Avoiding The Requirement To File A 990 Or 1120

[Neued]

We are a group of students who rent a large house and hire a cook.  We use a paid tax preparer for the cook, who handles all the payroll tax forms.

We collect more than $100,000 per year from our residents, but it all goes towards rent, utilities, groceries, the cook, general supplies for the house, and social events, especially each Fall when we hold large events to recruit "the best six or seven" new members from the thousand or so new students at our university and invite all new students to attend.  No one is "making any money" other than our employee, the cook, who is not a resident.  Our bank account does not earn interest.

We are having a big argument about whether we are just a group of people pooling expenses, under the theory that if this is true, we are neither a small business which would have to file an 1120 or an exempt organization which would have to file a 990 under one of the 501(c) categories.

The counter argument is that there is no such thing as "simply pooling expenses" and that we are an unincorporated association(we do elect "officers" from among our residents including the equivalent of a President and Treasurer, although we use different titles) and have to do either an 1120 and possibly pay corporate income taxes(although we think our expenses would equal our income) or submit a 1023 or 1024 and be recognized as exempt and then file a 990 each year.

There are many other similar off-campus organizations at our university, some of which have received determination letters as 501(c)(3) or 501(c)(7) organizations, or have such status as subordinate organizations within a national organization, but we are just a local group with no other "chapters".

The university requires us to participate in an "accreditation" process, which requires us to submit our 990s for inspection every two years under the theory that the IRS is going to levy huge fines if we don't file them, and the university wants to protect its students from getting into trouble, and has shown us huge fines levied by the IRS to some of these other organizations for not doing 990s, but has not been able to provide any proof that we need to start doing so, since we claim to not be running a 501(c)(3) or 501(c)(7), but are just pooling expenses.

Who is right?  Neither the proponents of the "we are just pooling expenses" theory nor the proponents of the position that "we are collecting income and operating either a business or an exempt organization, whether we say so or not" are willing to back down without some sort of convincing documentation that the IRS allows or does not allow a group above some certain size to "pool expenses" without accounting for the income and expenses as a business or association by filing an 1120 or 990.

Thank you.

ANSWER: Before I could give you more information I would need to know what entity has the EIN(Employer Identification Number, also known as the taxpayer identification number)that is associated with the bank account through which over $100,000 passes.   If it is an unincorporated association, does that association have any written and adopted articles of association. If an unincorporated  association, has that association filed anything with the State of Massachusetts or the IRS for previous years or this year? After you give me that information I will reply further. Harvey Mechanic, Attorney at Law - [email protected]

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.    

---------- FOLLOW-UP ----------

The EIN is in the name our student group is known by at our university.

We have written documents with officer job descriptions, responsibilities of membership, etc.  We have a small number of members who are not residents but participate in our activities, primarily new members, since our university does not allow first-year students to live in off-campus housing.

We have not filed incorporation papers with the state, nor have we filed tax returns with the state or IRS.

Our house is owned by a separate corporation with a separate EIN and separate officers.  Some of our officers serve ex-officio as directors of the "house corporation" which is recognized by the IRS as exempt under 501(c)(7).  It is incorporated and files 990s.  Its structure does not include our organization as a subsidiary, but our residents and other members eventually become members of the house corporation, and remain alumni members of that corporation.

The administrator of our university's accreditation process

requires submission of the 990s for both the alumni/ae house

corporation and the student organization and insists that we have

only two choices:(1) we must either have absolutely no

independent financial existence from our "house corporation", and

its tax filings must account for our combined income and expenses,

or(2) we must do our own filings to account for our income and

expenses as an unincorporated association.

We insist that we have no legal existence, and are just collecting money, depositing it into our bank account, and sharing expenses(including the rent paid to the "house corporation"), and are not a legal entity and do not have any filing requirement.

Thank you.

ANSWER: You are incorrect in your statement that you have no "legal existence".  Even before Massachusetts became a state, there existed a legal entity called an "unincorporated association" and, in most states, like California, unincorporated associations can exist simply by having a group, regular funding and a method of operation.  In California, for example, they do not need to register with the State. That registration is not mandatory, as we see the word "may" in California Code §21301.  "Any association, the principles and activities of which are not repugnant to the Constitution or laws of the United States or of this State, may register in the office of the Secretary of State a facsimile or description of its name or insignia and may by reregistration alter or cancel it." http://goo.gl/VUcbm

I have in my profile that this free forum is only for general questions relating to IRS federal exemption issues of 501(c)(3) organizations. You can check Massachusetts law, even though it probably does not require registration of unincorporated associations.

Therefore, you would need to show the university that you are not required to file any income tax returns. From page 7 of IRS Publication 1635 regarding entity types and

their returns, "An unincorporated organization with two or more

members is generally classified as a partnership for federal tax

purposes if its members carry on a trade, business, financial

operation, or venture and divide its profits."

www.irs.gov/pub/irs-pdf/p1635.pdf From what you informed me you are not set up to "divide profits" and, you would not, therefore, be required to file federal income tax returns.  If you want me to draft a formal legal opinion letter for the university, I would be willing to work on your matter, but I would need to spend a substantial amount of time and that would be beyond the scope of my offer of free services.  If you want to inquire about hiring me for such work, please contact me directly to the email address below. Harvey Mechanic, Attorney at Law - [email protected]

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.    

---------- FOLLOW-UP ----------

Thank you.

Based on your response, we are not unique in any way among social clubs, and no social club which only has income from its members and which spends all of that income on its own operation with no money paid back to its members should ever have to file any tax forms.

But what does the end of the paragraph mean when it says, "unless the co-owners provide services to the tenants"?    We don't simply take all of our bills and have each person pay a "share" of each bill.  Our organization charges(for example) a "house bill" of $5,000 per member and develops a budget from which it provides housing, meals, social events, etc., to the members.  Are we "providing services"?

Thank you.

[Baynebridge]

That sentence about "co-owners" is not relevant to your unincorporated group.  It would only apply to the situation when there are more than one owner of real property.  You already informed me that there is only one owner of the real property... the 501(c)(7) organization. Harvey Mechanic, Attorney at Law - [email protected]

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.