Form 990 and income

The client is a non-profit 501(c)3 filing Form 990 each year. In 2007, an individual member accepted substantial income of the non-profit in his own name, and deposited it into his personal bank account. From this personal bank account, the individual member paid expenses of the non-profit. Near the end of the year, he determined he had an excess of non-profit funds in his personal bank account and deposited the excess into the non-profit bank account. I am inclined to exclude the financial transactions of the individual and merely report the funds transferred to the non-profit as a donation. The Board and the individual insist that all the transactions should be reported on the Form 990. Opinions? Cites?

Reply to
Christopher
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I can't cite anything, but it seems to me the nonprofit got the benefit of the revenue and the expenses and they should all be reported on its books and on the 990. I think I'd record the revenue as coming in and going out immediately to the member in the form of an advance on expenses (like petty cash, though in this case maybe not so petty ). Then the member turns in the leftover cash with all of the receipts for the expenses he paid. He has no charitable contribution deduction, but he also has no income or expense arising from these transactions.

And I trust you have read the riot act to the Board and the individual so that this will never happen again!

Katie in San Diego

Reply to
Katie

[...]

What would you call the funds transferred *from* the non-profit?

-Mark Bole

Reply to
Mark Bole

There were no funds transferred from the non-profit. Members of the public made out checks to the individual, he deposited them in his own bank account. He wrote checks to various vendors from his personal bank account. The only time the non-profit was involved was when he deposited money into the non-profit bank account.

Reply to
Christopher

Is this organization eligible to receive tax-deductible contributions under IRC Sec. 170? If so, the donors lost their charitable contribution deductions by making their checks payable to Mr. X rather than the organization.

You can't just ignore his receipt of the funds. If it isn't an advance to him from the organization, it's income to him. Also, the vendor payments are nondeductible personal expenses to him unless he can document that they were paid for the benefit of the organization.

I think the only alternative to the solution I proposed above is to treat all of the receipts as "other income" on Mr. X's return and to deduct both the amounts paid to the vendors (assuming they can be documented as paid on behalf of the nonprofit) and the cash paid to the nonprofit as charitable contributions. He should give the nonprofit a detailed accounting and documentation of the payments he made, and the nonprofit should give him a letter acknowledging receipt of those amounts, plus the balance deposited to its account, as charitable contributions for which no other benefit was received. And both the contribution and the expenses should be recorded on the organization's books.

I think I'd still do as I suggested above -- make an adjusting journal entry on the nonprofit's books crediting revenue and debiting advance to Mr. X for the amounts he received from the donors, and a second entry crediting the advance and debiting the appropriate expenses and cash. Of course Mr. X must furnish the nonprofit with a detailed accounting and documentation of the funds expended to back up the second entry.

Either way, the revenue and expenses must be recorded on the organization's books and included in its 990.

Katie in San Diego

Reply to
Katie

Not to detract from Katie's thorough reply, but turn it around for a moment: if it was that easy, wouldn't a lot more organizations simplify things by just having a member pass everything through his or her personal checking account?

-Mark Bole

Reply to
Mark Bole

WoW, this known as "commingling funds" which is the Eighth Deadly Sin. It is ordinary income to the recipient and has been known to raise hell at an audit.

A Law firm collected over $25,000 for a charity dinner and paid the exact amount to the charity. Unfortunately the checks were made out to either an attorney or to the Law firm and, instead of depositing the checks into an escrow account, they deposited the checks into the firm's account.

I knew the Manager of the IRS office that audited them. He said on one day the firm's account was below $20,000 and they got taxes and interest. The penalty was waived because they admitted they were wrong and signed a cease and desist order to avoid publicity.

Dick

Reply to
Dick Adams

Well, I think most groups wouldn't do it because I don't see any way to salvage the deductibility of the donors' contributions that were paid to Mr. X.

However, hearing Dick's story, I have to admit that papering these transactions over after the fact may or may not be effective if questioned by the IRS. The vulnerable party here is not the nonprofit but Mr. X, who may be determined to have gross income in the amoount of the "contributions" and nondeductible expenses. The kind of documentation I suggested may protect him, but I wouldn't make any guarantees. I also suggested in a private e-mail to Christopher that the Board adopt a resolution authorizing Mr. X's receipt of the contributions on its behalf and the expenditure of the funds for its benefit.

I also suggested, in that e-mail, that there may be facts here that we are not privy to that could affect the analysis. Maybe something underhanded was going on here, who knows? If so, certainly all bets are off.

Katie in San Diego

Reply to
Katie

That reminds me of something. We were recently discussing Dick's issue of the deductibility of travel expenses when he's representing a nonprofit. The statute says something like, deductible gifts can be made "to or for the use of" the nonprofit.

The courts have interpreted the "for the use of" language to mean money or property given in trust to be held for the nonprofit. Isn't that the kind of thing that's happenning in this case? The one downside is that gifts given in this way are limited in deductibility to 20% of the donor's gift basis (or whatever they call it).

Stu

Reply to
Stuart A. Bronstein

I and, I suspect, many others here have acted as a conduit for a not-for-profit, e.g., collecting money for group outings, group dinners, group purchases. The problem is not the "for the use of" language, but rather the IRS looking at a taxpayer's return and seeing a series of credits and debits related to a not-for-profit AND seeing the taxpaper may have intemittently made personal use of these funds before replacing them. If intermittent personal use does not occur, there is no problem.

The very simple solution is to open an escrow account and run all transactions through it. Banks like non-interesting bearing escrow accounts and escrow accounts cause auditors to leave sooner.

This is a good recodkeeping situation where you dot the i's and cross the t's. Auditors love good recordkeeping.

Dick

Reply to
Dick Adams

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