Discussion:Has anyone heard of this?
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Discussion Forum Index --> Tax Questions --> Has anyone heard of this?
| 11 May 2007 | |
| An organization I work with (but I am not their CPA) asked me to review their operations. The organization has three entities: One is an exempt fraternal membership organization; a corporation holds title to the building the membership organization uses (this corporation was referred to me as the building association) and a third entity is in charge of renting the building and is a C Corp. All three are run by the same board of directors.
The building was built in the 1960's and is becoming a "tired" property. It needs renovation and the board has been setting reserves aside for such issues as general maintenance and repair and major renovations. They have set aside approximately $40,000. The board has been told by their CPA that they can't have reserves for this or any other purpose and that the IRS doesn't permit it. For clarification, the reserves are held in part by the building association and the C corp. They approached me and asked me if the reserve issue was correct. Other than the accumulated earnings tax for the C corp, I am not seeing anything that precludes any of these entities from having reserves. The fraternal organization uses much of its money for fraternal and charitable purposes and the other two organizations simply would use the money for keeping the building operational. My question is: what is correct, having reserves or not? | |
| 11 May 2007 | |
| I don't see a problem with reserves being held in the building association. These are reserves set aside for capital improvements and under association rules, these should be allowed.
As for keeping reserves in the frat, I don't know. Non profits can have funds set aside for building, but since the building is only being leased, then this would not seem to be correct. The C corp seems also like just a rental management company and it too shouldn't have reserves for it's purpose of only being a management company. These are my thoughts, but I don't have any entities like this, so perhaps wait for other opinions :) | |
| 11 May 2007 | |
| Sandysea, thanks for the information.
As I mentioned, the fraternal organization is exempt and runs a small excess of receipts over disbursements. The money that comes into the fraternal group is allocated to charities and scholarship funds. By directive of the national fraternal group, the fraternal part cannot own property, hence the building association, which is a 501(c) 2, a title holder to the property. The C corp is a profit-making entity which pays tax. Their further complaint was: how come they can't run a profit? We are not talking a lot of money, just enough to keep the organization and building going. I will quantify with the following figures: over the last 6 years, the building association has been in the black by an average of $2,000 annually, which goes to the reserve fund. The C corp is running around $5,000 annually in profit. The structure of the C corp and building association seems on the surface, unnecessary. Has anyone else seen this structure?It begs the question: why not have the building association and the fraternal side and let the building association run the business end? I can only surmise this structure has to do with UBIT issues but UBIT is taxed at corporate rates, so it doesn't seem logical. Of course, no one on the current board has a clue, the CPA who set this up is dead and the other CPA firm just keeps doing the books year in and year out with no one there doing any type of follow-up. | |
| 12 May 2007 | |
| I cannot imagine a situation in which the national organization does not have a standard set of guidelines for you to follow. | |
| 12 May 2007 | |
| Dennis, they don't other than the owning property issue. Every individual chapter has the option to either purchase land and build a facility to house their meetings and possibly use for other events of the organization or to make available to the public. The chapter just can't own it so most have a 501(c) 2 for that purpose. Other chapters have use of meeting space provided to them. It all depends on the chapter. | |
| 12 May 2007 | |
| The repairs are not the responsibilty of the charity, since the title is in another name. Therefore the charity can't have reserves for capital improvements.
The entity that owns it can have reserves. The lease can also be renegotiated, so the charity pays more rent. | |
