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Nonprofit Law/Distributions to a member controlled 501(c)(3)

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Question
1.  Church donates land in 1970 (worth $250K in 1970 dollars) and creates a 501(c)(3) corporation to build and run low income housing for the elderly. Church continues to be the membership of the 501(c)(3), electing directors each year.  Housing (200 units) is built with HUD financing.  HUD financing is now paid and HUD restrictions on sale and use largely eliminated.  Housing now generates excess income.  Church would like to use this income to fund its operations: pay the pastor, maintenance of its building; programming expenses, etc.  Church is itself a 501(c)(3).  Without jeopardizing any of the entities tax status, is there a way for the housing corporation to distribute monies to the church?

2.  Since church controls housing corporation board, church could arrange for sale of housing corporation property, presently valued at $8M.  Housing corporation would be dissolved and proceeds distributed to the church.  This gets the church money, but its mission is no longer served. Can a new 501(c)(3) be created which buys the housing corporation from the church for $8M (with HUD financing), with the housing corporation then dissolving and distributing the $8M to the church?  Any problems with this scenario?

3.  The issue, of course, is how to either get the church an income stream or a lump sum from an asset which it has without destroying what it has spent 40 years building - low income housing for the elderly.  If there are no good answers to numbers 1 and 2 above, any other thoughts?

Answer
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.

1.  Generally, any 501(c)(3) organization may distribute or grant funds to another 501(c)(3) organization (like to a church).  However, we would need to read any contracts that the housing corporation had executed with HUD as to the use of their funds. You wrote that restrictions were "largely eliminated" but we would need to see what restrictions remain.

2.  A new 501(c)(3) organization may be created and, subject to the same issues I mentioned in #1 above, it would be able to purchase the assets of the existing housing corporation and the housing corporation could be dissolved and the assets distributed to the church, absent anything in the Articles of Incorporation and Bylaws of the housing corporation relating to dissolution being relevant.

3. As you are referring to equity of $8M, I suggest that you consult with me as to the details. I would be willing to work on your matter, 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 you want to inquire about hiring me for such work, please 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.  

Nonprofit Law

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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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