You are here:

Nonprofit Law/501(c)(3) use of scrip to pay dues

Advertisement


Question
Dear Mr. Mechanic: I have been involved on the board of directors of a swim club for years. We are a 501(c)(3) organization. In the past we have used scrip to raise funds for the benfit of the organization-not allowing any to be used to towards individual dues. Lately, other similair organizations in our region have changed their programs allowing the money generated through use of scrip to benefit an individual's monthly dues. Has there been a recent change in the IRS position on this? I have seen some of the questions posed to you in the past and it certainly seems that the 501(c)(3) status is put in jeopardy to do this unless the IRS has changed its position. I really appreciate any light you could shed on the subject.

Ross Wabeke

Answer
One for-profit company that sells scrip explained "In order for the scrip concept to work, a participating retailer agrees to give a discount to GLSC. This discount is passed along to the non-profit, and when the certificate is sold by the non-profit for full face value, this discount becomes revenue for the organization. Since the retailer is giving up potential revenue, many of them want to be sure that a non-profit organization is benefiting - not another company. That's why GLSC requires all coordinators to verify their non-profit status....GLSC purchases the certificates directly from the retailers. The certificates we provide to our coordinators are the same gift certificates you would buy if you went to the participating retailer and purchased them yourself"
http://www.glscrip.com/howscripworks/faqs.aspx

You are asking about the situation when the a 501(c)(3) organization allows an individual family to sell the gift cards and by their sales work their family is directly benefited. The IRS has not recently changed their position on such activities. But in 2011 they clarified the law.

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."

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.  

Nonprofit Law

All Answers


Answers by Expert:


Ask Experts

Volunteer


Harvey Mechanic

Expertise

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.


©2016 About.com. All rights reserved.