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Nonprofit Law/types of non profits

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QUESTION: Our 501 C 3 group members volunteer to work at a local amphitheater that hire only non profit groups to work. All of the other groups I have spoke to divide the money earned into individual accounts for those who work, from everything I have read this is illegal. Is there a different type of non profit beside 501 C 3 that does allow you to divide the money?

ANSWER: There is no type of nonprofit that allows, as one of its substantial activities, contract labor.
See IRS Publication 557 "Tax Exempt Status for Your Organization"
which is available at:
http://www.irs.gov/pub/irs-pdf/p557.pdf
which describes the different types of exempt organizations and none allow such private benefit.  Further, tax evasion may be occurring as when people work for benefits, employment taxes are due.

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: We are a Booster Club but hold 501 C 3 status, would that change anything? Most do Bingo Halls, Concerts and Kings Dominion but we have to be non profit for all, And from what you say that means these companies are doing this illegally?

ANSWER: That would not change anything that yours is a 501(c)(3) booster organization.

In June of 2011 the IRS wrote:
---Start of Excerpt--
If a booster club confers a benefit on a participant in return for
their fundraising activities, such as by crediting amounts raised
by a participant toward that participant's dues requirement, or by
crediting amounts raised against the cost of a trip, the booster
club is providing a private benefit to that participant.
Consequently, such practices could result in the organization
failing to be described in 501(c)(3).
---End of Excerpt---
http://goo.gl/3Dx9o

The IRS continued in the next paragraph, "It is also possible that
amounts credited to a participant's account due to fundraising
would constitute income from services, and could result in
employment taxes."

The companies may be engaged in conspiracy to evade 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.    



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

QUESTION: I want to make sure you understand that the checks from the amphitheater are written to the organization and not put into accounts. Our group does not have accounts. We have had people ask why we don't since it appears that most of these groups do. We put all funds in one account and pay for all people who are members regardless if they participate.

Answer
Ok. If you are not giving benefits only to those working, then ignore my last reply, but my first reply is still applicable because if more than 15% of you income is coming from such contract labor or if employment taxes are not paid, you jeopardize your exempt status. The amphitheater may not be liable for any tax reporting as they have simply contracted with a corporation to provide temporary labor.

The following, though, may apply to your organization.  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."  

A Booster organization grants benefits even to families who are not members. My summary of IRS regulations relating to 501c3 booster organizations is at http://goo.gl/RO1ez -- you may be interested to read that.

As for the members working and the applicability of employment and minimum wage laws, see
The U.S. Supreme Court "Alamo Foundation" case which is available at http://caselaw.lp.findlaw.com/cgi-bin/getcase.pl?court=us&vol=471&invol=290

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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