I would like to thank you in advance for your time. My question in regards to a treasury position I was recently elected for on the Executive Board of our gymnastic gym's parent club (a 501(c)3. My question is in regards to our legitimacy as a 501 and is two pronged.
1. The gym (a for-profit)entity writes a sizable check each year to the parents club. Last year it equaled about one third of the clubs total revenue. This to me seems to be inurement as you would expect the writer of a $30,000 check to have significant influence. Additionally the parent's club pays the coaches for attending meets. This seems to me to be a tax free donation to a 501(c)3 for the gym but the funds then go to pay their coaches. If not in fact at least in appearance. Is my thinking correct?
2. All competing athletes are "required" by the gym to join the parents club or they cannot compete. And in the membership you have two options.
A. Join for $280 plus volunteer 4HRS plus fundraise $XXX
B. Join as an Opt-Out member for $600
My question is in regards to the mandatory membership in order to compete and the dollar amount on the volunteer hours. If you do not complete all of your hours you are billed $20 per hour not worked. Are these actions legal and within the boundaries for an exempt organization?
With me having a career in finance and accounting I just want to make sure the board I serve on is operating within the code.
Thank you again.
You are welcome.
The operation you describe clearly evidences what the IRS calls conspiracy to evade federal income taxes.
1. The $30,000 check from the for-profit gym to the club would be viewed by the IRS in the context of all of the transactions and, therefore, it could not be a "donation" from the for-profit to the 501(c)(3) organization.
One of the basic principles of Rev. Rul. 67-246 is that to be
deductible as a charitable contribution, a payment to a charity
must be a gift, that is, a voluntary transfer of money or other
property that is made with no expectation of procuring a financial
benefit commensurate with the amount of the transfer. Where
consideration in the form of substantial benefits is received in
connection with payments by patrons of fund-raising activities,
there is a presumption that the payments are not gifts, and that
the total amount paid represents the fair value of the benefits
received in return or in legal terms - a quid pro quo.
www.irs.gov/pub/irs-tege/eotopick90.pdf on page 2
The 501(c)(3) organization's decision to pay for coaches is seen in the context of the organization receiving the $30,000 payment from the for-profit.
The IRS often uses a "Substance over Form" doctrine.
The concept of the substance over form doctrine is that the tax
results of an arrangement are better determined based on the
underlying substance rather than an evaluation of the mere formal
steps by which the arrangement was undertaken. For instance, two
transactions that achieve the same underlying result should not be
taxed differently simply because they are achieved through
different legal steps. As the Supreme Court stated some years ago
in Minnesota Tea Co. v. Helvering, 302 U.S. 609, 58 S. Ct. 393, 82
L. Ed. 474 (1938), "A given result at the end of a straight path is
not made a different result because reached by following a devious
path." 302 U.S. at 613, 58 S. Ct. at 394.
2. The requirement of the for-profit that participants are required to join the purported 501(c)(3) organization and comply with the rules of that organization are another example of conspiracy.
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.
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
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.