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Nonprofit Law/501(c)(3) purchasing equipment ohio

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QUESTION: I've read a lot of sites and read through a lot of posts.  I  trying to familiarize myself with our non-profit account to make sure we are doing everything correct.

Recently our gym (profit organization) approached us and asked us to donate money for equipment. The gym pays half and we pay half.  We'll in discussion we have come to find out the the gym itself has a non-profit account.

The gym buys all equipment through its non-profit account, but then all monies received are through its profit account ie recreation classes, teams etc.

3 questions
1) is the gym in any violations when it buys equipment for the profit account through its non-profit so that they are tax exempt?

2) would we be in any violation if we gave monies to the gyms non-profit account if we knew what they were doing with the money?

It seems really Weird and sketchy the way this is playing out.

I see where you have put he equipment.  " organization is engaging in teaching sports to youth or by being affiliated with an exempt educational organization. Such educational organizations may ... provide facilities and equipment."
www.irs.gov/irm/part7/ch10s27.html#d0e103784

Which is clearly what both are intending to do, however one is a profit company.

Thanks so much!

ANSWER: I don't know what you mean by the gym having a "nonprofit account".  It appears that the gym is a for-profit entity and that the leaders of the gym have also established a nonprofit entity (other than your 501(c)(3) organization).  Please confirm or clarify that the account that the gym leaders control is in the name and EIN (Employer Identification Number - or Taxpayer Id number) of your 501(c)(3) organization. After you give me that information I will reply further.

1. In any case, it appears that the title owner of the equipment is a 501(c)(3) organization, but that 501(c)(3) organization allows the for-profit gym to use the equipment without charging any fees.  That would be prohibited.  It is called inurement.  Inurement (benefits to insiders) is discussed by the IRS at
http://www.irs.gov/pub/irs-tege/eotopicc90.pdf
and specifically note, on the bottom of page 10,
"even a minimal amount of inurement can result in disqualification
for exempt status, whereas private benefit must be substantial in
order to jeopardize exempt status."

2.  Your 501(c)(3) organization could be guilty of conspiring to evade federal income taxes if you gave money to the gyms non-profit account while you knew what they were using the equipment for their for-profit business activities.

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: Thanks Harvey!

In regards to your question:

The gym has a for-profit account.  The gym also has a 501(c)(3) #that is seperate from ours.

Our # is shared with 3 other teams inside the actual gym.

Answer
My previous answers (#1 and #2) then still stand.

I am surprised that the IRS approved the 501(c)(3) organization that "the gym has". See http://www.irs.gov/pub/irs-tege/eotopica93.pdf
starting on pages 11 "Private Facility Owners" which discusses
prohibited private benefit and excessive control of the booster
organization by such private facility owners.

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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