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Nonprofit Law/501 C 3 Fundraising

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Question
Hello,

I am a member of a non profit going through some assessment/fundraising changes. We were recently informed by another non-profit of practice that I believe you have stated is not kosher.

Specifically:
Q. Is it possible for the board to go back and earmark previously raised funds to specific gymnastic groups or levels?

A. Yes

Q. Can the board earmark funds from this year to specific team(s) or level(s) and still be in compliance? For example, if we have the records from a particular fundraiser can we earmark those funds for teams of parents working the fundraiser or for a specific team level?

A. Funds from a specific fundraising event may be earmarked to cover all the entry fees for members of a specific team or level, age-group, gender and so forth, provided all students on the team, at the level, in the age-group, etc. are equally benefited.

Q.Can the funds be earmarked even if the fundraiser was not earmarked prior to the event (past events)?

A. Yes. However, factors such as the existence of agreements or contracts with the parent fundraisers could raise issues other than IRS tax-exemption concerns.

Q. Do we need to have documentation designating a particular fundraising event as benefiting specific teams or levels prior to the event (future)?  

A. No

Q. How do we define the word team? Can team be redefined to represent subteams (i.e.level 4,5 etc.).

A. Without more information I cannot answer. I would caution you, however, not to take any action that directly links, or appears to link, the persons who raised funds to the funds raised. For example, the creation of a "subteam" that just happens to consist only of individuals who participated in the fundraising would be suspect in our opinion.


Any insight would be appreciated. Some of these answers seem to allow what I would consider suspect practice, e.g. specific level hold fundraisers for themselves, etc. Earmarking sounds inappropriate based on everything I have read. No documentation required to show how earmarks were determined? Seems odd.

Thank you.

Answer
What you referred to is not "earmarking" as the term is used by the IRS, which uses the term to mean something done by the donor.  For example:
See on page 3 of an IRS Private Letter ruling from 2006:
--- Start of Excerpt ---

 Another question that arises in the context of charitable
contributions is whether the contribution is really to the charity,
or to another person.  If a contribution made to a charity is
earmarked for the benefit of a particular person or non-charitable
organization under an express or implied agreement, then the
contribution is not deductible as a charitable contribution to the
charity.  The charity must have discretion and control over the use
of the funds.
---End of Excerpt---
www.irs.gov/pub/irs-wd/06-0003.pdf

In your fact patterns the charity decides, before fund-raisers are started what would be the use of the funds.  

The issue that the charity does run into, in such circumstances, is if it allows a fund-raiser for the benefit one person or a very small group, especially if the group are the persons who work to raise the funds.  See pdf  page 13 of
http://www.irs.gov/pub/irs-pdf/p3833.pdf under the heading
"Charitable Class
--start of excerpt  ---
The group of individuals that may properly receive
assistance from a charitable organization is called a charitable
class. A charitable class must be large or sufficiently indefinite
enough that the community as a whole, rather than a pre-selected
group of people, benefits when a charity provides assistance.
--end of excerpt  ---
More details are found starting at pdf page 6 of
http://www.irs.gov/pub/irs-tege/eotopick99.pdf

Traditionally, the IRS allows fund-raisers to benefit a team of 10 members of more, but I have never seen any approvals for "sub-teams".

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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