Folks:

We had a discussion at our museum yesterday afternoon about disposing of some surplus equipment. This is NON-RAILROAD stuff, such as old bulldozers, air compressors, surplus army type trucks, etc. Some of this stuff was used by the museum in the past, some has never been used, but is all now un-usable and surplus and is either ooccupying space needed for other things, or is sitting outside and is unsightly to visitors and neighbors of the museum. We talked about disposing of it and it was mentioned that we should take whatever we could get for it ($50 or $100 or whatever.) However, it was stated by someone that because we are a NOT-FOR-PROFIT Museum, we could NOT just unload this stuff at any price, but had to get the current book price, or close to it. It was pointed out that most of this stuff was donated to us, but this person said that it did not matter, legally we still could not sell it for "just anything."

Could anyone confirm that this is correct? Thanks!

Les Beckman (Hoosier Valley Railroad Museum/North Judson, Indiana)

midlandblb@cs.com

> We talked about
> disposing of it and it was mentioned that we
> should take whatever we could get for it
> ($50 or $100 or whatever.) However, it was
> stated by someone that because we are a
> NOT-FOR-PROFIT Museum, we could NOT just
> unload this stuff at any price, but had to
> get the current book price, or close to it.
> It was pointed out that most of this stuff
> was donated to us, but this person said that
> it did not matter, legally we still could
> not sell it for "just anything."

I don't think that's right.

There are provisions against "self-dealing" - i.e., you shouldn't give a member or volunteer or board member a "sweetheart deal." But the situation you describe could result in a situation in which you can't sell anything because no one will pay "book value."

Just defining "book value" might be difficult. There's not exactly a "blue book" for Niles machine tools or Lincoln welders. If it's what's on your books, has depreciation been calculated over the years? Probably not.

Keep it above board, use common sense, and document everything and you should be fine. Your best chance of getting into trouble is if your board or members buy some of this stuff for less than someone outside the organization would have paid.

JAC

Does your air compressor happen to be a "Joy model 105" from the early 1950's? I am looking for spare parts for ours (TRPA)

> Folks:

> We had a discussion at our museum yesterday
> afternoon about disposing of some surplus
> equipment. This is NON-RAILROAD stuff, such
> as old bulldozers, air compressors, surplus
> army type trucks, etc. Some of this stuff
> was used by the museum in the past, some has
> never been used, but is all now un-usable
> and surplus and is either ooccupying space
> needed for other things, or is sitting
> outside and is unsightly to visitors and
> neighbors of the museum. We talked about
> disposing of it and it was mentioned that we
> should take whatever we could get for it
> ($50 or $100 or whatever.) However, it was
> stated by someone that because we are a
> NOT-FOR-PROFIT Museum, we could NOT just
> unload this stuff at any price, but had to
> get the current book price, or close to it.
> It was pointed out that most of this stuff
> was donated to us, but this person said that
> it did not matter, legally we still could
> not sell it for "just anything."

> Could anyone confirm that this is correct?
> Thanks!

> Les Beckman (Hoosier Valley Railroad
> Museum/North Judson, Indiana)


http://rypn.org/TPRA/
greg.radler@parsons.com

> I don't think that's right.

> There are provisions against
> "self-dealing" - i.e., you
> shouldn't give a member or volunteer or
> board member a "sweetheart deal."
> But the situation you describe could result
> in a situation in which you can't sell
> anything because no one will pay "book
> value."

> Just defining "book value" might
> be difficult. There's not exactly a
> "blue book" for Niles machine
> tools or Lincoln welders. If it's what's on
> your books, has depreciation been calculated
> over the years? Probably not.

> Keep it above board, use common sense, and
> document everything and you should be fine.
> Your best chance of getting into trouble is
> if your board or members buy some of this
> stuff for less than someone outside the
> organization would have paid.

> JAC

John has it right (as he usually does). As a 501(c)(3) nonprofit, you should not encounter a problem by selling the material described to the general public for whatever price you can get. What a reasonable person would pay for an item in its condition when sold determines "fair market value," which is the term that matters to nonprofits and donors alike.

What you definitely do not want to do, again as John mentioned, is sell an item to an officer or director at substantially less than its fair market value. That would be "self-dealing." Self-dealing is a felony in federal law and the laws of most states. Both the individual and the organization could be tagged with it.

Coming back the other way, the fair market value of a donation to a nonprofit is an important datapoint for both parties that can be tricky if not handled right. If a donor claims an exhorbitant value for an item as a charitable contribution and the nonprofit acquiesces to that both could be in trouble with the IRS. With so many people donating cars, boats, property, etc, rather than go through the hassle of selling it, the IRS now watches closely for fair market value.

It is possible for both parties to stumble into a situation unwittingly. I know a young woman (a nonprofit association manager no less) who donated a diamond ring to a nonprofit for a charity auction and took a charitable deduction for what she sincerely thought the value to be. When the purchaser had the ring appraised, the value came in way below what the donor had thought and the charity had listed in its catalogue for the auction. Traced back through the charity, the donor had to ante up to the IRS. I believe she told me that the charity also incurred a fine. No discount from the IRS for her chagrin at having paid originally more than the ring was worth.

That suggests a process for improving the handling of things of significant value that come into and go out of a nonprofit. Get appraisals when items are offered (before accepted). An appraisal gives the nonprofit a benchmark value for an item that is useful for a lot of purposes. Insurance for one. In this case, an appraisal would provide a starting point for setting an "as is" value for a non-collection item to be sold or a collection item to be deaccessioned. An appraisal also gives the donor a benchmark.

Incidentally, if the organization thinks any potentially tax-related situation could be fuzzy, it always can contact the local IRS office, present the facts and intended course of action, and ask for a "ruling" before doing anything. The IRS people love to have the opportunity to answer a question before a situation becomes a problem. Whatever the situation and resulting ruling, an unspoken message also is sent to the IRS: "Organization XYZ thinks first and tries to operate within the rules." They remember and respect that, and who know what the organization's next dealing with the IRS might be?

Perhaps someone qualified can address accounting for the proceeds of the sell-off on the IRS Form 990. Who knows? Maybe the burned-out backhoe over in the weeds is a fabulously rare John Deere one-off for which the tractor collectors would sell their children, For the nonprofit, would that be unrelated income requiring a tax? May you be so lucky as to have such a problem.

Phil Padgett

ebt4evr@aol.com

I believe that if the value of an article donated is 5,000 and below the proof of valuation falls on the donor. If the value is above 5,000 then the receiving organization has to have a professional appraisel in order to furnish a receipt of acceptance of donation.

Les - why not post the list on this board or on TRAINLINE and accept offers for a certain amount of time - at the deadline, the highest offer gets the item. Keeps the stuff in the industry but allows the free market to set fair value.

Dave

irondave@bellsouth.net

> Les, prior posters have pretty much gotten it right, but just explore "someone's" confusion, I'll add my 2 cents.

Your status as a 501c3 has no bearing on your disposal of major property, no matter how it was acquired or used UNLESS you are selling to a person involved with your organization. The IRS could regard that as "prohibited inurement" which would be essentially a sweetheart deal in lieu of stock dividends which may not be paid by a 501c3.

As a practical matter, unless there is an active market for the stuff in question or you have an air-tight appraisal, don't sell it to those involved with your museum and avoid questions if you are audited.

Similarly, state corporation law would prohibit selling below fair value to insiders.

There is a difference between state and federal requirements though. State law requires directors and officers of corporations (i'm assuming you are organized as a corporation) to act in a fiduciary capacity, acting in the best and exclusve interests of the corporation. Selling substantial amounts of valuable assets with attempting to maximize the price TO ANYONE could be theoretically contrued as not meeting that requirement. However as a practical matter, non-profit boards are given more latitude than FORTUNE 500 companies, because of their lack of time and expertise along with the lower enforcement priority of states w/ regard to non-profits.

Practically speaking, the fact that you sold off eyesore "junk" @ scrap prices instead of running an auction isn't likely to be disputed, unless the property was donated with restrictions (not likely)

I suggest you periodically meet with competent counsel (e.g., a corporate specialist, not the guy who did aunt minnie's divorce) just in case your case is special or Indiana Law is different and your CPA for guidance.

Additionally, take a look at IRS Pub 557, just revised in MAY and downloadable in PDF format and written in fairly plain english. These steps help avoid the panic that follows the rants of anonymous self-styled experts like "someone"



May 2003 Pub 557
superheater@rrmail.com

Phil the easy way to avoid unrelated business income tax (UBIT) is to have all work done by volunteers, that has been a long standing a "safe harbor" in the Treasury Regulations that are the IRS/Treasury official interpretation of the Tax Code.

superheater@rrmail.com

> I believe that if the value of an article
> donated is 5,000 and below the proof of
> valuation falls on the donor. If the value
> is above 5,000 then the receiving
> organization has to have a professional
> appraisel in order to furnish a receipt of
> acceptance of donation.

My understanding is that it ALWAYS the responsibility of the donor to establish value. There is a threshold at which the donor must have a professional appraisel if (s)he is taking an income deduction. The receiving organization should never set a value.

If anyone has specific information please let us know.

Brian Norden

bnorden49@earthlink.net

> Phil the easy way to avoid unrelated
> business income tax (UBIT) is to have all
> work done by volunteers, that has been a
> long standing a "safe harbor" in
> the Treasury Regulations that are the
> IRS/Treasury official interpretation of the
> Tax Code.

(UBIT) One of things you have to watch is income derived from operations not directly related to your operation. I believe the number is something like 30% of your total income before you start paying taxes. An example that was given to me was revenue switching on a tourist RR. However, if I had a chance to pay taxes on a large source of revenue for the operation, I would jump at it. Normally the work to be done exceeds any possible revenue ...If you have problems arranging this, I would be glad to assist you :o)


lamontdc@adelphia.net

> Phil the easy way to avoid unrelated
> business income tax (UBIT) is to have all
> work done by volunteers, that has been a
> long standing a "safe harbor" in
> the Treasury Regulations that are the
> IRS/Treasury official interpretation of the
> Tax Code.

I don't think the disposal of the assets mentioned would require payment of UBIT.

UBIT would have to be paid if an organization operated a McDonald's 100 miles from their site and used the proceeds to subsidize the group's mission, for example. But ticket sales, on-site concessions, disposal of assets - all of these are directly related to a group's mission (or can be if the IRS filing is written properly).

JAC

Brian,

You are correct; museums do not place value, appraisers do that.

The IRS will usually take a guesstamate of up to $5,000 for a deduction, after that you would want to talk to a tax advisor. Especially if the donation involves real property such as a rail car.

A museum that I used to be with got in hot water with the IRS for a Board Member getting into trades and deductiong both parts. be sure if any of you readers are a Manager or a Director that you stay squeaky clean! Regardless of paid or volunteer status.

The Society for State and Local History folks in Nashville, Tennessee have published some good booklets on museum ethics for all of us.

ted_miles@nps.gov

I think that I said

If the value is above 5,000 then the receiving organization has to have a professional appraisel in order to furnish a receipt of acceptance of donation.

This is what I got from the IRS. It doesn't make any difference if the donor or receiver requests a professional appraisel as long as the appraisel is not done in house.

> I don't think the disposal of the assets
> mentioned would require payment of UBIT.

> John, I think you are right. The only thing that MIGHT happen is that selling such assets might be a capital gains event, but I'm pretty sure that is not the case- which is why non-profits will always be happy to accept stock and other capital assets.

superheater@rrmail.com

> I don't think the disposal of the assets
> mentioned would require payment of UBIT.

> UBIT would have to be paid if an
> organization operated a McDonald's 100 miles
> from their site and used the proceeds to
> subsidize the group's mission, for example.
> But ticket sales, on-site concessions,
> disposal of assets - all of these are
> directly related to a group's mission (or
> can be if the IRS filing is written
> properly).

The classical example of UBIT is a non-profit hospital, with excess capacity of its in-house laundry, that takes in the laundry of the motel across town.

Another example is selling too many unrelated items in your gift shop.

Brian Norden



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bnorden49@earthlink.net