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Nonprofit Law/Church providing financial help to members

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QUESTION: Our church is a 501(c)(3) with around 2,000 members scattered around the country. Our board of trustees has set up a fund to use to help members who have some emergency or temporary financial need.  They are setting aside 5% of all unrestricted donations for this fund.

First, is this OK under IRS regulations?  

Second, there is disagreement in our group about how much "due diligence" we have to do to make sure there is a real need.  Some people want a very thorough and invasive vetting before giving any funds to an individual, while others think we just take people at their word and give them what our budget would allow vis-a-vis their need.   

Is the church required to verify the need of an individual requesting help?  If so, to what extent?  

Thanks so much,

ANSWER: It appears that your organization may not be church for federal tax purposes, as the IRS defines a church unless it has regular meetings of a group of unrelated persons who physically meets together. You have not explained in your facts what the actual situation is. If you want to explain, after you give me that information I will reply further.

Anyway, as to your specific questions:

1. 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  ---

An organization that only gives benefits to members who are spread out throughout the United States is not considering giving benefits to all similarly situated persons of the community as a whole and, so that activity of giving funds to some of its members jeopardizes its exempt status. At http://www.irs.gov/pub/irs-tege/eotopicc90.pdf on pdf page 10 we that the even a small amount of private inurement is fatal to exemption.

2.  Revenue Ruling 56-304 provides:
--- 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.

However, organizations of this character which make such distributions should maintain adequate records and case histories to show the name and address of each recipient of aid; the amount distributed to each; the purpose for which the aid was given; the manner in which the recipient was selected and the relationship, if any, between the recipient and (1) members, officers, or trustees of the organization, (2) a grantor or substantial contributor to the organization or a member of the family of
either, and (3) a corporation controlled by a grantor or substantial contributor, in order that any or all distributions made to individuals can be substantiated upon request by the Internal Revenue Service.
---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. For me to consider your individual situation and how the law applies, I would need to gather more information.


---------- FOLLOW-UP ----------

QUESTION: Harvey - we are definitely a church.  Our members in communities around the country meet on Fridays for congregational prayer, and our "Mother" church in northern California has nationwide spiritual gatherings a number of times a year.  Perhaps this will change your response?

ANSWER: No that does not change my response.  My answer to your specific question applies to churches also. I just questioned whether you may want to consider whether your organization was still qualified as a church.  Sometimes local church congregations disband but the organization maintains some internet presence.  The IRS does not consider an "internet church" to be qualified as a church as to exemption regulations.

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. For me to consider your individual situation and how the law applies, I would need to gather more information.

---------- FOLLOW-UP ----------

QUESTION: Harvey, this http://www.tonycooke.org/articles-by-others/church_benevolence/ doesn't seem to agree with your answer.  What do you think?

Answer
I still think that the IRS opinion would count more:
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  ---


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. For me to consider your individual situation and how the law applies, I would need to gather more information.

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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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