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Nonprofit Law/Real Estate with a non-profit

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QUESTION: Should a nonprofit be given/donated a property from a bank, can the nonprofit then assign this ownership to a for profit social enterprise?

Thank you.

ANSWER: I have in my profile that this free forum is only for general questions about IRS federal exemption issues of 501(c)(3) organizations. Therefore, I am assuming you are referring to such an organization.

Internal Revenue Code section 501(c)(3) which is available at
http://goo.gl/7lFll (on page 2, first column) provides, in part,
that the 501(c)(3) organization must be one of "Corporations, and
any community chest, fund, or foundation, organized and operated
exclusively for religious, charitable ...or educational purposes
... no part of the net earnings of which inures to the benefit of
any private shareholder or individual".

Therefore, if the property is of value, the 501(c)(3) organization may not give the property to a for-profit entity unless there is proper value received in exchange.

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: Thank you so much for your response.

The property is in foreclosure and in a demolition by neglect status.  It also has some designated historical buildings that need immediate repair.  How would the nonprofit know what a fair value to sell it to the for profit?  

Would there be a conflict of interest if the nonprofit and the for profit-social enterprises were established by the same founding entities?

Thank you again.

ANSWER: You are welcome.

The IRS accepts several valuation methods for real estate. For example, see
http://goo.gl/0wqO6k and you can contact professional appraisers in the county where the real property is located and they will offer the organization their services to obtain a written appraisal.

  A conflict of interest is present whenever a director, and in some states an officer) or a close relative of that person has a material personal interest in a proposed contract or transaction to
which the 501(c)(3) organization may be a party. Some conflicts do not result in any illegality.

The IRS has published at www.irs.gov/irm/part7/irm_07-025-003-cont02.html#d0e4718
---Start of Excerpt--
Where an exempt organization engages in a transaction with an insider and there is a purpose to benefit the insider rather than the organization, inurement occurs even though the transaction ultimately proves profitable for the exempt organization. The test is not ultimate profit or loss but whether, at every stage of the transaction, those controlling the organization guarded its interests and dealt with related parties at arm's-length.
---End of Excerpt--




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

QUESTION: Should the for profit be a "social enterprise" or a community development organization, may the property be donated directly by the bank?

Thank you.

Answer
You would have to inquire from the bank as to what type of organization they are allowed to donate property to.  Most banks may only donate to a 501(c)(3) organizations or governmental instrumentalities according to their internal regulations or government regulations.

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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