Nonprofit Law/501c3 Donation

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Question
The volunteer fire department (a 501c3 organization) that I belong to recently made a donation to an individual for the purchase of a police dog.  This individual happens to be a member of the department.  The donation was made to a FOP lodge that distributed the money to the individual.

It is my understanding that this is a violation of 501c3 regulations however the department's administration is stating that as long as the donation is made to another non-profit it is legal.

Can you provide some answers?

Answer
A 501(c)(3) organization may make donation to another 501(c)(3) organization, but, if the agreement is that the second organization will pass through funding to a specific individual, then the IRS will treat the funding as if the original 501(c)(3) organization had made the grant to that individual. The IRS often  uses a "Substance over Form" doctrine.
See www.irs.gov/pub/irs-utl/ii.b_-_judicial_doctrines_ii.pdf
on page 6
---Start of Excerpt--

The concept of the substance over form doctrine is that the tax
results of an arrangement are better determined based on the
underlying substance rather than an evaluation of the mere formal
steps by which the arrangement was undertaken.  For instance, two
transactions that achieve the same underlying result should not be
taxed differently simply because they are achieved through
different legal steps.  The Supreme Court has found that a "given
result at the end of a straight path is not made a different result
because reached by following a devious path."
---End of Excerpt--

So we need to see whether the first 501(c)(3) organization is prohibited to make a grant to a member for what you seem to indicate is for his private use, and not primarily for his use as a volunteer fire-fighter. Internal Revenue Code section 501(c)(3) which is available at:
http://goo.gl/7lFll
has, in part, that the 501(c)(3) organization must be "operated
exclusively for religious, charitable ...or educational purposes
... no part of the net earnings of which  inures to the benefit of
any private shareholder or individual".

That term is defined in regulations 26 C.F.R. 1.501(a)-1(c) "The
words `private shareholder or individual' in section 501 refer to
persons having a personal and private interest in the activities of
the organization."
http://goo.gl/GtQpz on the right column of page 2

From what you wrote, therefore, the grant would seem to jeopardize the 501(c)(3) organization status of the organization.  Inurement (benefits to insiders) is discussed by the IRS at
http://www.irs.gov/pub/irs-tege/eotopicc90.pdf
(It takes a while to load the 52 page pdf file)
and specifically note, on the bottom of page 10,
"even a minimal amount of inurement can result in disqualification
for exempt status, whereas private benefit must be substantial in
order to jeopardize exempt status."

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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