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Nonprofit Law/Scholarships Requirements under a 501c

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QUESTION: My High School booster club is requiring the following as requirements to submit an application for a athletic scholarship:
1. Must be a Graduating Senior planning on attending college.
2. Has played soccer all 4 years in the HS
3. Membership dues of $10 must have been paid all 4 years
4. Eligible Player must not have been suspended

My first question would be the Membership Dues requirement. Does that go against the rules of the 501c?

Also, in the application itself the student is being asked which fundraisers that they volunteered for during the year for the club and they are being scored on it. Can that be done?

My final question is this...can a scholarship check be written directly to the student or does it have to be made out to the college...are there rules on that?

ANSWER: See pdf page 13 of http://www.irs.gov/pub/irs-pdf/p3833.pdf under the heading
"Charitable Class"
--start of excerpt  ---
The group of individuals that may properly receive
assistance from a charitable organization is called a charitable
class. A charitable class must be large or sufficiently indefinite
enough that the community as a whole, rather than a pre-selected
group of people, benefits when a charity provides assistance.
--end of excerpt  ---
More details are found starting at pdf page 6 of http://www.irs.gov/pub/irs-tege/eotopick99.pdf

Revenue Ruling 57-449, 1957-2, C.B. 622, states that a trust set up to pay a certain sum to all the individuals enrolled in a certain school on a particular date was held to be a private trust, not a
charitable trust. The beneficiaries were a group of identifiable individuals.
http://bit.ly/UGTyN

1. Considering the above it would be unlawful for the booster organization to limit the class to those who paid dues to their organization over a 4 year period.  

2. 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 will see there that such an organization may not discriminate, in giving benefits, on the basis of a family's membership or fundraising for their organization.  Therefore the group must not be use those issues to score toward a scholarship grant.

3. A grant may be given to an individual in certain cases, but the 501(c)(3) organization would find that it violated the Treasury regulations if it could not show later that the funds went for charitable, religious or educational activities.  For the grants you are asking about, the booster organization would have an issue if, for example, the student does not enroll in college and uses the funds for weed.

The IRS has published:
--- Start of Excerpt ---
A section 501(c)(3) organization will not jeopardize its exemption even though it distributes funds to organizations [or individuals] that are not themselves charities. The exempt organization would ensure use of the funds for permitted purposes by limiting distributions to specific projects that further its own purposes. The exempt organization would also needs to retain control and discretion as to the use of the funds and maintain records establishing that the funds were used for section 501(c)(3)  purposes.
---End of Excerpt---
Rev. Rul. 68-489, 1968-2 C.B. 210. http://www.irs.gov/pub/irs-tege/rr68-489.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. For me to consider your individual situation and how the law applies, I would need to gather more information.



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

QUESTION: Sorry buy this link was unavailable http://bit.ly/UGTyN
So I would like to present the following to our board, Please correct me if I am wrong.

Membership Dues requirement goes against the rules of the 501c. It would be unlawful for the booster organization to limit the class to those who paid dues to their organization over a 4 year period or even 1 year is that correct?

And the organization may not discriminate, in giving benefits, on the basis of a family's membership or fundraising for their organization.  Therefore the group must not be use those issues to score toward a scholarship grant. Can they word it in such a way in regards to outside community service? And not base it on the fundraising for the club?

ANSWER: Sorry, that Revenue Ruling 57-449 is available at http://goo.gl/KQOX2b

Correct as to dues. Grants and benefits can not be based upon dues for 501(c)(3) charitable organizations.

The 501(c)(3) organization may use "outside community service", though, as a factor or sole factor in making grants (but not based at all on fundraising for the group).

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: Just want to clarify:

"Grants and benefits can not be based upon dues for 501(c)(3) charitable organizations."

In regards to benefits: Would you consider holding office and voting on board matters a benefit? Could being a member entitle you to anything other than money matters?

Answer
Holding an office and being a (voting) board member are not considered benefits but, especially when those people do not receive compensation for their work in those positions, those are considered to be the opposite of receiving benefits.  They are giving services and, therefore, benefitting the 501(c)(3) organization by their services.

As for any other possible benefits, I do not know of any other than when money is given, but it would include also a prohibition from receiving any other goods or services from the 501(c)(3) 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. 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

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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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