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Nonprofit Law/cooperatives as 501c3

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Question
QUESTION: A group is discussing forming a cooperative to buy and operate a retreat center.  We would like to apply for 501c3 status but I have concerns about the cooperative structure being in conflict with 501c3 requirements.  The intent is to issue preferred stock to investors which would pay interest much like a loan, and common stock to members which would not pay dividends.  Members (holding common stock) would vote, preferred stockholders would have no membership rights but would receive interest on their investment much like a loan. Both are permitted under state law for cooperatives.  Can the coop issue stock in those circumstances without jeopardizing 501c3 status?

ANSWER: Cooperatives do not qualify for 501(c)(3) organization status. A 501(c)(3) organization is to be a charitable, not a cooperative, organization. For example, 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."

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: Thank you.  I had read your previous posts but I believe our operation would be distinct in several respects from the parent/booster type operations to which those posts referred.  This is an operating center that would change ownership from a religious order to the cooperative.  The retreat center will be run for the public, not just for the members.  As I understand the proposal, the members would pay dues but their only benefit would be continued availablity of the center (the order plans to close the center) and a voice in the operation.  If they patronize the center they would pay the same rates as the public and receive no share of the profits.  The preferred stockholders would receive a benefit in the form of interest on their investment, but they would not be members and they would have no voice in the operation.  Do you believe those differences are sufficient to overcome the IRS objection you refer to in your answer?

Answer
I am not going to comment on the issue of whether, under Wisconsin law, the organization would qualify as a nonprofit. 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. I will comment that, from you now write, the organization is not a cooperative, according to how the IRS uses the word and it could qualify for exemption notwithstanding that it may be offering market-rate or less interest to persons who loan money to the organization.

However, in order for me to analyze whether the IRS would consider your activities to be charitable, educational or religious, as used in the Code, I would need to spend a substantial amount of time in getting more details about your operation and analyzing them and that would be beyond the scope of my offer of free services.  If you want to inquire about hiring me for such work, please contact me directly to the email address below.

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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