I was just elected to the board of a small 501(3)(c) organization in Seattle. We want to buy "thank you" gifts for the retiring board members. Can we use funds from our treasury to purchase these gifts, or must we take up a separate collection? Our new treasurer says: 'According to this IRS statement about requirements for 501(3)(c) organizations "none of its earnings may inure to any private shareholder or individual" I think we most all feel a debt of gratitude for their service to ECS. ECS can't reimburse them for their services, but members can certainly give to a separate special gift fund." Is that correct? Would we be in violation of the law if we were to use funds from our treasury to purchase token "thank you" gifts?
If your treasurer's theory were advanced to its logical absurdity, then employee's of charitable organizations could not be paid salaries.
No. If the token gifts are valued at more than $25 then the outgoing director has taxable income. If you take up a separate collection for these gifts, THEN the people giving the money do NOT have a tax deduction.
Your treasurer is reading 501(c)(3) too literally. If "none of its earnings may inure to any private shareholder or individual" is taken completely literally, then a charitable organization would never be permitted to pay a salary to an employee or to make a distribution to help a needy person. Board members contribute a great deal of time and energy to the organizations that they serve, usually on a volunteer basis. In fact, from the IRS's perspective, the oraganization could actually pay board members a salary, as long as the salary was reasonable based on the director's work for the organization. If board members are paid nothing, then the value of a token parting gift would mean that they received nothing plus the $20 (or some other reasonable amount) spent on the gift in exchange for their hours and hours worth of work. The IRS is not going to challenge this as long as the value of the gift is reasonable considering the amount of time and effort that the director gave to the organization. See the intermediate sanction rules under Code section 4958 for more information on this. A related issue, however, is whether the gift is taxable income to the director. For purposes of the intermediate sanction rules state that you can ignore any compensation that would be disregarded as a nontaxable fringe benefit under Code section 132, and you should be able to apply this same rule to whether a gift is taxable to a director. If the gift is relatively modest and is not cash or a cash equivalent, then the exclusion for "de minimus fringe benefits" should apply and keep the gift from being taxable.
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