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Nonprofit Law/Possible tax fraud

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QUESTION: A homeless shelter in Fargo, ND charges residents $7.00 cash  only per night, for a 7'x2.5' double bunk bed, the footprint is 17.5 sq. ft.. 2 people share this space, so each pays $7.00 for 8.75 sq. ft of space. 7 x30 = $210 per mo. divided by 8.75sq. ft. = $24.00 per sq. ft.per mo. Not bad for a charity. Those who can't pay cash must complete "work therapy", i.e. work 4 hours in facility maintenance, to pay for their 8.75 sq. ft. If paid min. wage, 4x 7.25 = 29, 29x 30 = $870 worth of labor per mo. for 8.75 sq. ft.  $870 divided by 8.75 sq. ft. = $99.42 per sq. ft.

This shelter provides no direct social welfare services to its residents. When asked about the absence of such services, the building administrator only points to outside government agencies that provide social welfare services to residents who choose to be served. The shelter is organized as a trust, with unlimited federal tax exemption as a 501c3 , and is incorporated, with almost 3 million dollars in reserve funds , and an annual income of over 400,000. The building is old, obsolete, stands in an old, run down neighborhood, and is located close to a noisy railroad track. Residents are fed well, with food donated by local businesses. Residents are overwhelmingly ex-felons, who have trouble getting work,and housing, and therefore are easy for a landlord to take advantage of. These ex-felons are neither asked to prove employment, nor are they asked to prove the source of their "fee for rehabilitation services". The state attorney's office in Fargo  , and various professional social service providers have told me that they are quite aware that this shelter provides no rehabilitation for its residents.

My question to you is, do you smell a fish?

ANSWER: There may be a violation of the minimum wage law and one of the workers can file a complaint with the State Labor Department. This situation may be similar to that of The Tony and Susan Alamo Foundation which the U.S. Supreme Court dealt with at http://goo.gl/w3Ywoi

Also, the work in exchange for housing may be taxable as employment income, just like students at universities who work for benefits find that they earnings are taxable.
Also, the IRS has instructed
"Scholarship or fellowship grants that are taxable to the
recipient because they are paid for teaching, research, or other
services as a condition for receiving the grant are considered
wages and must be reported on Form W-2."
www.irs.gov/instructions/i1099msc/ar02.html#d0e311


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 Harvey,

Just one more question. Does the outrageous rent charged, in conjunction with the lack of social welfare services, sound like tax fraud to you?  The place is really nothing more than an ultra high rent flop house, pawning itself off as a tax exempt charity. The mortgage was paid off 15 years ago,the place has no liens, no property taxes, and in 2011 alone, brought in over 477,000 in revenue.
Do I have reason to be suspicious?
Thanks ,
D.R.

ANSWER: Internal Revenue Code section 501(c)(3) which is available at:
http://goo.gl/7lFll http://goo.gl/8oQUV (on page 2, first column)
has, in part, that the 501(c)(3) organization must be "operated
exclusively for religious, charitable ...or educational purposes

If charges are excessive then it indicates that the organization has another purpose, for example to amass funds.

Complaints could go to your State's Attorney General's Office as
that office generally oversees charities within the state. If the
action is criminal then your local district attorney may be
interested in prosecuting as at:
https://docs.google.com/open?id=0B4xNuGSpiyzgT3BybmZKSGxNa1U
which is a pdf file of 4 different news stories.

Complaints to the IRS regarding Exempt Organizations are discussed
at
http://www.irs.gov/irs/article/0,,id=178241,00.html
A referral of an exempt organization may be made by submitting Form
13909, Tax-Exempt Organization Complaint
http://www.irs.gov/pub/irs-pdf/f13909.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: Harvey,

How would I find out if an objective of the org. is to amass funds?
I mistakenly said, in my first ? to you, 'the org. has 2.7 million in reserve funds...' That should be 2.7 million in assets, which would, of course, includes the property, whose value I have not yet ascertained. It would seem that given its diminutive labilities, and its huge yearly revenues, that its reserve funds should be substantial. I was there for 2 yrs., and clearly, very little money is spent on upgrades, etc.

Thank You Harvey

Answer
You asked, "How would I find out if an objective of the org. is to amass funds?" You would look to their Form 990 annual federal income tax returns to see the numbers. You can go to http://www.guidestar.org and you can register there without fee and do a basic search and see the 990s there and other information.

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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