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501 C 7 Scholarship Awards

Business Law discussions

501 C 7 Scholarship Awards

Postby Siolat » Fri Oct 28, 2016 4:23 am

I'm a member of a 501 c 7 sorority.  Each year we award scholarships to female seniors based on merit as well as financial need.  In some instances the scholarship recipients have been family members of sorority members.  Awards are financed  via  fundraisers. Will this practice jeopardize or exempt status?
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501 C 7 Scholarship Awards

Postby Quennel » Fri Oct 28, 2016 8:43 pm

I'm a member of a 501 c 7 sorority.  Each year we award scholarships to female seniors based on merit as well as financial need.  In some instances the scholarship recipients have been family members of sorority members.  Awards are financed  via  fundraisers. Will this practice jeopardize or exempt status?
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501 C 7 Scholarship Awards

Postby Wilf » Fri Oct 28, 2016 11:06 pm

The IRS has a discussion of 501(c)(7) social organizations at /www.irs.gov/irm/part7/irm_07-025-007.html

Please note that donations to such organizations are not deductible by the donors. Also you will be denied status under section 501(c)(7) if over 35% of your gross receipts come from sources outside of membership fees.  That being said, you would need to comply with state laws as to "fundraisers" and federal tax laws as to unrelated business if the fundraisers are sales or other business activities.  IRS Publication 598 "Tax on Unrelated Business Income of Exempt

Organizations" at

www.irs.gov/pub/irs-pdf/p598.pdf

explains that such activities are generally taxable.

The IRS has published "Nonprofit organizations that are granted

Federal tax exemption based on their mission-related purposes

are allowed by the IRS, within certain limits, to generate income

from unrelated business activities."

www.irs.gov/pub/irs-soi/97eounrl.pdf on pdf page 1

The organization could, if it has more unrelated activities than

the IRS's vague "certain limit", be jeopardizing its exemption

depending upon the facts and circumstances. Two of the main

factors is the gross income of the activity in relation to the

gross income of the organization's total income and staff time

spent on the activity.

That deals with the income.  As to the expense items, your expenditures to members or persons related to members may be considered by the IRS as Inurement. www.irs.gov/irm/part7/irm_07-025-007.html#d0e306

To avoid problems you may want to set up a charitable fund. See IRS Publication 557 "Tax Exempt Status for Your Organization"

www.irs.gov/pub/irs-pdf/p557.pdf

on page 66(footnote 2)

An organization exempt under a subsection of Code sec. 501 other

than 501(c)(3) may establish a charitable fund, contributions to

which are deductible. Such a fund must itself meet the

requirements of section 501(c)(3) and the related notice

requirements of section 508(a). An example of such a fund is

discussed in the IRS memo at:

www.irs.gov/pub/lanoa/pmta00591_7201.pdf

The class of potential beneficaries would need to be large enough and the selection process would need to be based upon objective factors not as to relationship with the committee, for example, the need for funds for school or academic achievements. See:

www.irs.gov/irm/part7/ch10s03.html#d0e87962 where the IRS has

"an organization may properly have a purpose to benefit a

comparatively small class of beneficiaries, provided the class is

open and the identities of the individuals to be benefited remain

indefinite. It has been held that a foundation set up to award

scholarships solely to undergraduate members of a designated

fraternity could be exempt as a charitable foundation. Rev. Rul.

56-403, 1956-2 C.B. 307." Harvey Mechanic, Attorney at Law - [email protected]  
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