Expert: Harvey Mechanic - 2/27/2010

Question
QUESTION: Thank you very much for providing this help/information because we struggle with seeing other nonprofits (primarily school and youth sports) set a choice for participants between a fundraiser quota or a set fee (ie either sell or pay). We are under the impression that such violates the private inurement rules. We realize we cannot give an individual player/parent credit because they found a sponsor that would make a donation to a school sport/team. Can this be done for certain 501-C-3 fundraisers where you a set a sales or work time quota such as car washes, pancake breakfasts and discount/scrip cards where the buyer is not making a donation to the nonprofit but receiving goods or services for the payment? We would appreciate any advice on where the line can be drawn between IRS compliance re private inurement and a way to enforce or make sure every parent/player involved with a nonprofit team/sport does their fair share. Again, thank you.

ANSWER: Your question is not so much an issue of private inurement as it is of

1. Whether the organization deserves to have 501(c)(3) organization status.
2. Whether the benefits are taxable to the workers.

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".

I agree with the National PTA which stated on pdf page 50 of
their"Money Matters" publication  "Children should not take part
in fundraising activities."
www.pta.org/Documents/MoneyMatters_QRG.pdf

Also see:
http://viewer.zoho.com/docs/tabZa1
That article also warns that all funds solicited on behalf of the
booster organization in fundraisers (sales) must go into the
general fund of the booster organization and not directly into
individual accounts of the booster fundraiser. I agree with that
warning.

The statement that you made about "fair share" indicates that you do not want to operate properly. The fair share is applicable for a co-operative organization but not a charitable organization. In denying exemption to a purported 501(c)(3) organization
booster organization, in 1992 the IRS at
http://viewer.zoho.com/docs/s2ca6g
on page 6 stated "The reason you were created and your method of
operation indicate that you are made up of a group of parents who
have joined together to work cooperatively to provide funds to
pay for the participation of their children in athletic events.
The expenses incurred by these children would otherwise have been
paid by the parents.  All parents of competitive team members are
automatically members of your organization.  Accordingly, members
expect to receive a benefit in return for their membership.  You
pay no benefits to non-members.

Another, similar denial of exemption was issued by the IRS in
1990 and may be viewed at
http://viewer.zoho.com/docs/a4vd3

Such an operation would be what the IRS calls a cooperative.  A
cooperative is not qualified as a 501(c)(3) organization.  A
501(c)(3) booster organization is to be a charitable, not
cooperative, organization.

Now, if your organization is not a booster organization, let me know and I can adapt my answer to you.

Thank you.

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


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

QUESTION: Thank you for the information. We are a small private school (501-c-3)that does not have the funds/budget for extras like athletics so each team/sport's parents have to deal with funding that activity. Some parents want to just pay their "share" of the cost for the season but many say they need the fundraising activities to afford being on the team. So we are looking for a compromise without risk of violating IRS rules. There is no separate/official booster club or separate booster bank accounts (all funds are maintained and accounted for by the school).

Answer
Parents may certainly go out and sell items and make a profit and use that profit to pay their fees, but that should not be then an activity of the 501(c)(3) organization as then the 501(c)(3) organization will need to deal with the employment tax issues of the parents engaging in that for-profit activity.  Now if girl scouts families are selling cookies and the proceeds of each families sales go to the general fund of the troup that is different fromt he situation when the scouts sell for the their own families benefit.  

Thank you.

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