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Nonprofit Law/Booster Club Requiring Payment and Reimbursements

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Question
I have been the treasurer of a parent run booster club for a couple of years now and have followed practices which were set forth by previous members.  Payments for various program fees are collected each year from all members and at the end of the year one of our practices is to reimburse parents for any amounts paid directly by them (but not earned through fundraising efforts). Additionally if they could show proof of other expenses incurred as part of the program we would reimburse them for that as well (i.e. uniform cost, hotel expenses for travel to competitions, or camp costs paid to another organization that was a mandatory part of our program).  This practice is now being challenged and after reading through numerous articles and blogs I see this should not be our practice.  It appears we are not in compliance based on funds being "credited" to individual accounts based on volunteer service.  I have a couple of questions based on this information as follows:

1. Have we now jeopardized the status of the 501c3? How should we move forward and can the members of the board be held personally liable for any erroneous reimbursements which were made?

2.  Are refunds (or reimbursements) ever appropriate?  If payments were required (and received) for an activity that never occurred can those funds be reimbursed to parents?  It is being suggested that the payments were in fact donations, however they were explicitly stated as payments and in fact each member was invoiced for "program fees".  Prior to the start of the year those program fees were itemized with the total being split into monthly fees. I have the same question with regard to coaching fees (or any other fees charged), when the total amount received exceeded what was paid out for coaching fees, would those amounts be refundable?

3.  If we are receiving both payments from members as well as receiving fundraising dollars and have a substantial sum of money left at the end of the year, should we reimburse those payments if they exceeded what was needed for the year?  Otherwise, wouldn't we have to claim the payments as income? Can we avoid claiming the income by refunding the payments?

Thank you in advance!

Answer
1. The IRS does not refer to work as "volunteer" work unless there is no expectation of benefits in return. When someone works expecting benefits for a family member that work is treated like normal employment which is taxable. Further, a booster 501(c)(3) organization can not discriminate in giving benefits based upon work for the organization.  If it does, then it jeopardizes its 501(c)(3) organization status. 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 as it addresses the issues you raised.
The members of the board are liable to the organization if by their gross negligence the organization suffers.

2.  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  ---

See page 41 of IRS Publication 535 at
http://www.irs.gov/pub/irs-pdf/p535.pdf starting in the first
column under the heading "Accountable Plans" which the organization
must have.  That section is written for employees but also applies
to volunteers.
See the section under "Volunteer Officers/Workers" at
http://goo.gl/ypkKS
which is written specifically for Exempt Organizations and refers
to that Publication 535.
---Start of Excerpt--
A plan under which an employee or volunteer is reimbursed for
expenses or receives an allowance to cover expenses is an
accountable plan only if:

   *  There is a business connection for the expenses;
   *  The employee/volunteer adequately accounts for these
expenses within a reasonable period of time; and
   *   The employee/volunteer returns any amounts of excess
expenses within a reasonable period of time.
---End of Excerpt--

Details follow on from that page 41 of Publication 535.

Hotel expenses for all of the parents, for example, are not generally considered as a normal business expense as they are not all needed to monitor the youth.  Therefore, reimbursements to parents for their hotel stays would not be allowed and would be considered income to those parents.

Just like tuition to a school is not deductible as a donation, program fees are not deductible as donations. If a family pays for certain fees they can be refunded an amount, but all should get equal refunds for similar fees paid.

3. If fundraising amounts received by the booster organization are large enough then part or all of the money that the families paid as "program fees" can be reimbursed, again equally, not dependent upon the work that they did for the organization. If income items are refunded within the same fiscal year then you can avoid declaring that income.

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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