Nonprofit Law/501 (c) (3)
Hello Mr. Mechanic. I am looking for the legal written Statute or legal document that states or verifies the position you have said in previous posts about a 501(c)(3) (Not-for-Profit) may not be sold. Thank you.
A 501(c)(3) organization must have already in its articles of incorporation certain clauses mandated by the IRS. See IRS Publication 557 "Tax Exempt Status for Your Organization" which is available http://www.irs.gov/pub/irs-pdf/p557.pdf
discussed starting on page 24 under "Organizational Test":
--- Start of excerpt ---
The articles of organization must limit the organization's purposes to one or more of those described at the beginning of this chapter and must not expressly empower it to engage, other than as an insubstantial part of its activities, in activities that do not further one or more of those purposes. These conditions for exemption are referred to as the organizational test.
--- End of excerpt ---
Further, 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".
The term "private shareholder or individual" is defined in regulations 26 C.F.R. 1.501(a)-1(c) "The words `private shareholder or individual' in section 501 refer to persons having a personal and private interest in the activities of the organization."
on the right column of page 2
If some individual shareholders, like Directors of a 501(c)(3) organization purported to sell their interest in a 501(c)(3) organization to other individuals, that would result in prohibited inurement to those directors and the Internal Revenue Code provides for fines for such "excess benefit transactions".
In addition to the negative result as to the Directors, the organization would no longer be qualified as a 501(c)(3) organization. Inurement (benefits to insiders) is discussed by the IRS at http://www.irs.gov/pub/irs-tege/eotopicc90.pdf
and specifically note, on the bottom of page 10,
"even a minimal amount of inurement can result in disqualification for exempt status, whereas private benefit must be substantial in order to jeopardize exempt status."
Your issue is also controlled by state law because state law determines when an ownership interest in an entity may be transferred. Some states, like Michigan, allow shares of stock to be issued to evidence some ownership interest in a Michigan Nonprofit Corporation, but most of other states do not give authority to their Nonprofit or Not-for-Profit Corporations to issue stock. You wrote from Florida and I have looked over their law and do not see any authority for the Not-for-Profit Corporations to issue stock. Therefore, under law there would be no interest to transfer (or sell), except that allowed in the statute as to mergers with other Not-for-Profit Corporations. If a person has no cognizable ownership interest, such as evidenced by shares of stock, then there is nothing to sell as to the ownership of the corporation and any purported transfer is similar to the purported transfer of the Brooklyn Bridge by an individual.
You asked a question about a 501(c)(3) organization being sold. That is different from two other issues:
1. Whether Directors can turn over their seat for money to other people who would then control (but not own), the organization.
2. Whether a Not-for-Profit Corporation may sell some or all of its assets.
There are ways to transfer control of a not-for-profit corporation that do not result in prohibited inurement, but that would depend upon the details that you want as to the changeover. I have in my profile in my forum at http://bit.ly/NonprofitLaw
that the free service that I offer is only for general questions. The details of drafting transactional documents are beyond that and I would need to spend a substantial amount of time in analyzing your particular situation. If you want to hire me for such work, send me an email directly to my email address below and I will quote you my fees.
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.