Expert: Harvey Mechanic - 11/8/2009

Question
QUESTION: I understand that the allocation of fund raising to individuals is not allowed (inurement rules)in a 501(c)(3).  But in a 501(c)(3)is it allowable to allocate specific funds to a team?  For example, a trip to Cooperstown for a group of 10 year old players where the organization has ten different baseball teams. Can the 10 year old parents raise money for this trip and not pool it with the other members of the 501(c)(3)?  If they can fund raise for the event, can they allocate the receipts based upon the efforts of the individual parents?  Can the coach go for free to compensate for his donated time and effort?  It gets fuzzy for me.

ANSWER: The IRS does not prohibit fundraising earmarked for a team where there are more than a few members. They have not published the exact number of members of the team that would be the minimum, however.  I doubt that it would be allowed for a two-man bobsled team, but for a baseball team that would be allowed.  
---Start of Excerpt--
A charitable organization must be set up for the benefit of an
indefinite class of individuals, not for specific persons. A
corporation organized and operated for the
benefit of specific individuals is not charitable, even if the
specific individuals in question are in need of assistance.
Citing to Rev. Rul. 57-449.
---End of Excerpt--

The Board of Directors of the 501(c)(3) organization would need to decide to allow this type of team fundraising, not the parents of the team.  

They may not credit each family, though, as to their work. The IRS may have a problem with a 501(c)(3) organization allowing
individuals to collect funds to go for their own, private
benefit. See
www.irs.gov/pub/irs-wd/02-0041.pdf on the top of page 2 about
Scouts collecting for their own use. "Earmarked accounts may not
be compatible with continued tax exemption." The IRS then cites
to
www.irs.gov/pub/irs-tege/eotopica93.pdf  (Example one on page 5),
where they determined that the resulting "private benefit to the
individual members was substantial and negated the charitable
intent of the organization precluding exemption under section
501(c)(3) of the Code".

Harvey Mechanic, Attorney at Law -
Harvey108@hotmail.com


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

QUESTION: Excellent responses, just a few follow up questions.......So only the board should collect and make allocation of the fund raising?  Can the board distribute the funds such that one group of parents get a free trip (coaches) while others pay their own way?  What about the poor kid who can't afford the trip?  Can he get a disproportionate allocation?

ANSWER: The Board can distribute funds as long as it is not based upon a prohibited reason, such as the amount of fundraising a family.  Giving funds to a poor kid who can't afford the trip is certainly charitable and that is directly a purpose of a 501(c)(3) organization. Internal Revenue Code section is 501(c)(3) at: http://snipurl.com/7s89j and it has, in part, that the 501(c)(3) organization must be "operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes".
Funding coaches would be in line with "educational" purposes.

Revenue Ruling 56-304 promulgates that "Adequate records and
case histories should be maintained to show the name and address
of each recipient, the amount distributed to each, and the
purpose for which the aid was given, the manner in which the
recipient was selected and the relationship, if any, between the
recipient and members, officers, or trustees of the organization,
in order that any or all distributions made to individuals can be
substantiated upon request by the IRS."
www.irs.gov/pub/irs-tege/rr56_304.pdf
(cited with approval in IRS instructions for Form 1023
Application for Exemption on pdf page 23 middle column) at:
www.irs.gov/pub/irs-pdf/i1023.pdf)

My summary of IRS regulations relating to 501(c)(3) booster organizations is at:
http://snipurl.com/boosterinf
and you may be interested to read that and the issues would apply in your situation.

Harvey Mechanic, Attorney at Law -
Harvey108@hotmail.com


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

QUESTION: In the article from the Booster Club a $5,000 penalty per year was discussed.  Can you point me to where I can find such penalties for nonprofit organizations?

Answer
An IRS article about such intermediate sanctions and excise taxes
under IRS §4958 is at:
www.irs.gov/pub/irs-tege/eotopice04.pdf

Section 4958 of the Internal Revenue Code imposes an excise tax
on excess benefit transactions between a disqualified person and
an 501(c)(3) organization or 501(c)(4) organization. The
disqualified person who benefits from an excess benefit
transaction is liable for the excise tax. An organization manager
may also be liable for an excise tax on the excess benefit
transaction.
http://vlex.com/vid/19210976

The IRS describes who is a "disqualified person" in the 6th
paragraph, in part
---Start of Excerpt--
The term ''disqualified person'' means, with respect to any
transaction - (A) any person who was, at any time during the 5-
year period ending on the date of such transaction, in a position
to exercise substantial influence over the affairs of the
organization, (B) a member of the family of an individual
described in subparagraph (A)
---End of Excerpt--

Harvey Mechanic, Attorney at Law -
Harvey108@hotmail.com