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Nonprofit Law/Profitable Ventures for 501(c)(3)

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Question
Does it endanger 501(c)(3) status for a nonprofit to undertake a specific profitable venture that is directed by restricted funds and then return the "seed" money to the donor from any profits derived?  Then, once the investment is repaid, can the nonprofit retain that income for its charitable purposes?

Answer
It appears that the 501(c)(3) organization would be borrowing money from a donor who would be paid back, under some contingencies, without interest.  That part is fine.  However, as to the venture itself, we first need to find out if the venture is related to the exempt activities of the 501(c)(3) organization or not.

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.

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 substantially 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
depending upon the facts and circumstances. Two of the main factors
is the gross income of the activity in relation to the gross income
of the organization's total income and staff time spent on the
activity.

If you explain how the proposed venture relates to the charitable, religious or educational activities of the 501(c)(3) organization, then I would be able to 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. 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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