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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10491
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Im an officer of a non-profit organization. A foundation wishes

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I'm an officer of a non-profit organization. A foundation wishes to give a 5-digit sum to the non-profit and has asked that we direct the funds to an employee of our non-profit. The foundation to which the funds were originally given is a non-profit as well. Can these funds be passed to an employee of the non-profit on whose board I sit as a gift? Or only as taxable wages? And are there any risks to the non-profit status of the organization on whose board I sit?

So to summarize: Non-profit A wishes to give funds to Non-profit B and wants those funds to be gifted to an individual who is an employee of Non-profit B.

NPVAdvisor :

You raise an important question ... Risk most certainly does exist here

NPVAdvisor :

In the Internal Revenue Code, the nondistribution constraint is embodied in the prohibition against inurement

NPVAdvisor :

The inurement prohibition forbids the use of the income or assets of a tax-exempt organization to directly or indirectly unduly benefit an individual or other person that has a close relationship with the organization or is able to exercise significant control over the organization.

NPVAdvisor :

The essence of the inurement proscription is found in the language of Code § 501(c)(3), which provides that no part of a 501(c)(3) organization’s net earnings can inure to the benefit of any private shareholder or individual.

NPVAdvisor :

Can a case be made that this is to pay for work to be done that directly furthers the non-profits mission?

NPVAdvisor :

My opinion is that documenting that the incremental wages are going to a new position or additional/incremental work that will directly address the (further the) mission of the organization is the way to do this with the least amount of risk

Customer:

To answer your final question: it's pretty much "gray," in my opinion. To be more explicit about the situation, a non-profit religious organization ("Non-profit A" in my original description) wanted to give $10,000 to one of our pastoral staff (who is employed by our church, "Non-profit B"); and they wish to give the money to our church and ask/hope that we will simply pass it through to the pastoral staff person as a gift. (We've always resisted this in the past, because the original gift to Non-profit A was tax-advantaged/deductible; etc.)

Customer:

The person who controls the disbursement of funds from "Non-profit A" simply wished to express gratitude to our pastoral staff.

NPVAdvisor :

I completely agree with your intuition ... the IRS terminology here is "excess benefit transaction" but it IS a facts and circumstances test

NPVAdvisor :

Again, if this was done along with some letter of documentation of an expectation that the efforts of whatever nnon-profit is involved be "furthered," continued." etc willl help

NPVAdvisor :

Just to give you the tests check use...

NPVAdvisor :

sorry the test's (factors) IRS would use if this were looked at in an audit of the for 990:

NPVAdvisor :

Factors the IRS will consider include:



  • The size and scope of the organization’s regular and ongoing activities that further exempt purposes before and after one or more excess benefit transactions occurred;

  • The size and scope of one or more excess benefit transactions relative to the size and scope of the organization’s regular and ongoing exempt functions;

  • Whether the organization has been involved in repeated excess benefit transactions,

  • Whether the organization has implemented safeguards that are reasonably calculated to prevent future violations, and

  • Whether the excess benefit transaction has been corrected or the organization has made a good faith effort to seek correction from the disqualified person or persons who benefited from the excess benefit transaction.

Customer:

OK. Apart from the matter of this test factor, are there any issues regarding the funds themselves: that is, they were donated to org. A as an income-tax deductible gift; do those funds need to be taxed as income when passed to org. B's (our church's) employee? or can it simply be gifted?

NPVAdvisor :

Art more than science here, but having it be wages, especially given the tax incentive that exist for clergy, would CERTAINLY carry less risk

Customer:

OK. Thanks for your help with this. Appreciated much.

NPVAdvisor :

YW.

NPVAdvisor :

Here's an excellent resource: (these folks are excellent) ... no association , but appreciation

NPVAdvisor :

If this HAS helped, I would appreciate a feedback rating of 3 (OK) or better … That's the only way they will pay us here.


HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.

Lane and 2 other Tax Specialists are ready to help you

Thanks much.

Lane