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Nonprofit Law/Distribution of funds


QUESTION: We have a 501(c)3 booster club that has different types of fundraising activities.  We have fundraising activities such as can shakes, selling candy, cups, cookies, coupon books, donations that go into a general fund and benefits everyone.  We also have a concession booth.  A portion of these funds are set up as a financial assistance funds for hardship assistance (to all members) and the remainder of the funds are used to pay for the trips for the kids of the parents that worked the stand.  All funds leftover after allowed expenses are used to sponsor children of families that face a financial hardship.  We want to make sure that we comply with the law.  Is this acceptable?

ANSWER: When parents work at the stand and then benefits go only to that family, the IRS and the States consider that taxable employment income and the 501(c)(3) organization may lose its exemption if it does not properly file papers with the taxing authorities regarding that taxable employment income.

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.

My summary of IRS regulations relating to 501c3 booster organizations is at:
and you may be interested to read that.

Harvey Mechanic, 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.    

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

QUESTION: So if we issue 1099's we'll be fine in what we're doing?  Not jeopardy to the 501 c 3 status?  


If the workers are employees, then the employer would issue W-2 form. If, instead, they are independent contractors, then the payor would issue the 1099-Misc.  It appears that they would be employees, as normally workers in food service are.

There are many factors that the IRS uses to conclude whether someone is an employee or an independent contractor and the nonprofit corporation's treatment of someone as an independent
contractor instead as an employee for tax purposes may be incorrect and subject the nonprofit organization to taxes and penalties. For the factors the IRS considers, see

Note on that page at the bottom "If you want the IRS to determine whether a specific individual is an independent contractor or an employee, file  Form SS-8 (PDF), Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding."

If the 501(c)(3) organization properly treats the worker's payments, then that activity would not jeopardize the 501(c)(3) status with the IRS.

Harvey Mechanic, 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.  

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Harvey Mechanic


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 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 "" without the quotes and then add your search terms before hitting enter.


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.


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

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

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