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Nonprofit Law/tax liability on dividends for non-profits

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Question
I run a small business non-profit association that has a 501c6 determination letter. We started a scholarship program and have built a $100,000 designated reserve fund that we have purchased CD's in the past for the interest earnings to help grow the fund and provide for more money to give away to eligible applicants. Interest rates are insignificant to the growth goals and we are looking to expand the investment range to include dividend paying stocks or ETF's. Any of the captured income from the investment would go to the scholarship program and be distributed at the direction of the board. In this scenario, is there a tax liability incurred on the dividend or profit from the sale of appreciated value in the underlying investment asset?

Answer
Section 512 of the Internal Revenue Code provides for exempt organizations, "(5) There shall be excluded [from federal unrelated business taxes] all gains or losses from the sale, exchange, or other disposition of property [exceptions then listed which do not apply to your case]"
http://goo.gl/N3DuRP You can see at the top of that page that section 512 is within Part
III which is entitled, " Taxation Of Business Income Of Certain Exempt Organizations".

Therefore, your organization would not have any federal income tax exposure from the sale of appreciated value in investment assets?

Also note that dividends are not taxable either. 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 the charitable, educational, religious or other purpose or function
constituting the basis for its exemption (other than for production of income), then the activities are generally taxable. But on page 9 in the middle column we see:
--- Start of excerpt ---
All dividends, interest, annuities,  payments  with  respect  to  securities
loans, income from notional principal contracts,
and  other  income  from  an  exempt  organization's ordinary and routine investments that the
IRS  determines  are  substantially  similar  to
these types of income are excluded in computing unrelated business taxable income
--- 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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