One of the generous donors of your animal rescue organization donates an immaculately maintained BMW for its use. While you appreciate the gesture, what your organization really needs is cash for cat food, not a fancy car. One of the members of the board of directors, however, would like to purchase it for her teenage daughter – and she is willing to pay a fair price.
Non-Profit Organizations and Fair Market Value of Property
Non-profit organizations are called “non-profit” because all revenues are used for the purpose of running the organization. Unlike a “for profit” organization, a non-profit is prohibited from distributing its revenue to its board of directors, officers, members or any private individuals.
While formed under state law, a nonprofit can apply for 501(c)(3) tax-exempt status with the Internal Revenue Service. An excess benefit transaction occurs when a 501(c)(3) organization sells property to a board member, employee or other private party for less than fair market value. So, if your non-profit sells the donated BMW for less than it is worth, it violates the IRS rule that prohibits such transfers of assets to board members and others. The IRS may assess a penalty on the board member and other managers involved in the transaction. The non-profit organization itself could face revocation of its tax-exempt status, although this is unlikely since the IRS can punish the individuals who participated in the transaction. If the non-profit's tax-exempt status is revoked, its revenues become taxable in the same manner that any for profit business would be taxed.
Read More: Tax Law for a Non-Profit Organization
References
- Cornell University Law School: Non-Profit Organizations
- Cornell University Law School: 26 U.S. Code § 501 - Exemption From Tax on Corporations, Certain Trusts, etc.
- Internal Revenue Service: Charitable Organizations, Exemption Requirements - 501(c)(3) Organizations
- Stanford University: Anything Goes: Approval of Nonprofit Status by the IRS
- Internal Revenue Service: Charitable Organizations, Intermediate Sanctions - Excess Benefit Transactions
- Internal Revenue Service: Chapter 27. Exempt Organizations Tax Manual, Section 20. Disqualified Persons as Defined in IRC 4946
- National Council of Nonprofits: Maintaining Tax Exempt Status
Writer Bio
An attorney for more than 20 years, Cara O'Neill currently practices in the areas of civil litigation, family law and bankruptcy. She also served as an Administrative Law Judge and taught undergraduate and graduate courses in the areas of employment law, business law and criminal law for a well-known university. Attending the University of the Pacific, McGeorge School of Law, she graduated a National member of the Order of the Barristers - an honor society recognizing excellence in courtroom advocacy. She is currently licensed in the state of California.