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Property Lease Agreement

Having a dispute with a tenant or landlord? Rental Law discussion

Property Lease Agreement

Postby Pelltun » Sun Dec 04, 2016 5:51 am

Hello,

My wife and I are in the process of forming a nonprofit farmed animal rescue sanctuary. We have purchased 20 acres and a small home with our own funds. By the time our corporation is formed this property will be paid in full.

We will be living in the home and running the farm, as well as the founders of this nonprofit. I understand that in the future we could technically be removed as caretakers and employees of the corporation, and forced to leave our home, if we give the property to the corporation. Would it make sense to lease the property to the corporation? Would that be legal given our positions with the corporation? If improvements were made to the property with corporate funds, would they be allowed to remain if the corporation was dissolved?

Thank you for your time and for providing assistance on this forum.

Sincerely,

Mark Pruitt

Co-Founder

Uplands Peak Sanctuary

www.uplandspeaksanctuary.org

ANSWER: It appears that you are referring the situation that you would have unrelated directors of the nonprofit corporation so that you would have a chance for public charity status. The IRS wants at least 3 unrelated directors for public charities and, in any case, the board should not be controlled by related persons.

See:

www.irs.gov/pub/irs-wd/1002041.pdf

which is denial of exemption based, in large part, upon the fact

that there was only one effective leader of the organization. At

the bottom of pdf page 4, the IRS indicates what I have found in

the past, i.e. that, when a organization files for public charity

status has only one director, the IRS sends out a notice

recommending that, to increase the possibility to gain exemption

determination, the organization add at least 2 other, unrelated

directors. That 2009 denial on the bottom of pdf page 5 cites to

Revenue Ruling 55-656, 1955-1 C.B. 262,"the control of one

person or a small, related group suggests that an organization

operates primarily for non-exempt private purposes, rather than

exclusively for public purposes."  The organization would then

have a burden to show that it is not operating for the benefit of

the sole director.

If the corporation was controlled by non-family members and it owned the land then you are correct that you could be removed as caretakers and employees of the corporation, and forced to leave your home.

If you want to keep control of the corporation, therefore, you would have the  burden to show that it is not operating for the benefit of your family. Improvements would benefit the family if it owned the land. But, as you wrote above that you would be an employee that would bring up another issue.  You would have the burden of showing why the corporation should hire you(at the compensation).

"Although control by ... a small group may not necessarily

disqualify [an organization] for exemption, it provides an

obvious opportunity for abuse of the claimed tax-exempt status."

Church of Ethereal Joy, 83 T.C. 20 at 23(1984). That case is

cited in the United States Fifth Circuit Court of Appeals case

St. David's Health Care System v. U.S., 349 F.3d 232(2003)http://pages.citebite.com/o1n5g1q6c0htj

Certainly you can eliminate the possibility of the nonprofit owning the land and then treating you negatively and you would do that by renting the land to the nonprofit but that would need to be at a rental that is equal to or less than market rates and again, the burden would be on your to show compliance.

Harvey Mechanic, Attorney at Law - [email protected]

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.    

---------- FOLLOW-UP ----------

Thanks so much for the quick reply.

We have no problem with the board having control, and although we would initially be 2 members, of a 5 member board. If we became compensated in the future...we would obviously replace ourselves on the board. I just wanted to protect us down the road, so we wouldn't lose our home. I had planned to just rent the land for very low rate...as our goal is not to make a bunch of money off the nonprofit, just live modestly and run the farm. Sounds like were on the right track...thanks SO much for your help, this process is often daunting.
Pelltun
 
Posts: 42
Joined: Wed Feb 26, 2014 8:54 am

Property Lease Agreement

Postby Durwin » Wed Dec 07, 2016 10:27 am

Hello,

My wife and I are in the process of forming a nonprofit farmed animal rescue sanctuary. We have purchased 20 acres and a small home with our own funds. By the time our corporation is formed this property will be paid in full.

We will be living in the home and running the farm, as well as the founders of this nonprofit. I understand that in the future we could technically be removed as caretakers and employees of the corporation, and forced to leave our home, if we give the property to the corporation. Would it make sense to lease the property to the corporation? Would that be legal given our positions with the corporation? If improvements were made to the property with corporate funds, would they be allowed to remain if the corporation was dissolved?

Thank you for your time and for providing assistance on this forum.

Sincerely,

Mark Pruitt

Co-Founder

Uplands Peak Sanctuary

www.uplandspeaksanctuary.org

ANSWER: It appears that you are referring the situation that you would have unrelated directors of the nonprofit corporation so that you would have a chance for public charity status. The IRS wants at least 3 unrelated directors for public charities and, in any case, the board should not be controlled by related persons.

See:

www.irs.gov/pub/irs-wd/1002041.pdf

which is denial of exemption based, in large part, upon the fact

that there was only one effective leader of the organization. At

the bottom of pdf page 4, the IRS indicates what I have found in

the past, i.e. that, when a organization files for public charity

status has only one director, the IRS sends out a notice

recommending that, to increase the possibility to gain exemption

determination, the organization add at least 2 other, unrelated

directors. That 2009 denial on the bottom of pdf page 5 cites to

Revenue Ruling 55-656, 1955-1 C.B. 262,"the control of one

person or a small, related group suggests that an organization

operates primarily for non-exempt private purposes, rather than

exclusively for public purposes."  The organization would then

have a burden to show that it is not operating for the benefit of

the sole director.

If the corporation was controlled by non-family members and it owned the land then you are correct that you could be removed as caretakers and employees of the corporation, and forced to leave your home.

If you want to keep control of the corporation, therefore, you would have the  burden to show that it is not operating for the benefit of your family. Improvements would benefit the family if it owned the land. But, as you wrote above that you would be an employee that would bring up another issue.  You would have the burden of showing why the corporation should hire you(at the compensation).

"Although control by ... a small group may not necessarily

disqualify [an organization] for exemption, it provides an

obvious opportunity for abuse of the claimed tax-exempt status."

Church of Ethereal Joy, 83 T.C. 20 at 23(1984). That case is

cited in the United States Fifth Circuit Court of Appeals case

St. David's Health Care System v. U.S., 349 F.3d 232(2003)http://pages.citebite.com/o1n5g1q6c0htj

Certainly you can eliminate the possibility of the nonprofit owning the land and then treating you negatively and you would do that by renting the land to the nonprofit but that would need to be at a rental that is equal to or less than market rates and again, the burden would be on your to show compliance.

Harvey Mechanic, Attorney at Law - [email protected]

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.    

---------- FOLLOW-UP ----------

Thanks so much for the quick reply.

We have no problem with the board having control, and although we would initially be 2 members, of a 5 member board. If we became compensated in the future...we would obviously replace ourselves on the board. I just wanted to protect us down the road, so we wouldn't lose our home. I had planned to just rent the land for very low rate...as our goal is not to make a bunch of money off the nonprofit, just live modestly and run the farm. Sounds like were on the right track...thanks SO much for your help, this process is often daunting.
Durwin
 
Posts: 49
Joined: Fri Feb 07, 2014 3:06 pm

Property Lease Agreement

Postby Mago » Sat Dec 10, 2016 2:52 am

Many 501(c)(3) organizations have compensated board members, so I don't know why you wrote that "If we became compensated in the future...we would obviously replace ourselves on the board."  That certainly might be beneficial in certain respects though.

It appears though that you still may have an issue because one of your purposes for setting up the 501(c)(3) organization is so that you can live modestly.  I suggest that we consult for one hour to analyze the possibilities of your organization being granted 501(c)(3) organization status by the IRS.  I do not always advise such a consultation, but do for you.  I would be willing to do that, but that would take me beyond the scope of my offer of free services.  If you want to inquire about hiring me for such work, please contact me directly to the email address below. Harvey Mechanic, Attorney at Law - [email protected]

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.  
Mago
 
Posts: 46
Joined: Sun Feb 09, 2014 2:00 pm


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