Nonprofit Law/Spending fundraising monies
Dear Mr. Mechanic, I really appreciate your time! I have several questions regarding the proper and legal ways to spend money that we earned through fundraising. We are a small scouting type organization chartered through our local church. I do know we have our own account that is a subsidiary of the churchs finances and we are owned by the church, they are our chartered organization, and we are legitimately a 501(c)3. In the past scouting organizations have been able to fund raise and accumulate money for individual boys or girls that did the fundraising, i.e. individual accounts. I understand that is no longer true. I cannot find any documentation about this, Although I have heard it enough times I believe it to be true. If you could confirm that I would appreciate it. Also there has been some question on how we can properly spend the money. It seems to make sense to me that we could spend the money on equipment that the boys would need i.e. outdoor gear or supplies for the educational classes, gasoline for the church bus to go on an outing, and those kinds of things. Can the money be used to lower our overall yearly dues per child, an example would be if it cost $100 per year to be in our Scouting organization would we be able to raise the funds to lower that to $50 per boy per year? Also if we had specific fund raising for specific items such as uniforms, would that be appropriate? Could you please explain the definition of general fund versus any other appropriate fund that would apply to our organization. Can the high school age boys specifically raise money for special gear or a special high-adventure excursion? Thank you very much for your time Mr. Mechanic, it is greatly appreciated! If you can see that I am not asking the right questions please feel free to add any knowledge that you may feel is important to help in my understanding of this process. Also for our CPA/treasurer could you guide us towards the IRS codes that give us the actual rules. I understand your advice is not legally binding and that is why I asked you to steer us towards the IRS codes. Thank you again!
1. Allowing individual families to sell or otherwise raise funds would make the 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 a cooperative, organization. A charitable organization, like the Red Cross, does not require beneficiaries to work for the Red Cross in order to receive benefits.
In August, 2013 the U.S. Tax Court supported the revocation of 501(c)(3) organization status of a formerly exempt organization and noted that a parent's fundraising was earmarked to reduce what otherwise could be a $1,400 payment the parent would have to pay out of his/her pocket. The direct linkage of a parent's fundraising resulted with paying expenses for that parent's child and was a very specific benefit obtained by the insider. While the parent may not have been paid cash, the parent nevertheless ended up
escaping having to write a check for the amount of the benefit. Families who did not fundraise did not receive any benefits from the purported a 501(c)(3) organization. http://goo.gl/QS9wCH
2. You could certainly lower the fees to be charged across the board equally if the organization has sufficient funds. The same with fundraising for uniforms, which the youth could not reasonably use for non-scouting activities.
The IRS rule for what nonprofits may spend money on is similar to
the standard that the IRS uses when determining what is a valid
business expense for an ordinary business. For example, at:
the IRS refers
extensively to the regular business expense rules and applies them
to 501(c)(3) organizations. On page 32 we see "Reimbursements are
technically covered by Regs. 1.62-2. However, for administrative
purposes, all TE/GE [Tax Exempt & Government Entities Division]
administrative personnel will treat reimbursements of a business
expense the same as if the expense were paid directly by the
employer, as long as the employee complies with the substantiation
on page 3, under "What Can I Deduct":
--start of excerpt ---
To be deductible, a business expense must be
both ordinary and necessary. An ordinary ex-
pense is one that is common and accepted in
your industry. A necessary expense is one that
is helpful and appropriate for your trade or busi-
ness. An expense does not have to be indispen-
sable to be considered necessary.
--end of excerpt ---
Most small organizations would only have a general fund, but, if you wish you can set up a special fund for a particular purpose and certain fundraising could be designated to go into that fund and the treasurer would keep track of that.
3. The high school boys could specifically raise money for special gear or a special high-adventure excursions as long as the number of high school boys is sufficiently large. There is no specific minimum number but probably 4 is too small. 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
You are welcome.
Attorney at Law
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.