated time on answers that would not benefit the public. If you have other questions, please contact me at Harvey108@hotmail.com I will reply from my email. In any case, do not reveal confidential information to me until after I have contracted with you to provide personal legal services. My responses on this forum are intended to be general statements of law, should not be relied upon as legal advice, and do not create an attorney/client relationship. For me to consider your individual situation and how the law applies, I would need to gather extensive information about the situation. To search my previous answers you can do a Google search by "site:allexperts.com/q/nonprofit" without the quotes and then add your search terms before hitting enter.

Experience

I have been practicing law and especially the law of nonprofit organizations since 1990 when I was admitted to the New York Bar and I have maintained my status with the Bar since that time.

Education/Credentials

B.S. Columbia University in New York City, 1970

J.D. (Law Degree) Brooklyn Law School, 1990 -- Cum Laude.


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