Closely Held 501(c)(3) and (c)(6) Orgs Organizing Tournament

My client is the executive director of both a 501(c)(3) and a 501(c)(6) organization. These organizations are fairly small and are organized and run by the same group of people.

The (c)(6) collects $70,000 or so in membership dues each year and this money is used for the executive director's salary, meetings, my firm's fees, and other overhead. The general idea is that anything leftover will be donated to the (c)(3) organization. The (c)(3) organization also solicits donations in other ways and has fundraisers.

The (c)(6) organization has held a golf and tennis tournament each year. The tournament is open to the public, and there's a set price to get in that's not reduced for members. After the tournament, there is a dinner which has been free for members. Others are asked to pay extra to attend the dinner, and this has typically resulted in few people other than the members attending.

The tournament has typically been break-even. This year, the board wants to start making some money off of it, and they want to "add a tax deductibility amount to the program fee". They also want to make sure that their members continue to benefit from the free dinner at the end.

This proposition led to a phone call between me and my client. It turns out that there is not enough sense of separation between these two entities, and she would like my help to figure out how to smooth things out so that the (c)(3) and (c)(6) are kept separate and operating under appropriate guidelines and principles and so that they can add the "tax deductibility amount" and also provide a benefit to the members of the (c)(6).

I do have a couple of ideas, but I'm interested to hear if anyone else has worked with organizations like this or could offer some general suggestions about the issues in play as well as suggestions about this tournament. Specifically, I see the "issues in play" as

1. maintaining 501(c)(3) status,
2. optimizing the potential for deductions under section 170,
3. encouraging participation and donations, and
4. refraining from adding complexities to the structure as much as possible.

I have an update on this issue. The board would like my advice on the following arrangement:

1. This year, the (c)(3) organization will be the one to host the tournament. They charge $250 for the tickets and provide access to the tournament with an estimated FMV of $200.
2. The (c)(6) organization will provide catering to the event to both its members and non-members who attend the event.
3. All proceeds from the tournament will be retained by the (c)(3) organization.

The goal is for participants to be able to deduct the additional $50 hike in ticket prices for this year even though they will also receive food this year at no additional charge.

Under Regs. § 1.170A-1(h)(2)(i)(B), ticket holders must subtract the "fair market value of the goods or services the organization provides in return". "The organization" in this case isn't directly providing the meals, but they might be treated as indirectly providing them. So, the questions are as follows:

1. Is "the organization" indirectly providing meals via the step transaction and/or substance over form doctrine? In other words, are the meals first treated as donated to the organization and then provided by the organization?
2. If so, what modifications could be made to the arrangement to prevent this treatment? For example, would there be a way to make the catering non-contingent on purchase of a ticket and thus not subtracted from the tax-deductible amount?
3. If participants decline to participate in the catered portion of the event, must they still subtract its value to determine the deductible amount of the ticket price?

1. Yes the organization is providing the meals - directly or indirectly because you have related organizations.
2. I can't think of any way.
3. The players aren't going to partake of the beer and wings? For $50 a pop, I would tell everyone don't be cheap.

Might the FMV of the right to play in the tournament plus the food and drink be $200?
If you truly have a FMV for the meal part and some people do not partake, they do not have to subtract the cost. But how will you give an accurate head count to the caterer?

Might the FMV of the right to play in the tournament plus the food and drink be $200?

Could be.

They've been charging around that much for just the tournament for some time now and charging an extra $100 for the dinner afterwards. Apparently it's a lot fancier than just beer and wings. Based on this, I would not personally put forward a position that the dinner plus tournament has an FMV of $200. I suppose that's not an absolute, but I hesitate to say even that lest it be construed as advice in favor of a $200 valuation.

Something I've been pondering is the prizes. Some of the ticket price goes towards those. If you don't get a prize, do you get to say that your FMV is lower than if you did get one? Or is it all just one flat figure that includes the *chance* to win a prize?

If you truly have a FMV for the meal part and some people do not partake, they do not have to subtract the cost. But how will you give an accurate head count to the caterer?

I think the best answer is to have people RSVP. People who don't RSVP can be told that the FMV of goods & services received is $200; others can be advised that the entire amount was for goods and services.

What is the c3's charitable purpose? There may be a UBIT issue...

Something I've been pondering is the prizes. Some of the ticket price goes towards those. If you don't get a prize, do you get to say that your FMV is lower than if you did get one? Or is it all just one flat figure that includes the *chance* to win a prize?

Yes, I think you have to include the chance to win a prize in your FMV calculation. It might even be a good idea to have the prize tickets sold separately or separately valued, lest the entire "excess" be considered a raffle. Raffle/lottery/etc. tickets, even if run by a charity for a charitable purpose, are never deductible, regardless of how much of the "pot" is retained by the charity.