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QUESTION: Thank you so much for your help.  I have read several of your answers to other questions and it has been so helpful in my understanding of the 501(c)3 operation, so thank you :-)
Background - I am part of a 501(c)3 foundation that supports a dance team.  We train at a for-profit studio and pay the studio tuition each moth to train there and use their dance instructors.  Competitions are not covered in this tuition.
Our non-profit collects  fee's from the parents to cover the cost of dance competitions (registration to enter competition and the coaches fee's for their time at the competition).  We then raise money throughout the year to offset these costs for the entire dance team (not just those who participated in the fundraiser).  My understanding is individual fundraising is not permitted under the IRS guidelines, but I have also read where it is allowed in certain circumstance.  This is where I am confused.
Let me give you an example.  A typical year of fundraising for our foundation is a dance competition we host and smaller restaurant nights.  Additionally we sell advertisement spots for our dance competition program.  The money raised through these activities are placed in the general fund to be used to offset the competition fee's for the entire team.  Basically if we have 10 girls and our competition costs are $10,000 ($1000 each girl), we take the money raise and deduct it from the $10,00 (so if we raise $2000 over the past year we deduct it from the $10,000 and divide the remaining costs amongst the 10 girls).  By doing this the cost to compete for each girl would go down from $1000 to $800.  We have some parents who would like to do additional fundraising to cover their remaining $800.  We have a mom who would like to sell extra ad spots for our program and have it applied to only her $800.  She also wants to offer a cookie dough fundraiser for the parents who want to also apply their fundraising to their specific daughters $800. My understanding is this is considered individual fundraising and now allowed, but this mom is adamant it is allowed.  She has some previous experience as President of a 501(c)3, so I  wonder if maybe I am misunderstanding the law.
Second question.  I removed wording from our "agreement" the parents sign at the beginning of the year to remove the wording which says you are "required" to work 30 hours at our host dance competition or pay a buyout (something else I am under the impression is not allowed under the law). She said we can place a requirement and any fundraising beyond the "requirement"  is considered optional and allowed under the law (to which those funds would be applied to the individual family who chose to participate).  I feel like they are trying to use our non-profit as a front to fundraise for themselves so I am a little concerned, but this mom again is adamant.  Please clarify, as I don't want to be fighting a battle if indeed she is correct.
One last thing, I am understanding you cannot place a requirement of any kind (buyout or not) on the parents as part of being on the dance team.
Thanks again.

ANSWER: The advertisement income may be taxable as unrelated business income.  But from page 5 of an 1994 IRS internal memorandum. "The Announcement further stated that the Service would not apply the
guidelines to organizations that are of a purely local nature and that receive relatively insignificant gross revenue from corporate sponsors and that generally operate with significant amounts of volunteer labor."
www.irs.gov/pub/irs-tege/eotopico94.pdf

You wrote, "We have some parents who would like to do additional fundraising to cover their remaining $800."  That is not allowed for a 501(c)(3) organization. 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.http://goo.gl/F2dZws

If any mom believes the law is otherwise have them give you the url where that information is and I will comment further.

A 501(c)(3) booster organization may require, as a condition of membership in its group, a work or dues requirement or buyout, but that does not mean that the organization may discriminate, in making grants, against the dance team families that are not members of the organization or do not want to do fundraising. My summary of IRS regulations relating to 501c3 booster organizations is at: http://goo.gl/ULw6f6and you may be interested to read that.

You are correct that a 501(c)(3) booster organization may not "place a requirement of any kind (buyout or not) on the parents as part of being on the dance team."  The booster organization may not interfer with the operation of the dance team (it is not under the corporate authority of the booster organization).  The booster organization only raises funds and disperses funds. It may not control the dance team.  Further, if the dance team tries to institute a requirement that a member of the dance team must fund-raise for the 501(c)(3) booster organization, then that for-profit dance team is engaging in conspiracy to evade federal income taxes.

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: I'm still a little confused about requirements and buyouts.  The last 2 paragraphs seem to contradict each other.  It sounds to me as a condition of membership into the group you can in fact place requirements and buyouts.  But then in the last paragraph it says you cannot.  How would you enforce a requirement if you are not able to interfere with the operation of the dance team.  This is where I am confused.  Let me give an example:
We used to "require" the parents to do a certain number of hours as part of their responsibility of being a member of the "Non-Profit parent group".  The parents are automatically part of this group when their daughter becomes a member of the team. They could pay a buyout if they chose not to meet the requirement. All members recieved the same benefits (some chose to meet the requirements and others chose to buy out of their requirements)
We have since removed that clause because we were told you cannot place a requirement or buyout to receive benefits from the non-profit. (benefits being a reduction in costs for the competitive season).  Are we in fact allowed to place a requirement in order for the parent to pay the "reduced" amount?
Say the season cost $1000.  the non-profit subsidized $200 of it through fundraising so the cost for each family is $800. Now separate from that would we be allowed to say everyone pays the $800, but those who choose not to fulfill their hour requirement pay a $200 buyout?  Because $1000 per girl is needed to cover competition costs for the year, someone who chose not to fulfill requirement and did not pay the $200 buyout would be short money to cover their daughters fee's and therefore unable to compete in a portion of the season.  Can you please clarify for me.  Thanks

Answer
You can have membership requirements, but the main point is that a 501(c)(3) booster organization may not discriminate in making grants or giving benefits, by only giving to members is good standing.  

In most states people can not be "automatically" members of a nonprofit organization.  They must affirmatively accept the invitation. But, a team can not require people to join another group as a condition for being on the team.  That would be conspiracy to evade taxes.  It is not the teams business to tell people that they have to join a group and pay money to that group when that group would be funneling the funds to the team, because the only reason to do that would be to try to have the parents get the funds without them being taxable to them as income.

Those who are team members can not be required to pay anything to a booster organization.  If they do raise funds that go directly to their families benefit then that would jeopardize the 501(c)(3) organization status of the nonprofit booster organization.

If you are not sure that you understand something in my answers please quote each of the sentence(s) separately that you may not understand, and then explain what you think they mean and then I will correct you or confirm your understanding.

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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