non profit real estate sale

[ggarmento]

What is the name of your state?North Carolina

Can a non-profit 501(C)(3) establish an LLC and then sell real estate property under the LLC and then claim the income on the non-profit as a bequest?

 

[Zigner]

What is the name of your state?North Carolina

Can a non-profit 501(C)(3) establish an LLC and then sell real estate property under the LLC and then claim the income on the non-profit as a bequest?

I'm sure that tax dodge has been tried in the past.

 

[ggarmento]

Is it a dodge or a loophole?
I am interested in citing either case law or IRS regulation.

 

[Whoops2u]

Who owns the property now?

Try to imagine the books on the transfers that would be involved if owned by the non-profit now. Someone is going to have income or UBIT. Transferring it shouldn't change things financially.

If you're talking about circumventing the rules against selling real estate and non-profits, usually because of self-dealing (Or, "excess benefit"), the risk of getting caught will be the same. Maybe more if the donees to the non-profit look at the books.

Can you describe the loophole a bit better?

 

[ggarmento]

The LLC that the non-profit opened to perform real estate transactions was name XXXXX Real Estate and destructed in 2015 after the property sale -- and two days shy of one year, so no annual report was filed with the NC Sec State (not conclusive, but suspicious). The non-profit owned operated out of the real estate property fro several years and then sold the property in 2015 to a third party LLC for 1.4 million.

I have the non-profit's IRS 900-T (2012, 2013, 2014, 2015, 2016, 2017) and the Consolidated Audits (2012, 2013, 2014, 2015, 2016, 2017)... but I do not have a finance background to totally understand what I am looking at... but, the 2015 Consolidated Audits shows a $1.3 million Bequest under the Assets ledger. In previous years the Bequests were non-existent, and 2016 Bequests of $25,000 was entered, and none in 2017. And I am not sure where to look in the IRS 990-T form for the sale.

 

[Whoops2u]

https://www.irs.gov/pub/irs-tege/eotopich94.pdf

Who are you in this situation? Do you have access to the LLC's books?

 

[Taxing Matters]

What is the name of your state?North Carolina

Can a non-profit 501(C)(3) establish an LLC and then sell real estate property under the LLC and then claim the income on the non-profit as a bequest?

You said that the property that was sold was owned by the exempt organization for several years and evidently conducted its operations from that property during the time that it owned it. Then evidently the organization formed a LLC of which it was the sole member and transferred the property to the LLC. After that, the property was then sold to someone unrelated to the exempt organization for $1.4 million. Within a year after that the LLC was "destructed" which I will take to mean that the LLC was liquidated and terminated. Is that correct?

If those facts are correct then it's important to understand that for federal tax purposes a wholly owned LLC created or organized in the U.S. is by default a disregarded entity. That means that the IRS would not see the LLC and instead treat the real estate as though it were still owned directly by the exempt organization. Since it appears that the property had been used to further the organization's exempt purpose the gain (if any) would not be subject to unrelated business income tax (UBIT), which is how exempt organizations pay income tax on the income they receive from nonexempt activities. The exempt organization could have elected to treat the LLC as a corporation, but that's unlikely as there would typically be no tax advantage to the organization for doing that. In short, there appears to be no tax advantage to the organization in choosing to use the LLC to do the sale.

What you have not told me is how the organization got the property in the first place. Was it given to the organization as a gift after the donor had died? If so, that property would have been by bequest if the gift was made in the donor's will. The organization may have been saying that it regarded the money from the sale as a bequest since the property sold was a bequest. Or it may be that the $1.3 million bequest it mentioned is completely unrelated to the sale of the property. Without reviewing all the records I cannot say what reference to bequest is about. Also we don't know the basis that the organization had in the property. It may well be that there was little or no gain on the sale anyway.

Note that the term "nonprofit" is a bit of a misnomer, at least in tax law. In tax law, organizations that are exempt under IRC § 501(c) are known as exempt organizations. Exempt organizations certainly can make a lot of money; there is no prohibition against making a "profit".

What is your concern here? What is it that you suspect the organization has done and why?

 

[ggarmento]

Within a year after that the LLC was "destructed" which I will take to mean that the LLC was liquidated and terminated. Is that correct?

The NC Sec of State has the LLC formed on paper in Aug 2014 and filed in Apr 2015, and destructed in Apr 2016 two days shy of one year. I have no direct connection between the LLC (let us call the short lived real estate company: XXXXX LLC)

What you have not told me is how the organization got the property in the first place.

It seems the prior ownership of the property was another non-profit (YYYYY) corporation who's registered agent (according to NC Sec State) is the Executive Director of principal non-profit (ZZZZZ) in question. According to county tax records, YYYYY Inc. (non-profit) transferred the real estate property in 2006 (Transfer Date 01/05/06, Price $0, Legal Reference: NON WARRANTY DEED) to ZZZZZ non-profit [online tax records don't go back further that 2006].

What is your concern here? What is it that you suspect the organization has done and why?

ZZZZZ non-profit is operating under federal funds to provide benefits to homeless veterans; in doing so ZZZZZ non-profit exploits the homeless veterans as a free labor work force at their non-profit and for-profit business interests. The homeless Veterans were gathered and shuttled to the real estate property in question, for the purposes of emptying out the property which was a condition of the sale; the veterans were not paid for their labor. This one instance is a single example of a pattern of practice that is a daily occurrence at the non-profit. The federally funded non-profit is operating under a self-designed homeless Veterans program which seems to suggest that working the homeless veterans for no pay teaches time management skills, job skills, and a sense of purpose. So I have to ask, what is an hour of a homeless veterans labor worth?

The Fair Labor Standards Act (FLSA) grants no exemption regarding payment of wages in a for-profit or not-for-profit business; one criteria for the application of the FLSA is in regard to a $500,000 worth of "business done".

U.S.C. 29 § 203 (s)(1)(a)(ii) (ii) is an enterprise whose annual gross volume of sales made or business done is not less than $500,000 (exclusive of excise taxes at the retail level that are separately stated);

 

[ggarmento]

https://www.irs.gov/pub/irs-tege/eotopich94.pdf

Who are you in this situation? Do you have access to the LLC's books?

I do not have access to the LLC.s books. Thanks for the PDF, it looks like it will help me make a informed opinion.