Nonprofit Law/Cheer Booster

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Question
Mr. Mechanic,

I have few questions, My daughter is an All Star Cheerleader at a gym that is privately owned. We are just trying to get organized to get the Booster Organization set up.  My question is that - The if the gym owner sets up the Booster account that is under her "EIN" number that is a separate Bank account number that requires two signatures, will the gym owner be taxed on the monies earned by the the Booster's?  I am thinking yes - Unless it's set up as a Non-Profit.  Am I wrong?    

I have served on a Non-Profit Cheer Board previously for another organization, and our by-laws were set up that "All Funds were split EQUALLY" among all team members - No matter who raised the money.  First, I don't necessarily agree with the way that one was set up, because you only had a handful of members who worked, but then everyone had the benefit, which was not fair.  

My question is: If we organize a (501)(c)(3) for the new Cheer Boosters,  Is it possible for each Cheerleader to have their allocation of "Individual Monies Raised" and let say - 5% of all monies earned going into a general fund - which that money is split equally. My understanding was that being a 501 c 3 we had to equally divide our monies earned.  The girls have competition fees, travel expenses and so forth, that this money would be used for and monitored by a Board of Directors. But, we would like to make this fair for the members that really work, and keep an account tab on the amount raised for each child.  

Additionally, my concern is - If we/parents are serving on a Board as a Chair member that is NOT registered as a 501 C3 - We can be held personally liable.  Are my assumptions correct?
My concern is the liability issue of serving on a board, (which I know we must have insurance as well if it is registered as a 501c3), otherwise the board is riding the Coat tails of the gym owner & I am not sure which would be the best way to go at this point.  Could you please give us some insight.  

I am thinking it would be better to set this up as a NON Profit, with individual tab accounts for the kids, but having a small percentage going into a "general fund" that all members would get to take advantage of.  Additionally, it would give us more tax options, and a release of liability for the board members that is not a direct corporation within the gym or their owners.  Any ideas?  

Thanks Again,

Answer
The EIN of the gym owner is assigned to a for-profit entity and, therefore, all income in any of the accounts would be part of the gym-owners consolidated return and any net income from sales activities would be taxable.

Your idea of "fair" may apply to a cooperative organization, but a 501(c)(3) organization is supposed to be a charitable, not a cooperative organization. A cooperative is not qualified as a 501(c)(3) organization. A charitable organization, like the Red Cross, does not require beneficiaries to work for the Red Cross in order to receive benefits.

In denying exemption to a purported 501(c)(3) organization
in 1992 the IRS at http://goo.gl/e9Mkd
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."



Benefits for work is a problem. In June of 2011 the  IRS wrote:
---Start of Excerpt--
If a booster club confers a benefit on a participant in return for
their fundraising activities, such as by crediting amounts raised
by a participant toward that participant's dues requirement, or by
crediting amounts raised against the cost of a trip, the booster
club is providing a private benefit to that participant.
Consequently, such practices could result in the organization
failing to be described in § 501(c)(3).
---End of Excerpt---
http://goo.gl/3Dx9o

The IRS continued in the next paragraph,

"It is also possible that amounts credited to a participant's
account due to fundraising would constitute income from services,
and could result in employment taxes."

You asked about liability of Board members and officers.  I have in my profile that this free forum is only for general questions relating to IRS federal exemption issues of 501(c)(3) organizations. The liability for tax evasion would go individually usually to any person who is what the IRS calls a "responsible party".
--- Start of Excerpt ---
“responsible party” is  the person who has a level of control over, or entitlement to, the funds or assets in the entity that, as a practical matter, enables the individual, directly or indirectly, to control, manage or direct the entity and the disposition of its funds and assets.
---End of Excerpt---
http://goo.gl/3TJBB (4th paragraph).  

My summary of IRS regulations relating to 501c3 booster organizations is at http://goo.gl/RO1ez -- you may be interested to read that.

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

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.  

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Harvey Mechanic

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I am an attorney and I volunteer time to answer general questions about U.S. Federal income tax issues of nonprofit 501(c)(3) public charities only. Those questions could be about establishing and maintaining legal requirements for such non-profit organizations in the United States, including Internal Revenue service filings and requirements. I will not be working on this free forum to answer questions about Nonprofit's possible unrelated or for-profit businesses or how to fill out forms. This forum is only for general questions about federal tax law, not as the law applies to your specific situation. If you do not make your question public then I will not be spending much of my donated time on answers that would not benefit the public. If you have other questions, please contact me at Harvey108@hotmail.com I will reply from my email. In any case, do not reveal confidential information to me until after I have contracted with you to provide personal legal services. My responses on this forum are intended to be general statements of law, should not be relied upon as legal advice, and do not create an attorney/client relationship. For me to consider your individual situation and how the law applies, I would need to gather extensive information about the situation. To search my previous answers you can do a Google search by "site:allexperts.com/q/nonprofit" without the quotes and then add your search terms before hitting enter.

Experience

I have been practicing law and especially the law of nonprofit organizations since 1990 when I was admitted to the New York Bar and I have maintained my status with the Bar since that time.

Education/Credentials

B.S. Columbia University in New York City, 1970

J.D. (Law Degree) Brooklyn Law School, 1990 -- Cum Laude.


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