Nonprofit Law/Non Profit behaving like a For Profit
I run a business that provides a spring youth football tournament for youth football teams to sign up and play in a state wide tournament that my business administrates. I charge a per player fee and provide all services related to the tournament. I am a duly registered LLC.
In my town there is a large Non Profit Youth Fall football league that controls 16 youth football non profit organizations under their fall league.
After I had started my spring tournament the President of this Fall non profit started a FOR profit spring program with a friend of his that competes with my business and essentially markets "vigorously" to his fall leagues. 90% of the teams that participate in his for profit spring program are from his fall teams.
Some time back when I challenged him that he was violating the not for profit IRS rules he resigned from the board of the for profit, but clearly continues to call the shots. I have multiple face book, email and other evidence to show he is integrally involved, including the fact that they use all the fields and facilities he has access to from the local County for his fall programs to run his spring tournament, their operations and meetings etc. I suspect he may also be using the fall program insurance policy and other items to help reduce his expenses for the for-profit business.
In my view these gentlemen are carrying out a number of activities which I believe are illegal with regard to non profit entities...can you confirm:
1. The President of the non profit league is obviously the person calling the shots in the for profit business even though he has resigned his post. Is this illegal and what are the parameters for proof of illegal IRS activity in this regard?
2. I am unable to fully establish if he actually receives remuneration but clearly he is completely involved and openly sells and pitches his program, while blasting my program. To what degree does remuneration have to be a factor, or is this a violation simply to be associated with a very related for profit business when you are the executive president of a non profit with same activity?
3. He uses the non profit fall programs website and social platforms to market their spring league. Is this allowed?
4. They essentially "strong arm" any of their fall league organizations from participating in my tournament. Openly speaking for that spring tournament on forums etc. and blasting my program. What are the parameters for proving this is violating the not for profit rules?
5. If this President is violating the tenet of the IRS non profit rules to what extent are the other executive board members of his fall program responsible for their actions in condoning this obvious conflict of interest?
6. Is the inurement section of the IRS rules for non profits applicable in this case.
7. Do you take cases like this? My losses are that these 64 teams are not accessible to me, he is able to unfairly compete pricing wise because he uses the not for profit company to negotiate better pricing than I can, therefore keeping his price below mine, and he has now started to market to teams outside of his own fall program using all this advantage.
I have in my profile that this free forum is only for general questions about IRS federal exemption issues of 501(c)(3) organizations. Many of your questions are very specific and I would need to gather more information before I could give definitive answers. But I will try to help you here with some answers.
1. You wrote "he resigned from the board of the for profit, but clearly continues to call the shots." By "calling the shots" you mean that he is in control of the for-profit. You wrote that he "resigned" his board position but that means nothing as to his ownership interest, which requires a sale or gift instead of a "resignation". I would need to know whether he has an ownership interest in the for-profit (either by himself or a close relative) before I could analyze any inurement issues. It appears though, because you wrote that he help to "start" the for-profit business that he has some ownership interest. If you filed a complaint with the IRS you would be giving the IRS enough information for them to start an investigation, if they actually want to use their limited resources for such. 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
But, even if you do not have access to information such as his ownership interest or whether he receives compensation from the for-profit, he is presumed to have a financial interest in the for-profit and if you sue him and the for-profit you would have access through what is called "discovery" in the lawsuit to ask him relevant questions such as that. I would be willing to help you on the case. At least you could hire me for one hour to consult on the possibilities. If you want to hire me, send me an email directly to my email address below and I will quote you my fees.
2. Remuneration does not need to be there but at least some "financial interest".
3. The 501(c)(3) organization may not market a for-profit program without receiving reasonable value for the marketing, advertising.
4. The IRS would use the same parameters it uses when looking at activities of insiders of a 501(c)(3) organization in campaigning for persons who are up for election. A 501(c)(3) organization is prohibited from such campaign activity. Individuals have first amendment rights to speak or publish but, if they are acting in their capacity as an official of the 501(c)(3) organization, they are not allowed to strong arm fall league organizations to use a certain for-profit.
5. If there is financial benefit going to that President, then the Board may be liable legally to the organization for any losses that the 501(c)(3) organization experiences because they are negligent in overseeing the President.
6. I addressed the inurement issue above.
7. If the facts are as I see that they are then you have a case for money damages under what is called "unfair business practices".
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.