Nonprofit Law/City Non-profit

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Question
A local city has set up a non-profit foundation to assist in revitalizing it.  I looked at their 501c3 document and it does not indicate that it is a 509.  It raises money and then gives it out to the city and area businesses for start up costs or building renovations.

It has applied for a grant to cover some operating costs for a non-profit (509(1a) that I work with.  I am concerned that since the foundation supports for-profit activity that we cannot donate to them without some sort of tax impact on us.  Additionally, would personal donations be tax deductible to the foundation?  

Thanks

Answer
I am assuming that you are referring to a nonprofit corporation established under the laws of the State of Ohio.  The organization has to qualify for 501(c)(3) organization status in two ways, organizational and operational.  The organizational refers to the articles of incorporation and the organization must have certain IRS-mandated clauses in the organizational document. See, starting in the middle column of page 26 of Publication 557  under "Organizational Test". Samples
start on page 77 and the IRS discusses some of the textual requirements for the organizational document starting in the middle of page 26 of their Publication 557 and going through the paragraphs under the heading "Dedication and Distribution of Assets" on page 27.

Also the operation must include exclusively charitable, educational or religious activities.  The fact that they grant funds to for-profit entities does not, in itself, indicate that it is not qualified for 501(c)(3) organization status.  The IRS does grant 501(c)(3) organization status to some organizations that are making such grants as long as the primary purpose is revitalization. For example, see the IRS internal memorandum, "Lessening the burdens of Government" which is available at www.irs.gov/pub/irs-tege/eotopicb93.pdf

You asked whether donors could deduct donations made to the foundation. From what you wrote, I am assuming that the foundation has not received a determination letter from the IRS that it is exempt from federal income taxes as a 501(c)(3) organization.  For donations to such organizations a taxpayer may take a deduction when the organization publishes that it is a 501(c)(3) organization but, if the organization later is denied exemption for that period, then the donation deduction could be challenged by the IRS.  On page 7 of http://ftp.irs.gov/pub/irs-tege/eotopicm88.pdf
"Advance assurance of deductibility is only available to an organization that applies for and receives recognition of exempt status from the Service and that is listed in Publication No. 78."

For readers of this answer I will point out that section 509(a)(1) which appears to be the section that you wanted to cite to, refers to public charities. http://www.law.cornell.edu/uscode/text/26/509

A public charity generally would have grant rules that include the statement that they would not be making grants to organizations other than other public charities and that pubic charity status would need to be evidenced by a determination letter from the IRS that it is exempt from federal income taxes as a 501(c)(3) organization that is not a private foundation.  But, if your organization wants to analyze the articles of incorporation and bylaws and operation of the proposed grantee, which has been recently established it can then make a determination that the organization would soon be receiving such a determination letter from the IRS and, therefore, if such a determination is based upon, for example, an opinion letter from knowledgeable nonprofit counsel (such as me), then there will not be any tax liability to your organization if later the IRS denies the new organization's Form 1023 application for exemption.  If you want such an analysis by 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.  

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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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