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Nonprofit Law/Individual Fundraising

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QUESTION: Hi,

I have read many of your responses regarding fundraising on an individual basis (separate accounts) for various 501C3 booster or choir type entities.  Based on those responses and associated IRS pronouncements, it seems that any fundraising that a child does in the name of the 501C3 is not legal in the eyes of the IRS (sells candy bars and based on his/her total sales gets separate credit to be used to pay for his/her tuition or travel costs associated with the choir).  It would seem that any fundraising action done by the child can only benefit the organization, not the individual.  IF this is the case, can you point to an IRS pronouncement or suggested fundraising framework that delineate what type of fundraising can the child in the 501C3-choir participate in?

ANSWER: The IRS does not have any particular publication detailing what type of fundraising a child may engage in for the benefit of the larger group.  But see, generally, see "Fund Raising" at:
www.irs.gov/pub/irs-tege/eotopicl82.pdf as to the type of "fundraising"  that is allowed to maintain 501(c)(3) organization status and to avoid having unrelated business taxes due from your organization.

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.

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

QUESTION: Thank you for you quick reply.  I do have a follow up question.  

The 501C3 community choir that I am affiliated with has a slightly different spin on fundraising.  The choir is tuition based, with tuition costing $550 per year, per student.  There is also required fundraising of $200, meaning that the child is required to sell $200 worth of cookie dough or scrip, etc.  If the child does not participate in this required fundraising (or participates so that the proceeds are less than $200), then the child (parent) is required to 'buy out' the difference - child raised $50, is thus required to pay $150.  

So in sum: all children are required to participate.  If the child does not raise any money via fundraising then the $200 must be paid to the organization.  And, if a child raises more than $200, any overage is credited to a separate account that the child can use for choir related expenses.

My questions
1) - Is this required fundraising example legal?  I see this $200 requirement as a type of soft dollar tuition - you can pay the sum outright or fund raise an equivalent amount.  Either way it MUST be paid.

2) - If this soft dollar tuition arrangement is within IRS guidelines, is raising more than $200 and then crediting the amount over $200 to a separate account for the child also legal in the eyes of the IRS?  I have read IRS pronouncements on what is substantial (30%) vs. insubstantial(2%) fundraising is.  But what figure would these %'s be applied to?  The amount that the child raises, or the amount that the organization raises?  Or possibly could the %'s be applied to the total budget of the 501C3?

Thanks again for your help.  Your POV and the allexperts.com website are greatly appreciated!

Answer
1.  No. Such an 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/F2dZws

2.  N/A as it is not within the IRS guidelines.

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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