You are here:

Nonprofit Law/church lease to for-profit business

Advertisement


Question
Our congregation is considering a lease to a for-profit daycare center.  The owner of the business is the child of a council member who is leaving council this year.  Our understanding is that we can lease the property as long as we do so at a fair market rate so as to avoid any issues of inurement or private benefit.  Is this a correct understanding?  If she was not related to a council members would we still be required to set the lease rate a fair market value to avoid private benefit?  We want to do what is legally and ethically correct.  We have contacted the tax assessor to find what our tax liability would be for the percent of property to be used for profit.  I would greatly appreciate your assistance.

Answer
You have the correct understanding as to federal law. Even if the church was not renting to a church insider it would still need to rent at fair market value unless renting to another 501(c)(3) organization.  The issue as to insiders is called inurement and the issue to others is called private benefit. An extensive discussion by the IRS of the private benefit issue relating to 501(c)(3) organizations is found at:
http://www.irs.gov/pub/irs-tege/eotopich01.pdf

IRS Publication 598 "Tax on Unrelated Business Income of Exempt Organizations" at
http://www.irs.gov/pub/irs-pdf/p598.pdf
explains that,  if products or services are not directly related to the charitable, educational, religious or other purpose or function constituting the basis for its exemption (other than for production of income), then the activities are generally taxable. However,  on page 9 we see "Rents from real property... are excluded in computing unrelated business taxable income." However, on pages 14-19 as to Unrelated debt-financed property, we see that, if there has been recently  debt-financing (like a mortgage),  rents are, at least to some extent, unrelated
business  taxable income.

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

All Answers


Answers by Expert:


Ask Experts

Volunteer


Harvey Mechanic

Expertise

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.


©2016 About.com. All rights reserved.