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Nonprofit Law/Can Working on a Fundraiser Be a Requirement? Can a Booster Club Penalize/Fine You if You Don't?

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Question
My daughter is a member of a gymnastics team.  Per the contract we sign with the gym, all families are required to be part of the Parent Association, which is a 501(c)(3).  Families pay an annual assessment to the parent association, which is divided between individual accounts for each gymnasts and a general fund.  The general fund covers coaching-related expenses (e.g., travel costs).  Individual accounts cover things like meet registration fees, judges fees for in-house meets/feedback sessions, uniforms, etc.)

The parent association hosts an annual meet which serves as its primary fundraiser.  Every family is required to participate in the planning as well as the meet itself, and every family receives an equal share of the profit (paid into the shared general fund as well as individual gymnast accounts; no money is paid directly to parents or individuals).  If a family does not want to participate, it can pay a fee to be released from this obligation.  Also, if a family fails to complete the expected planning work prior to the meet or does not have a family representative working at the meet for the designated time, the family is fined and its gymnast cannot work out at the gym until the fine is paid.  

After reviewing many of the articles about violations booster clubs, especially gymnastics booster clubs, commit, I'm concerned we may have an issue, but I'm not sure.  Can participation in a fundraiser be a requirement that is met with a fine if it is not met?  Also, is there an issue placing the profit from a fundraiser into individual accounts for gymnasts as opposed to the general fund?  To be clear, every family receives an equal portion of the profit.

Answer
You are not sure, but I am sure. That Parent Association is not acting like a 501(c)(3) organization. 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.  A cooperative is not qualified as a 501(c)(3) organization.
A 501(c)(3) booster organization is to be a charitable organization, not a cooperative 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.
Families who did not fundraise did not receive any benefits from
the purported a 501(c)(3) organization.  http://goo.gl/F2dZws

    Therefore, sales activities by cooperatives for their own
benefit are generally taxable to the cooperative and to the
individuals who benefit from the sales activities.  The purported
501(c)(3) that acts as a cooperative has a requirement to report
sales income and they generally do not do so and, therefore, they
are engaging in tax evasion.

   The for-profit gym is engaging in conspiracy with the
purported 501(c)(3) booster organization to evade federal income
taxes if it tries to require fundraising work for the purported
501(c)(3) organization as a condition for membership on a team.
That is because both parties, the purported 501(c)(3) organization
and the for-profit gym, would be acting together in a way that
hides taxable income.

    The officers of the purported 501(c)(3) organization are using
illegal threats and actions to try to coerce families to fundraise
or otherwise work for their organization. The threats are used in
the nonprofit's plan to engage people in sales activities and not
to declare the sales income as taxable to the individuals or the
organization, which is then acting not as a 501(c)(3) organization,
but as a cooperative.  By making such demands, the organization's
leaders have turned their operation into what the IRS has described
as a cooperative organization.  I am assuming that by "fundraising"
you mean sales activities because that is generally the meaning
when that term is used by booster organizations.

 I do not believe that the for-profit gym may legally require a
family to join or work for an associated booster club, for there is
no valid reason for the gym to require such.  The gym is trying to
make money and it would benefit from prohibited inurement which
would bring the gym owner into conspiracy with the booster club to
evade federal tax regulations.

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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