Nonprofit Law YOU Want to Know

We regularly feature answers to questions from readers in our “To the Point” column. The full list can be viewed here. Here are some of the questions recently received from readers.

Church rentals of property

Our Church is a 501(c) (3) which has a Camp with about 30 cabins where we spend about 10 days a year for Church services. Many parties are interested in renting our facilities. Would such rentals affect our status with the IRS and cause us to be subject to local real estate taxes? In addition, a Pastor has left the ministry and has asked to place a trailer on our property, for which we are charging a $75 fee to cover expenses. Can this pastor donate each month to cover his expenses to the Camp? Can he work the fee off in labor and would this make him an employee?

Although churches are not required to file the Form 990 tax information returns, they can be subject to unrelated business income tax if they engage in unrelated business income activities. Although rental income is usually not taxable, short-term summer rentals on a regular basis for unrelated purposes could generate unrelated business income, which could be taxable, and which, if a substantial activity, could ultimately cost the church its charitable exempt status. (See Ready Reference Pages: “Charities Often Worry About UBIT.”)

Non-charitable business activity for profit could also disqualify the property from local real estate exemption, depending on the specific requirements of your local state law.

The Pastor could give the church the $75 per month for expenses, but it would not be a charitable contribution deduction because of the occupancy rights received in return. He could work off the fee by labor, but it would probably be taxable income to him. Whether he would be an employee or an independent contractor would depend on the character of the relationship with the church. (See Ready Reference Page: “Classify: Employee or Independent Contractor.”)

It sounds as though you have enough fact-based questions – and enough flexibility in what you decide to do -- that you ought to consult a local lawyer for advice on the most advantageous way to accomplish what you want to do.

Nonprofit subsidiaries

Can a for-profit have a nonprofit subsidiary?

Yes. For-profits often create wholly-controlled nonprofits to serve as private foundations for their philanthropy. It is less likely, thought not illegal, that a for-profit would create a nonprofit subsidiary for other purposes, and the IRS would carefully scrutinize such an arrangement for possible private inurement or private benefit to the parent for-profit organization.

Gifts for volunteers

I am a volunteer. A cancer patient was so grateful for the help we provided that she gave me a personal gift worth about $200. Is the gift considered compensation for my work? Or does that only apply to the foundation's paid staff member?

A gift that is truly gratuitous would not be considered compensation or income, but the bigger question is whether your organization has a policy regulating the receipt of gifts by staff and volunteers. Most organizations prohibit or discourage such gifts, especially if the patients or clients are particularly vulnerable.

Public disclosure of budgets

I requested a copy of the budget from a 501(c)(3) children’s home that I contribute to. I was told it is not their policy to provide budgets. Aren’t they required to?

I am not aware of any rule that requires a charity to make public its “budget,” but most charities other than churches and certain other religious organizations are required to give out copies of their Form 990 tax return upon request. The tax return will show the basic financial data for the year passed, not the budget projected for the year before it began. Most recent 990s are available on the Internet at www.guidestar.org. Many charities are also required to file copies of the tax return and/or audited financial statements in order to solicit contributions in most states. You may be able to get the information you want from the tax return or the financial statement even if you can’t get a budget for the year.

Closing down a charity

I am the treasurer of a 501(c)(3) community center. We are thinking of closing the Center. What happens to the exempt status? Does it also cease? Can it be held in the hope of reopening the Center, or can it be transferred to another entity?

It is not unusual for a small nonprofit to shut down operations for a period of time to reorganize and gain enough funding to reopen the program. The exempt status will not be lost immediately. Although the IRS could revoke your exemption for failure to conduct a charitable program, it almost never happens. You could lose your public charity status if you do not meet the public support test because you have had no income for five years. (See Ready Reference Pages: “Calculating Public Support Percentage.”) The one thing you can’t do is transfer the exempt status to another entity. Even if you were to legally merge with another entity, you would have to submit a new application for exemption.

Alcohol at Board meal

Is it a problem to pay for alcohol as part of a Board meal with 501(c)(3) funds?

There is nothing in the tax law that prohibits serving alcoholic beverages as part of a meal for the Board of a charity. If anything is being given to Board members, you always have to consider the possibility of an excess benefit transaction, but the questions are not of a different character because of the alcohol. (See Ready Reference Page: “Charities Must Avoid Excess Benefit Transactions.”)

Expanding the Board

Our nonprofit corporation is now 10 years old. We have always had just the 4 officers and members. As we are growing, we would like to start a voting board along with the officers. How do we go about doing this?

You need to review your articles of incorporation and your bylaws to see what they say about the number of individuals who can serve on your Board and how they are supposed to be selected. Those governing documents may give you the procedure. If you don’t have bylaws (or can’t find them), consult an attorney to help you draft an appropriate set. If you have access to a state association of nonprofits or an academic nonprofit management support center, you might want to attend some programs on corporate governance to get a broader overview of the issues as you grow the organization.

Have a question you would like to submit? Send it along.