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Nonprofit Law/Fundraising for a Booster Club

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Question
Hello,

My daughter is part of a competitive team at a dance studio in Louisville, KY. We are incorporating a Booster Club in order to file for 501c3 exempt status. Our biggest question has to do with fundraising events and the distribution of those funds. For example, there is a local catering company that allows non-profit organizations to work in concession areas at local venues to earn money for their organizations. This opportunity can be lucrative so we are concerned that some parents may take advantage of the Booster Club rules and not volunteer to assist with those events because they still get to receive a benefit even if they aren't working. Our normal practice would be to divide the earnings equally among the families who did participate, however, I've read conflicting information on whether that is a practice we can continue or not. We do other events such as basket auctions, car washes & pancake breakfasts as well. We want to understand better our options to protect all families who are active against being taken advantage of by those who are not (though few we are still concerned)?

Answer
If a 501(c)(3) organization discriminates in making charitable grants on the basis of a person's work, then the organization no longer qualifies as a 501(c)(3) organization.  If you do make such descrimination, then 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/QS9wCH

My summary of IRS regulations relating to 501(c)(3) booster organizations is at: http://goo.gl/IdQwML and you may be interested to read that.

By the way, the arrangement with the catering company appears to be what the IRS calls "contract labor" and that is taxable to the beneficiaries.  If the catering company is not sending Form 1099-Misc annually to those who it contracts with and the recipient beneficiaries do not declare that income, then they all may be engaged in conspiracy to evade income taxes. I have been noticing more and more of such arrangements.  See instructions for form 1099-Misc at http://www.irs.gov/pub/irs-pdf/i1099msc.pdf

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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