Nonprofit Law/Real Estate

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Question
Hi There,
I work for a non-profit that has sold some land. The issue I am curious about is they sold the land for less than it was appraised for and took in a monetary donation to make up the difference.So the purchaser benefited in a few ways.The taxes will be less according to the purchase price. They received an additional tax benefit for the donation, and of course the land when sold will be at a greater value. Is this legal and or ethical?

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. The IRS prohibits 501(c)(3) organizations from transferring assets for less than its fair market value, but, from what you wrote, I am assuming that they did not do that, as the total given (including the purported "donation") may have been equal to the fair market value.  If my assumption is not correct, let me know and, then I will reply further. It might not be correct as you wrote that "the land when sold will be at a greater value".  But I interpreted that phrase to mean that the land will not be sold again for at least one year (to come under what is called long-term capital gains provisions of the Internal Revenue Code.

But there is a significant violation of the law as it appears th the 501(c)(3) organization is going to give the purchaser an acknowledgement of a donation (in the amount you refer to as the amount "to make up the difference".  The IRS has written on page 1 (first column under "Introduction")
in their publication 526 "Charitable Donations", which is available
at: www.irs.gov/pub/irs-pdf/p526.pdf "A charitable contribution is
a donation or gift to, or for the use of, a qualified organization.
It is voluntary and is made without getting, or expecting to get,
anything of equal value."

That conclusion is supported by  Singer Co. v. United States, 449
F.2d 413, 418, 196 Ct.Cl. 90 (1971), citing to a House Report

In an Internal Memorandum from the year 2000,"Fund Raising Issues:"
the IRS explained further, "where a payment is made in return for
an item or benefit, the presumption is that such payment is the
purchase price and not a gift."
www.irs.gov/pub/irs-utl/topict00.pdf on page 12

Therefore, the parties would be guilty of conspiring to evade the Internal Revenue laws if they treat that amount as a donation and the 501(c)(3) organization gives an acknowledgement of donation.

That situation is also controlled by state law and states may differ somewhat with how they would treat such issues. Even though this forum is not for such state law issues, every state's law that I have reviewed prohibits not reporting the total value of what is given for the transfer of real property.  That is under the code sections as to "transfer tax". Therefore, the parties would also be guilty of conspiracy to evade the transfer taxes.

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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