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Nonprofit Law/501(c)3 regulations

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QUESTION: If money was donated to an educational institute and those monies where used to set up 501(c)3 educational Foundation and donations were earmarked to a particular department, can the nonprofit transfer funds to an individual's activities account at an educational institute without assuming responsibility that department will use the donations correctly?  And are there federal or  state guidelines that the 501(c)3 organization must follow and where can I locate them.

ANSWER:  Revenue Ruling 56-304 provides:
--- Start of Excerpt ---
Organizations privately established and funded as charitable
foundations which are organized and actively operated to carry on
one or more of the purposes specified in section 501(c)(3) of the
Internal Revenue Code of 1954, and which otherwise meet the
requirements for exemption from Federal income tax are not
precluded from making distributions of their funds to individuals,
provided such distributions are made on a true charitable basis in
furtherance of the purposes for which they are organized.

However, organizations of this character which make such
distributions should maintain adequate records and case histories
to show the name and address of each recipient of aid; the amount
distributed to each; the purpose for which the aid was given; the
manner in which the recipient was selected and the relationship,
if any, between the recipient and (1) members, officers, or
trustees of the organization, (2) a grantor or substantial
contributor to the organization or a member of the family of
either, and (3) a corporation controlled by a grantor or
substantial contributor, in order that any or all distributions
made to individuals can be substantiated upon request by the
Internal Revenue Service.
--- End of excerpt ---

It appears from what you wrote that the educational institute is a 501(c)(3) public charity and it set up another 501(c)(3) public charity, which you referred to as a "Foundation". If those facts are not correct, let me know because my answer may be different.  But, otherwise, grants to the Foundation by another public charity may be made without the grantor insuring that the funds were used in the way that the grantor requested.  The organization that supports the individual's activities would follow the revenue ruling.

As for "federal guidelines", the best general source is IRS Publication 557 "Tax Exempt Status for Your Organization" which is available at http://www.irs.gov/pub/irs-pdf/p557.pdf

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. For me to consider your individual situation and how the law applies, I would need to gather more information.


---------- FOLLOW-UP ----------

QUESTION: The educational institute is a public school. Does your answer differ now?

Answer
A public charity when earmarking funds to a public school for the benefit of an individual, the public charity must follow Revenue Ruling 56-304, which I cited to earlier, because it is functionally giving a grant to benefit an individual. The IRS treats grants to governmental instrumentalities, like public schools a little differently than grants to public charities. A governmental unit, like a county government is able to receive deductible donations. See IRS Publication 526 "Charitable
Donations" which is available at www.irs.gov/pub/irs-pdf/p526.pdf and on page 2 there is the box chart which includes money or property deductible as charitable contributions to, "Federal, state, and local governments, [but only if the] contribution is solely for public purposes.

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. For me to consider your individual situation and how the law applies, I would need to gather more information.

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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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