You are here:

Nonprofit Law/Sale of real estate by 501c3 in Texas

Advertisement


Question
QUESTION: I currently sit on a BOD for a non profit. We are in a situation where we need to generate funds to keep programs running. I am in a situation where I can purchase the property to relieve the mortgage debt from our organization, and will remove myself from the board to allow this transaction. I would be purchasing at less than appraisal. Is this legal? and would I be able to lease part of the property back to the organization for a tax deferment or write off as a charitable donation at the end of the year. Our main goal is the continuation of the programs and are afraid that a sale to someone else may have a negative effect.  

Thanks

Michael in Texas

ANSWER:  
The IRS has published at
www.irs.gov/irm/part7/irm_07-025-003-cont02.html#d0e4718
---Start of Excerpt--
Where an exempt organization engages in a transaction with an insider and there is a purpose to benefit the insider rather than the organization, inurement occurs even though the transaction
ultimately proves profitable for the exempt organization. The test is not ultimate profit or loss but whether, at every stage of the transaction, those controlling the organization guarded its
interests and dealt with related parties at arm's-length.
---End of Excerpt--

The Texas Code sections for "Nonprofit Corporations" are available at
http://www.statutes.legis.state.tx.us/Docs/BO/htm/BO.22.htm
Go down (search for Sec. 22.230 which is entitled, Contracts or Transactions Involving Interested Directors, Officers" and you see there that you do not need to remove yourself as a member of the Board.

I don't know where you got the information that you could write off a lease amount as charitable donation. See IRS Publication 526 "Charitable Donations" which is available
at http://www.irs.gov/pub/irs-pdf/p526.pdf especially on page 9 the IRS writes about "partial interests" under the heading "Partial Interest in Property" which means that donations of use are not deductible. Even if the landlord gives space for free to use the landlord does not receive a charitable deduction. "Example 1. You own a 10-story office build- ing and
donate rent-free use of the top floor to a charitable organization. Since you still own the building, you have contributed a partial interest in the property and cannot take a deduction for the contribution."  That comes right from section 1.170A-7(a) of the Income Tax Regulations.
http://www.law.cornell.edu/cfr/text/26/1.170A-7

Also I don't know where you got your information about the tax deferment, but if you send me the url I will then comment on that.

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: "Where an exempt organization engages in a transaction with an insider and there is a purpose to benefit the insider rather than the organization, inurement occurs even though the transaction
ultimately proves profitable for the exempt organization"

Ultimate purpose is to benefit the Organization... I just happen to be the one best situated to carry out the financing...  but would withdrawal from the board still categorize me as an insider?

As for the Tax deferment, This property has been exempt from property tax for the last 17 years due to the 501c3. Apparently if I purchase the property it reverts back to a publicly taxed property which places the property considerably above the amount I am able to spend trying to save it. I am looking for viable options to reduce more so the property tax rate as the income tax but thought a lease agreement with the Org for a certain amount in cash and a certain amount abated would equate to donation. We currently give donors a receipt for whatever their donation is, which is tax deductible, I guess I believed a donation of part of the rent would be tax deductible as well.  

My plan was to purchase and re lease the property to the 501c3 for 1/4 their current mortgage cost.

Again thanks for the help

Michael in Texas

Answer
In the context of a real estate transaction, the amount of money involved is so substantial that it would not matter if the issue was "private inurement" or "private benefit".  Private benefit applies to those who are not even insiders or were recently insiders.

An extensive discussion by the IRS of the private benefit issues and private inurement relating to 501(c)(3) organizations is found at http://www.irs.gov/pub/irs-tege/eotopich01.pdfYou will see in the second heading that "the Internal Revenue Code and Treasury Regulations do not specify or define insider relative to inurement".

The IRS on that webpage gives an example of private benefit not going to insiders.
--- Start of Excerpt ---
United Cancer Council v. Commissioner, 165 F.3d 1173 (7th Cir. 1999). The court reversed and remanded the Tax Court's ruling to uphold revocation of an organization exempt under IRC 501(c)(3) based on inurement. It found nothing in the facts to support the fund-raisers seizing control of the exempt organization, thereby becoming an insider, triggering the inurement provision, and destroying exemption. The court stated there was no diversion of charitable earnings to board members or other insiders. The court pondered a different argument: suppose the exempt organization paid the fund-raiser twice as much as it actually charged for its services, so half of the annual fund-raising expense was like a gift to the fund-raiser. Then it could be argued the organization was operated substantially for the private benefit of the fund-raiser. The court suggested enforcing the tax law in this way could address the problem of a charitable organization's expenditures that are extravagant but do not inure to the benefit of insiders. "That in fact is the IRS's alternative ground for revoking the exemption."
--- End of Excerpt ---
http://goo.gl/UAeFXQ

Even if the transaction is not done to benefit you at all, there is an issue, especially if the purchase price is less than the fair market value (which you indicated it was by stated the purchase price was going to be less than the appraised value). It may depend upon the other reasons why the organization would not want to sell to someone of the public, after listing it for sale.

I have in my profile in this forum that the free service that I offer is only for general questions directly related to IRS exempt purpose issues of 501(c)(3) organizations.

Your issues are beyond that and I would need to spend a substantial amount of time if you want me to analyze the different factors, such as the reasons why the organization would not want to sell to someone of the public, after listing it for sale and the factor as to how much less than the market value the sale price is.  If you want to hire me, send me an email directly to my email address below and I will quote you my fees.

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.