Nonprofit Law/501 (c) (3)

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Question
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.

Answer
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."
http://goo.gl/GtQpz 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.

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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