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QUESTION: may a 501c3 corporation be established to operate  as an organization which uses funds solicited by a group of parents for the sole benefit of those parents' children in the form of martial arts instruction, dance lessons,  language instruction, summer camp, and day care.

ANSWER: Such an operation would be what the IRS calls a cooperative.  A
cooperative is not qualified as a 501(c)(3) organization.  A
501(c)(3) booster organization is to be a charitable, not a
cooperative, organization. A charitable organization, like the Red
Cross, does not require beneficiaries to work for the Red Cross in
order to receive benefits.

In denying exemption to a purported 501(c)(3) organization
in 1992 the IRS at http://goo.gl/e9Mkd
on page 6 stated "The reason you were created and your method of
operation indicate that you are made up of a group of parents who
have joined together to work cooperatively to provide funds to pay
for the participation of their children in athletic events. The
expenses incurred by these children would otherwise have been paid
by the parents.  All parents of competitive team members are
automatically members of your organization.  Accordingly, members
expect to receive a benefit in return for their membership.  You
pay no benefits to non-members."

Another, similar denial of exemption was issued by the IRS in
1990 and may be viewed at
http://goo.gl/3CVwT

In 1998 the IRS even denied 501(c)(7) recreational or social
organization status to such a cooperative
http://www.irs.gov/pub/irs-lafa/den0147r.pdf

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.    



---------- FOLLOW-UP ----------

QUESTION: thanks!!  are "donations" to this cooperative considered tax deductible.   For example, if a private foundation donates to this group, would the donation be considered tax deductible in IRS view?   thanks.

Answer
See on page 7 of
http://ftp.irs.gov/pub/irs-tege/eotopicm88.pdf
"Advance assurance of deductibility is only available to an organization that applies for and receives recognition of exempt status from the Service and that is listed in Publication No.
78."

From what you wrote, the organization has not yet received a determination letter from the IRS that the organization is exempt under section 501(c)(3). If donor does give a donation to the organization and later the organization receives such determination letter, then, as the IRS normally grants exemption retroactive to the date of incorporation, the donation is considered deductible. See IRS Publication 557 "Tax Exempt Status for Your Organization"
http:// www.irs.gov/pub/irs-pdf/p557.pdf
which has on page 24, right column, under the heading ""Effective date of exemption" that the exemption determination is granted retroactively to the date of formation which is normal for
501(c)(3) organizations that apply for exemption within the first 15 months of their formation. "If the organization files the application within this 15-month period, the organization's
exemption will be recognized retroactively to the date it was organized."

That applies to normal donors, but you specifically asked about a private foundation.  Private foundations have expenditure responsibilities.  
http://pages.citebite.com/y1s4q9t2v1ioe

I don't know any private foundation that would want to risk giving a grant to an organization that has not yet received a determination letter from the IRS that the organization is exempt under section 501(c)(3)  because they may later have major issues if the grantee corporation was denied exemption or found not to be qualified as a 501(c)(3) organization.

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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