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Nonprofit Law/Commissions paid to 501 c 3

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QUESTION: Hi!
We are a 501 c 3 travel softball team. We have been offered by Melaleuca an opportunity to support our team. They have offered to pay us a monthly commission of 5% on orders placed under our team. The team does not have to purchase anything nor sell anything. They don't even have to advertise for them. I understand this is considered unrelated business income. However, I would like to know if that type of income is taxable for a tax exempt organization? What are the specifics on what is considered taxable for tax exempts?

ANSWER: That is not considered unrelated business income because such payments by a company even to individuals or to for-profit companies is not even considered income. The Internal Revenue Code at section 102(a) provides that gifts are not income.  "Gross income does not include the value of property
acquired by gift..." http://codes.lp.findlaw.com/uscode/26/A/1/B/III/102

Note that, in reference to your 501(c)(3) organization they are a particular type of gift, called a "charitable donation" because the individuals, who purchase items from Melaleuca and are requesting in their purchase that they are wanting Melaleuca to donate 5% of the purchase to your 501(c)(3) organization.

Your organization has no obligation to do anything for the for-profit vendor in order to receive the 5% - you simply may be indicating to people who want to favor your organization that, if they purchase items from the vendor anyway, they may as well designate that they want 5% to go to your charity. If your organization does do some advertisements for the for-profit vendor, let me know and then I will reply further.

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: If I am the person that enrolls the organization in Melaleuca bc I am an independent marketer for them and a member of the organization because my child is on the team, is that considered a conflict of interest? I make no money off of the organization bc they do not purchase anything. The customers that the organization makes money off of are my customers that agree to support the organization. There is no financial benefit to me personally. I would like to make certain that by trying help the organization, I would not be jeopardizing their status as a 501 c 3.

Answer
  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. We would need to look at the
decisions of the organization or the Directors to decide if their
actions are illegal. This forum is only for federal tax questions
regarding 501(c)(3) public charities as I have explained in my
profile.

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--

--- Start of Excerpt ---
an organization may represent that services will be provided at a
significant discount to the organization. When an organization
contracts with interested board members, the circumstances may
demonstrate that the organization does not have a purpose to
benefit the insiders. Sales or services by the board members'
businesses to an organization at a significant discount, at or
below cost, would help to justify the selection based on the
economic benefit to the organization....Transactions at fair market
value with board members may be allowed. But the determination to
do business with a board member or other interested party with
control must be made by an independent disinterested board. It is
not unusual for a board member to offer his own business services
to the organization. However, if the board member is not selected
by a disinterested board, then a transaction that would provide
services even at low market rates is problematic.
---End of Excerpt---
www.irs.gov/pub/irs-tege/eotopicb96.pdf on pages 22-23

Considering the above, if you are an officer or director, certainly a conflict may exist but then the question is why would the organization give you the contact information of the members.  If it does not, then there is no issue, because the organization is not involved in the transaction.  If it does, then it appears that your organization does not protect the privacy of its members, but, as for any issues if it does simply provide the contact information, that would not be sufficient, in itself to jeopardize the 501(c)(3) organization status with the IRS.

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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