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Nonprofit Law/Property transfers

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QUESTION: We are a non profit economic development corporation in South Dakota. We recently received a property from a private individual who had lost a considerable amount of money attempting to help someone make this property profitable. We have since then found a tenant for the property but would like to sell it eventually. If we could sell it, we would like to donate any money after our expenses are met to the individual who gave us the property. Is this something we could do without penalty? Are we restricted as to how we sell or offer to sell the property?

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.

If the individual donates real property to a 501(c)(3) organization she would be able to take a deduction based upon the fair market value of the property.  The organization would need to provide to the individual an acknowledgement of the donation.  Your organization does not value the property and does not indicate any value on the receipt. See the IRS Publication "Charitable Donations --- Substantiation and Disclosure Requirements" http://www.irs.gov/pub/irs-pdf/p1771.pdf on pdf page 5:
---Start of Excerpt--
... an organization can assist
a donor by providing a timely, written statement containing
the following information:
1.  name of organization
...
3. description (but not the value) of non-cash contribution
4.  statement that no goods or services were provided by the
organization in return for the contribution, if that was the
case
---End of Excerpt--

As to #4 it would not be the "case" if your organization gave to the donor an assurance that you would be giving her some money if and when the property sells.  The "giving" by your organization would not be considered a donation to the individual because of the quid pro quo as the term is used in that IRS Publication 1771 on pdf page 3.

If, instead, you do not communicate to the donor anything about your organization's desire to remit funding later, then that would be treated differently.  If that is the situation, let me know and 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: We at no time indicated to the donor that it was our intention to return any monies to them at time of sale. It was our thought that it would be an act of "kindness" to cushion some of their loss.

Answer
See http://www.irs.gov/pub/irs-pdf/p3833.pdf starting on pdf page 13 as to the discussion of "Charitable Class"
--start of excerpt  ---
The group of individuals that may properly receive assistance from a charitable organization is called a charitable class. A charitable class must be large or indefinite enough that providing aid to members of the class benefits the community as a whole.
--end of excerpt  ---

Therefore, a 501(c)(3) organization may not give funds to someone out of a feeling of kindness.

Revenue Ruling 56-304 has:
--- 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.
---End of Excerpt---
http://www.irs.gov/pub/irs-tege/rr56_304.pdf (cited with approval in IRS instructions for Form 1023 Application for Exemption on pdf page 23 middle column at http://www.irs.gov/pub/irs-pdf/i1023.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.

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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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