You are here:

Nonprofit Law/Opting out, grants, uniforms and general guidance

Advertisement


Question
QUESTION: I'd appreciate some clarification on a few different issues related to the operations of our group. I hope that I’m not asking too many questions at once!
Background – we are a gymnastics booster club currently operating as an IRS 501(c)(3) organization. Our funding comes from a combination of donations and fundraising activities. Donations are from outside businesses and individuals, as well as some unsolicited donations made by our own members. All donations are used for the benefit of the entire group. Currently, we maintain no individual accounts, although we did so in the past. Our activities are focused in several areas—general operations, fundraising, promoting competitive gymnastics to local youth, co-hosting (along with the for-profit gym) local competitive events, strengthening team skills and cohesiveness and encouraging/enabling gymnasts to remain active in the sport. We receive no direct funding from the co-hosting of local competitions (i.e., no share of entry fees or admissions), but we do raise funds through concessions sales, raffles and program advertising and sales.
In the past, a lot of our focus was on helping to offset competition costs. However, this year, the gym implemented a new billing system by combining competition fees with the regular monthly training fees billed to families—leading us to believe (incorrectly, I hope) that we could no longer provide any such financial support.
Membership in the booster club is automatic, although families may opt out of membership. We do not charge dues. The Board of Directors includes four elected officers, plus elected and/or volunteer level representatives. Currently, there are nine voting members of the Board.
Membership and distribution among levels changes every year as gymnasts join, move through levels and retire. The current team base includes about 50 gymnasts from Levels 2-10 (women’s team) and Levels 4-10 (men’s team). Generally, there are more gymnasts competing at lower levels.
Opting out – If a member fully opting out does so in a written request stating that they do not want their child to receive any benefit, would there be any legal problem with our honoring that request? What if a member wants to opt out of only a specific activity? For example, if we offered financial grants for a specific purpose (attendance at a training camp, for instance), and the family wanted to opt out of that specific activity, would we risk our non-profit status by excluding that gymnast from the grant process?
Financial grants – We’re considering providing financial grants to families to offset costs, such as competition fees, meet entry fees, uniform costs, gymnast travel costs, etc. Rather than establishing a contract with the for-hire gym and paying grants to them, we’d prefer to pay the grants to the families of the gymnasts. Assuming that we offered any and all such grants to all gymnasts (unless families opted out as per the above paragraph) and obtained all necessary documentation to support the grant (grantee identification, itemized receipts showing expenses paid, grant applications, receipts and cancelled checks for grants awarded, etc.), would we risk our non-profit status by providing such grants only to those families who provided the required application and documentation?
Could we base the grant awards on a percentage of actual cost (or some other pre-established formula) rather than on than equal share? (Adjusting for the cost increases of higher levels of competition?) Must such financial grants be limited only to helping to offset costs associated directly with the competition season (meet entry and coaching costs, uniforms) or could such grants also be provided to help offset costs for regular monthly training of gymnasts who compete? Would it be acceptable to provide such grants to offset the travel expenses of the gymnast and the gymnast’s family?
Uniform purchases – You previously provided guidance indicating that if the 501(c)(3) purchased uniforms for the team, the 501(c)(3) would need to take receipt of the uniforms back at the end of the competition season. However, if I’m understanding the grant situation correctly and assuming all of the proper conditions (offered to all unless opted out, properly documented, etc.), it appears that we can avoid having to “own” the uniforms by using the grant process to help families offset those costs. Is that an accurate understanding?
If we opted to purchase uniforms for the entire team, how would the fact that our competitive gymnasts are often required to wear their uniforms at various promotional or fundraising events throughout the year impact the requirement that they be returned to the 501(c)(3) at the end of the competition season? If a gymnast’s family prefers to fully purchase their own, how should we document that desire and sale from us. Assuming that we sold it at cost, would we need to report that as income? Would we be able to offer used uniforms for sale at a used-clothing price—either at the end of a season or at the end of the uniform’s useful life? Would those proceeds need to be reported as income?
General Requirements – Paperwork from initial IRS filings were lost long ago, so we currently have no records of what was initially submitted to IRS to receive our 501(c)(3) status and cannot even accurately quote our mission of record. We complete our required annual filings using the short form. I understand that we are required to have some documents on file and available for inspection, upon request. How do we go about obtaining those records?
Our by-laws have been amended annually for at least the last five years. Are all revisions, including minor changes, required to be submitted to the IRS, and if so, where? We have been considering drafting business rules, but not have done so yet. Are they required? What should they cover and what is the benefit of having those?
Thank you, very much, for being a valuable resource for the non-profit industry. As a 100% volunteer organization, we especially appreciate the service that you provide.

ANSWER: You asked, "For example, if we offered financial grants for a specific purpose (attendance at a training camp, for instance), and the family wanted to opt out of that specific activity, would we risk our non-profit status by excluding that gymnast from the grant process?"  The first thing that I need to know is whether, in order to receive any grant or benefit a family needs to work for your organization.  If you do have that requirement, then your organization is not qualified as a 501(c)(3) organization.  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.

You would not risk your non-profit status by providing that proper grants would only go to those families who provided the required application and documentation.

You may base the grant awards on a percentage of actual cost (or some other pre-established formula) rather than on than equal share.

Grants may also be provided to help offset costs for regular monthly training of gymnasts who compete. It is acceptable to provide such grants to offset the travel expenses of the gymnasts but only to the member's of the gymnast’s family who would be chaperoning a group of the gymnasts. The IRS rule for what nonprofits may spend money on is similar to the standard that the IRS uses when determining what is a valid business expense for an ordinary business. For example, at http://www.irs.gov/pub/irs-tege/eotopich02.pdf the IRS refers extensively to the regular business expense rules and applies them
to 501(c)(3) organizations. On page 32 we see "Reimbursements are technically covered by Regs. 1.62-2.  However, for administrative purposes, all TE/GE [Tax Exempt & Government Entities Division]
administrative personnel will treat reimbursements of a business expense the same as if the expense were paid directly by the employer, as long as the employee complies with the substantiation
rules..." See also http://www.irs.gov/pub/irs-pdf/p535.pdf "Business Expenses" on page 3, under "What Can I Deduct":
--start of excerpt  ---
To be deductible, a business expense must be
both ordinary and necessary. An ordinary ex-
pense is one that is common and accepted in
your industry. A necessary expense is one that
is helpful and appropriate for your trade or busi-
ness. An expense does not have to be indispen-
sable to be considered necessary.
--end of excerpt  ---

Having each family send a parent is not necessary even for travel events.

Uniforms must be only used for those in the approved sporting activity and training and, therefore, reimbursements may only be given under that condition (and the uniforms given to the 501(c)(3) organization at the end of such use. If the gymnasts are required to wear the uniforms for various promotional or fundraising events throughout the year they would not need to return them at the end of the competition season, but at the end of use for approved 501(c)(3) organization purposes.

Even if you sell the uniforms at cost, you would we need to report that as income unless you received first the funds from the families and were obligated to pass on that amount to the vendor - then it would be a pass-through and not income.  If you are having pass-throughs, let me know and I will give you some details.  Otherwise all money coming in to your organization needs to be accounted for as income items.

Anyone may request a copy from the IRS of the 1023 application of
any exempt organization (including the documentation supporting the
application) and there is no fee for non-commercial requesters,
but, unfortunately, it takes the IRS about 60 days to mail out the
information to the requester. Form 4506A is used.
http://www.irs.gov/pub/irs-pdf/f4506a.pdf

The instructions for that form are available at
http://www.irs.gov/pub/irs-pdf/i4506a.pdf
and that shows a fax number for 513-263-3434 for a copy of an
exemption application (which includes all supporting documents)

You asked about submitting amendments to bylaws to the IRS. The IRS wants copies of such amendments but they are not actually required unless the amendment is material to your operations or financing in reference to 501(c)(3) organization regulations. The IRS exemption determination letters are standard. You can see in a sample determination letter at:
www.mcsb.us/Documents/IRS%20501c3%20Approval%200001.pdf on page three under the heading "Notify Us On These Matters"

--Start of Excerpt ---
If you change your name, address, purposes, operations or sources of financial support, please inform our TE/GE Customer Account Services Office at the following address: Internal Revenue Service,
P.O. Box 2508, Cincinnati, Ohio 45201. If you amend your organizational document or by-laws, or dissolve your organization, provide the Customer Account Services Office with a copy of the
amended documents. Please use your employer identification number on all returns you file and in all correspondence with the Internal Revenue Service.
--- End of Excerpt ---

Bylaws deal with the internal operation of an organization.  "A corporate bylaw is basically a rule that helps to govern a corporation. Just like municipal bylaws that help govern a city, a corporate bylaw can not contradict local, state or federal laws in any way or they are invalid."
www.lawprofessor.com/corporate-law/corporate-bylaws

My sample bylaws are available on my Google Drive at https://goo.gl/ESxPjl

You wrote, " we do raise funds through concessions sales, raffles and program advertising and sales." If by "concession sales" you are referring to contract labor, that requires the reporting and collection of employment taxes.  As for raffles your group would need to lour local board of county commissioners’ office.  Also see http://www.gambling-law-us.com/Charitable-Gaming/Montana

You are welcome.

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



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

QUESTION: Thank you for your quick and detailed response.  In answer to your question, no one is required to participate in any fundraising activity (or any other activity, in fact), so we're good there.  We encourage, but do not require. To date, all benefits are provided to all members of the class--regardless of their participation or contribution in anything.

The opting-out issue arose because of our belief that we had to provide the benefits even if the family opted out. We were told that we were 'making' the parents feel guilty because we were providing the benefit to their child. In the past, we offered that anyone feeling such guilt was welcome to make a donation equal to what they felt the 'benefit' was worth. After reading your previous answers on this subject, I wondered if having the parent opt out in a written and signed document expressly stating that they wanted no benefit for their child would be an effective and acceptable way to resolve things for everyone.

Regarding the sale of used uniforms or the parents opting to purchase the uniforms for their child, I misstated my question.  I understood that it would be considered income.  My concern was whether or not that would constitute unrelated business income.

Regarding grants to help cover the cost of gymnast/family travel to away meets, I'm still a bit confused. I understand that we could not offset the cost of family travel unless it was a for a family traveling as a chaperon to a group of children. But, are would we be okay if we offered grants to offset the cost of the gymnast's travel. We would use standard mileage rates and meal or perdiem rates, and actual lodging costs. Since most of the time, parents are transporting their gymnast and they share lodging, the actual cost would be the same, but we would not consider the parent's meals into the grant.

At this time, we do not maintain any pass through accounts. We have no immediate plans to re-implement those.

The concessions sales that I was referring to are our own sales and staffed by our own volunteers, not contracted labor.

Thank you, again, for your prompt and detailed response.

Answer
Yes. If parent opt outs of benefits for their child that would be effective for your organization.

Sale of uniforms is not an issue of unrelated business taxes because that is related to your exempt functions.

As for travel expenses of the gymnasts that is a normal expense. In my earlier response I was not grammatically correct.  The applicable answer should read the following: It is acceptable to provide such grants to offset the travel expenses of the gymnasts. As for the persons who are not the youth who are gymnasts, grants for travel would only be permitted when the person is required to chaperone a group of the gymnasts.

You wrote:
--- Start of excerpt ---
Since most of the time, parents are transporting their gymnast and they share lodging, the actual cost would be the same, but we would not consider the parent's meals into the grant.
--- End of excerpt ---

That would be fine if only one gymnast was going to that location from your group. Otherwise, generally it would be expected that gymnasts would share rooms.

You are welcome again.

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

Nonprofit Law

All Answers


Answers by Expert:


Ask Experts

Volunteer


Harvey Mechanic

Expertise

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.


©2016 About.com. All rights reserved.