Government & Politics

$800,000 award from city could end up hurting Zulu

Accepting a recent $800,000 award from City Hall could further jeopardize Zulu Social Aid and Pleasure Club’s tax exempt status.

That’s because its unusual IRS status requires that it get at least 65 percent of its gross income from membership dues. Its latest tax filing, for 2007, shows that it apparently violated that provision, with only $61,000 coming from dues — about 2 percent of its income.

If the organization’s finances are similar for this year, the $800,000 award – either as a gift or a loan – will only worsen the situation, reducing the percentage of income from dues.

Reached by phone Thursday evening, Zulu Vice President Naaman Stewart said he would call The Lens later, but did not.

A close look at tax documents filed by the venerable African-American organization reveals that the IRS classifies it under the tax category typically assigned to athletic clubs or amateur sports organizations.

This 501(c)(7) designation sets Zulu apart from the more common non-profit organizations, most of which are designated as 501(c)(3) or 501(c)(4). For instance, the Carnival krewes Orpheus and Bacchus hold 501(c)(4) status.

Zulu’s traditional Lundi Gras celebration at the riverfront last month was punctuated by the presentation of an oversized $800,000 check to the organization from one of its own members – Mayor Ray Nagin. Later that week, Nagin administration officials couldn’t say whether the award was a loan or a gift from the city.

The money comes from the federal Urban Development Action Grant fund, which is administered by the city. Typically, UDAG grants go to public community centers, housing or job-creation programs with the goal of helping poor communities after decades of urban decay and population loss.

An important qualification of the UDAG-eligible projects is their potential to generate new jobs. The Zulu proposal projects 10 permanent “service and maintenance” jobs and 225 temporary construction jobs.

The Zulu application asks for $850,000 to go to the cost of constructing a $1.25 million reception hall and clubhouse. The new building would replace the club’s existing Broad Street headquarters. Zulu president Charles Hamilton wrote in the cover letter of the application that the organization has “received a commitment from the SBA for a portion of the projected cost” of the new building. Later in the application, though, Zulu notes that “to secure the full loan amount from SBA the organization must show the source of the total construction cost of $1.25M.”

A condition of the city’s application for the money was the ability of the project to stand on its own without continued public investment.

In its application, the organization projects earnings of $12,000 a month from the rental of the space for parties and meetings, $18,000 a month from membership dues and $25,000 from sales at its gift shop. The publicly funded 10,000 square foot clubhouse would nearly triple organization’s current Broad Street quarters.

Competing proposals promise far more jobs and provided more details as to how the larger community would benefit from the investment of public dollars. The Lens will post all four applications for the money Friday.

In a Times-Picayune story last month, a Zulu official couldn’t provide details on how the organization came to apply for the money.

A Nagin spokeswoman asked The Lens to e-mail questions about the Zulu award, but she has not yet responded.

In 2007, the organization took in a total of $2.7 million, according to its most recent tax filings. That same year, the organization only took in $61,081 in membership dues. Though the return is for 2007, it wasn’t filed with the IRS until March of 2009.

If Zulu were a more conventional 501(c)(3), it wouldn’t need to be concerned about the percentage of income from dues.

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  • Where is all the money coming from? Are these riding dues? Could those also be considered membership dues?

  • Ariella Cohen

    Hi there- It’s unclear whether the “membership” dues listed in the 990 include payments to ride in the parades. These are the kinds of questions we’d ask Zulu if we would get the call back. For now, all we know is what we can divine from the 990s

  • jinx

    Can you explain what Zulu gains (if anything) from having 501(c)(7) status, as opposed to (c)(3) or (c)(4)? Thanks.

  • I ain’t passed the bar, but I know a little bit…

    Having been a trustee for many years of a non-profit educational, my sense was that you wanted to the most advantageous status for your particular organization. While the 501 c3 might have the best tax advantage, it’s also more restrictive.

    For example, according to this link, a 501 (c) (7) can lobby and engage in political activity:

    From just glancing the document linked above, it looks like membership dues to a 501c7, less the percentage used for lobbying, are tax deductible. Or in some circumstances they are. It’s not entirely clear to me. Contributions, however, are not.

    Again, I’m not a lawyer and didn’t study this document carefully. Might be interesting to get the opinion of an expert.

    Ariella: Maybe you could ask a law professor to clarify?

  • First sentence should have read:

    “Having been a trustee for many years of a non-profit educational group, my sense was that you wanted to have the most advantageous status for your particular organization.”

  • jinx

    Ha. I have passed the bar, though I know precious little–less than you, Frolic, and probably less than Jay-Z–about tax law. I don’t think it’s appropriate for Zulu or anyone else to cheat on their taxes. It’s just not clear to me from the article who the loser is here (in the specific context of Zulu’s tax-exempt status, and not with respect to the larger issue of whether public money should be allocated to help Zulu rebuild). Do taxpayers lose out because tax-exempt status has been given to an organization that shouldn’t be tax-exempt? Is Zulu losing, assuming its 501(c)(7) status is revoked, because it didn’t have the foresight to become a 501(c)(4)? Is there something else I’m missing? Just trying to figure out how much I care about this.