Nonprofit Law/membership dues


We are in the organizational phase of establishing a nonprofit organization that had 501(c)(3) status revoked. We are under new leadership and need to know if we collect membership dues does that jeopardize our chances of getting our tax exempt status returned? The organization is a charitable group that helps low income children to attend college with small scholarship contributions.

Many 501(c)(3) charitable organizations have people that pay membership dues and that will not effect exemption determination unless the organization is not almost exclusively serving the public but is serving the membership.  For example, some booster organizations serve their members instead of the community as a whole and those are then considered cooperative organizations and not charitable organizations. A cooperative is not qualified as a 501(c)(3) organization.  A 501(c)(3) booster organization is to be a charitable, not a cooperative, organization. A charitable organization, like the Red Cross, does not require beneficiaries to work for the Red Cross in order to receive benefits.

In August, 2013 the U.S. Tax Court supported the revocation of 501(c)(3) organization status of a formerly exempt organization and noted that a parent's fundraising was earmarked to reduce what otherwise could be a $1,400 payment the parent would have to pay out of his/her pocket. The direct linkage of a parent's fundraising resulted with paying expenses for that parent's child and was a very specific benefit obtained by the insider.  While the parent may not have been paid cash, the parent nevertheless ended up escaping having to write a check for the amount of the benefit. Families who did not fundraise did not receive any benefits from the purported a 501(c)(3) organization.

You did not ask, but, if you are forming a new organization that is the successor of a revoked organization, when you complete the Form 1023 Application for Exemption you will need to complete Schedule G (for successors). See the Application for Exemption on pdf page 22 for that Schedule G

Most revoked organizations do not establish a new nonprofit organization, but simply re-apply for exemption with the IRS.

You need advance approval from the IRS for your method of giving scholarships. For organizations granting scholarships,  Schedule H of the IRS Exemption Application needs to be completed and evidence needed as starting at the bottom of page 25 of Publication 557 at
and you can see there the issues that the IRS is concerned with.

Harvey Mechanic
Attorney at Law

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


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 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 "" without the quotes and then add your search terms before hitting enter.


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.


B.S. Columbia University in New York City, 1970

J.D. (Law Degree) Brooklyn Law School, 1990 -- Cum Laude.

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