Our 501(c)(3) recreational organization owns two boats, purchased with 501(c)(3) donations and rented by a 501(c)(7) social club for use when we are not using them. We are considering the sale of the boats to the club but the club is now claiming, for the first time, that it has paid too much to use the boats over the last 10 years and claiming we owe them more money than the boats are worth, which is clearly untrue. While we are willing to sell the assets, it is our understanding that we cannot give away assets purchased with donations to any entity other than another 501(c)(3) with similar interests (upon dissolution), and definitely not to a social club, without getting fair value in return. Is this true? Could we sell for a non-cash payment, such as free use of one of their boat slips for one of our boats for a period of years?
As a charity, you should not be giving away your assets for free except to those charitable beneficiaries for whom you were formed to help. A charitable hospital can give free care to patients who can’t afford to pay, and you could provide free use of your boats for kids who couldn’t pay, for example. You could also probably give them to a charitable summer camp where they would be used for charitable purposes.
The fact that the boats were purchased with contributions is not determinative. The same rule would apply if you earned the money to buy the boats through user fees on other services. Once a charity has assets, those assets are to be used for charitable purposes. You can sell them to others at fair market value and use the proceeds for your charitable services, but you can’t give assets of significant value away and still meet your 501(c)(3) obligation to operate primarily for charitable purposes. You wouldn’t have to sell them for cash. You could sell for a right to use one of their boat slips for a value substantially equal to fair market value of the boats.
With negotiating partners like this, who apparently make up arguments with no basis in fact, I might auction them off for whatever I could get, or give them to the charitable camp I mentioned before. I assume you have a relationship with this club that you don’t want to damage irretrievably and my visceral reaction should probably not prevail. But you don’t have to sell the boats to the club. If you can’t work out what you think is a reasonable deal, you can just keep them for yourself.
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