501(c)(3) versus 501(c)(6) Tax Status

[Timothy S. Faith]

The following is the Executive Board's Discussion concerning our tax exempt status as a California corporation.  We solicit feedback from the membership on this issue.

[Daniel Perry]

I am opposed to seeking 501c6 tax-exempt status. The IRS has rejected our request for 501c3 status. The 501c6 status holds very little advantages for us. At best, members can deduct their membership fees from their RL taxes. However, those fees are already so low (less than $10) that this deduction is practically valueless. We are already a California not-for-profit. The 501c6 status hold no tangible benefit to us but exposes us to liability if there is any mistake in record-keeping or filing returns. The headaches of maintaining such a status simply does not warrant us as SL organization to continue seeking 501c6 status.

DanielPerry Laa

[Stephen Wu]

Here is how I see it. I believe that we should seek 501(c)(6) tax-exempt status, if the members decide that they do not want to seek 501(c)(3) status because it is too restrictive of social activities. I do think that networking activities would be beneficial to the association, in keeping with its strategic plan. So if sacrificing 501(c)(3) and switching to 501(c)(6) are needed to keep the networking activities and tax-exempt status, I am OK with that.

As an aside, in the future, the association can set up a separate 501(c)(3) foundation to do charitable work. For instance, the American Bar Foundation is a separate organization from the American Bar Association, and is a 501(c)(3). The ABF can do some things the ABA cannot.

Finally, I do want to address Daniel Perry's comments. His comment suggests that the best thing to do is abandon both the 501(c)(3) and the 501(c)(6) idea, and simply retain the California non-for-profit corporation to shield the association from taxes. I do not believe this will work. Income, i.e. dues, coming into the association is potentially taxable unless we have a 501(c) status at both the federal and its equivalent at the state level. Abandoning the 501(c) application may open the association to tax liability. Accordingly, I see it as important to see the application through and gain some 501(c) status.

I defer to the people more knowledgeable about tax law in case I have this wrong.

Steve Wu
SL: "Legal Writer"

[Timothy S. Faith]

I voted in favor of moving to 501(c)(6) status for our organization. One of the issues raised by Daniel in opposition to this status was that he has participated as general counsel for another 501(c)(6) that has not grown and continues to debate whether to continue as a 501(c)(6). Member participation (and participation/interest generally) is a key element of the success of any organization. I agree with with Stephen that doing this for our existing entity does not preclude us from forming a separate 501(c)(3) later for donations. I would note that today, I am not aware of any major donors waiting to make a donation to our organization that would drive us to choose the (c)(3) designation to make their donation tax deductible.

It does appear, however, that there is interest among our membership to continue to have social activities. We should strive to bring value to our membership. I hope that others will chime in if they think a (c)(3) function should instead be our primary purpose.

[Mick Stenvaag]

It is my opinion that tax liability should not be the largest motivator for the tax exempt status. In the early formation discussions regarding organizational constructs, the most attractive aspect of becoming a 503(c) was that the tax exempt status would be attractive to large donors so their contributions would be tax deductible.

I assert that perhaps the language and framework surrounding the 503(c) application be reviewed and reconsidered. In my humble opinion, the need for exempt status is to better position the organization to raise funds to pay for expenses, tiers etc. and should not be focused on limiting tax exposure.

I have NOT been been active in the board level discussions,and not familiar with the amount of funds collected, but in my opinion if it is $10,000 / yr or less I would suggest remaining a loosely held organization with by-laws. I have done this with success for political affinity groups in Colorado just fine.

Let me caveat that I am an expert of my own opinion and these comment are merely my 2 cents.

Mick Stenvaag