Nonprofit Law/503c7

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QUESTION: I am associated with a small 503 C 7 association (gross revenues < $45,000) supported by memberships dues and conference fees.  In order to do an association fundraising event, who can I receive donations from? Suppose I hold an event to raise money to benefit our membership. Is this legitimate function for our organization? Now suppose I held another fundraising event to benefit another charitable organization who either does or does not share our mission statement. Is this legitimate function for our organization? Another question: We were approached by a national fundraiser who told us to consider forming a private foundation for fundraising purposes. Why would I want to consider doing this if I could do it through the 503 C 7? I think they want us to raise money for their causes. Any thoughts?

ANSWER: There is no organization known as a 503c7.  There are 501(c)(3) organizations that are charities and there are social clubs that do not qualify for 501(c)(3) organization status.  IRC 501(c)(7) exempts from federal income tax, clubs "organized for pleasure, recreation, and other nonprofitable purposes, substantially all of the activities of which are for such purposes and no part of the net earnings of which inures to the benefit of any private shareholder."
http://www.irs.gov/irm/part7/irm_07-025-007.html

Which is yours?  A 501(c)(3) organization or a 501(c)(7) organization?  If neither, please clarify. After you give me that information 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: Sorry, it is a 501(C)7.

Answer
You are referring to a social club and social clubs do not qualify for 501(c)(3) organization status nor are able to accept donations that are deductible by the donors as charitable donations.  
http://www.irs.gov/irm/part7/irm_07-025-007.html

Such an organization may solicit funds but, if it engages in sales activities for more than an insubstantial amount of its gross revenue, the proceeds are taxable. IRS Publication 598 "Tax on Unrelated Business Income of Exempt Organizations" at http://www.irs.gov/pub/irs-pdf/p598.pdf
explains that,  if products or services are not directly related to purpose or function constituting the basis for its exemption (other than for production of income), then the activities are generally taxable.

Their exact wording is found in the middle column of page 3 "Unrelated business income is the income from a trade or business that is regularly carried on by an exempt organization and that is not substan-
tially related to the performance by the organization of its exempt purpose or function, except
that the organization uses the profits derived from this activity."

The IRS has declared, "Nonprofit organizations that are granted Federal tax exemption based on their mission-related purposes are allowed by the IRS, within certain limits, to generate income from unrelated business activities."
http://www.irs.gov/pub/irs-soi/97eounrl.pdf on pdf page 1. But, the organization could, if it has more unrelated activities than the IRS's vague "certain limit", be jeopardizing its exemption.

You referred to two types of fundraising - one to benefit your organization and other fundraising to benefit "another charitable organization".  A social organization is not considered by the IRS as a charitable organization.  A charitable organization qualifies for 501(c)(3) organization status.  In any case, the sales activities are still considered unrelated business even though proceeds go to a charitable organization.    See "Fund Raising" at www.irs.gov/pub/irs-tege/eotopicl82.pdf specifically on page 8:
---Start of Excerpt--
Some factors to consider in determining whether a particular
activity is non-taxable fund raising are the following:

1.  Occasional activity of a nature not usually
considered to be commercial;

2.  Members volunteer substantial services, so far as
practical under the circumstances;

3.  Advertising in programs is of the type usually
regarded as charitable contributions;

4.  Merchandise which is donated or furnished at cost;

5.  This does not preclude the payment of reasonable
rents, fees for professional services, and reimbursement of
members for out-of-pocket expenses.

Where an income-producing activity is conducted primarily in
the manner set forth above, the Service takes the position that
the activity is allowed as "fund-raising" instead of being
unrelated business that may be taxable.
---End of Excerpt--

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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