Have Tax Questions? Ask a Tax Expert for Answers ASAP
You raise an important question ... Risk most certainly does exist here
In the Internal Revenue Code, the nondistribution constraint is embodied in the prohibition against inurement
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.
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.
Can a case be made that this is to pay for work to be done that directly furthers the non-profits mission?
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
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.)
The person who controls the disbursement of funds from "Non-profit A" simply wished to express gratitude to our pastoral staff.
I completely agree with your intuition ... the IRS terminology here is "excess benefit transaction" but it IS a facts and circumstances test
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
Just to give you the tests check use...
sorry the test's (factors) IRS would use if this were looked at in an audit of the for 990:
Factors the IRS will consider include:
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?
Art more than science here, but having it be wages, especially given the tax incentive that exist for clergy, would CERTAINLY carry less risk
OK. Thanks for your help with this. Appreciated much.
Here's an excellent resource: (these folks are excellent) ... no association , but appreciation
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.