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Nonprofit Law/Is it possible to set up contracts between an organization and those fundraising?


  I have read over several of your questions, as well as done a ton of research on the matter. From what I understand, the IRS code for 501 3(c) prohibits the individual distribution of funds from fundraisers to parents on the basis that it is private benefit. However, I am wondering if there is anyway to credit individuals insubstantially. For example, I have read that friends and family may put money into a child's individual "account" and that this would not be a tax deductible donation, but it is a way to use individual accounts correctly. If this is true, would it be possible to have fundraiser set up using a contract between the organization and those fundraising that defines that x amount goes towards the goods, y amount goes to the organization, and z amount would not "belong" to the organization, but would be a refundable "rebate" of sorts? This method seems to be the one used by the Scrip program. I believe the IRS recently examined the Scrip program and determined that the rebate earned was returnable to the parents because it doesn't belong to the organization. My suggestion here, is not to use individual accounts as the primary purpose of the booster club. We would conduct several fundraisers throughout the year in which funds would be distributed to the entire group. My question is only pertaining to a small percentage of fundraisers. So, for example if we held 10 fundraisers throughout the year, and allowed cooperative fundraising in 2, would this constitute an "insubstantial" amount?

You wrote that the IRS recently examined the Scrip program.  The most recent ruling that I am aware of was in 2009 and contained these facts:
--- Start of excerpt ---
Taxpayer is an individual who purchases scrip from an organization described in
§ 170(c) (“charity”). The charity purchases the scrip at a discount but sells the scrip at
face value to individuals such as Taxpayer. Thus, for scrip with a face value of $-----
that the charity purchases at a ---% discount, Taxpayer pays the charity $-----, and the
charity’s cost for the scrip is $--
--- End of excerpt ---

If you are referring to a more recent ruling, please send me the url.  In that 2009 ruling the IRS concluded two things, the first being:
--- Start of excerpt ---
(1) The portion of the purchase price Taxpayer pays a charity for scrip that Taxpayer
can either receive back in cash or allow the charity to retain does not constitute gross
income under § 61.

--- End of excerpt ---

The IRS had a second conclusion:
--- Start of excerpt ---
2) The amount of the rebate that Taxpayer can receive in cash but instead allows the
charity to retain constitutes a charitable contribution at the time Taxpayer could have
received the amount in cash, to the extent provided in § 170.
--- End of excerpt ---
However, the Taxpayer could not receive a charitable contribution if the amount that the charity retains is in exchange for a benefit.  As to charitable deductions, see IRS Publication 526 "Charitable
Donations" which is available at on page 6 middle column under the heading "Contributions You Cannot Deduct" is "3. The part of a contribution from which you receive or expect to receive a benefit".

Also, your fact pattern is different from that in the 2009 IRS Ruling, because it appears that you are proposing that the charity purchases scrip from the merchant, then the members of the charity sell the scrip to the public. Let me know if that is your proposal and, if so, I will comment further. Make sure, if that is the situation, to inform me what part of the sales to the public would be going to the benefit of the member's family who makes the sale.

I do not know why you are asking about whether any benefits to the family are "insubstantial".  Families in small booster organizations are considered by the IRS as insiders and any benefits to them without any proper payment by the families results in prohibited inurement for the purported 501(c)(3) organization. See on pdf page 10 where we that the even a small amount of private inurement is fatal to exemption. That is confirmed by the U.S. Tax Court in 2013.

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. For me to consider your individual situation and how the law applies, I would need to gather more information.

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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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