Professional Query
How Should We Distribute Gifts in Our Booster Club?

The online correspondence was interesting.  See how people from several states responded to this query.  Start with the full text of the inquiry. Continue with (the slightly condensed) replies that were received within 24 hours.

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10/15/04 -- Initial Query to nonprofit@rain.org

Help! I know this is probably a very basic question on this board, but I need some advice. I'm a member of a High School Booster Club, located in Washington State, that has a non-profit 5013C status. Each year we attend an out of state competition that costs the students around $750 each. Each student has what we call a "trip account". Students/Parents make monthly payments into their accounts. We provide lots of fundraising opportunities to help them make these payments.

One of our largest fundraisers is a student store that we run on the campus. Parents work several hours daily to keep this up and running. We take a small percentage each day that the two workers can place into their child/children, or any child's trip account. We are in a small, rural, depressed area and parents work towards their children's trip, otherwise, MANY kids would not be able to go on this wonderful experience! Part of this trip includes our school band marching down main street in Disneyland.

We have a new member that is a CPA, and has a personal axe to grind, so to speak with the band. He is telling us that we are breaking the Exemption Requirements of our tax exempt status. He quoted, "No part of the net earnings of an IRC Section 501(c)(3) organization may inure to the benefit of any private shareholder or individual".

Does this apply to our situation? No money goes to any parents or kids directly. The money is ONLY transferred into their children's trip account. How is this different from any other fundraiser that we do? Parents and kids sell numerous things, wash cars, wrap Christmas gifts, etc.. All money they make from these actives are placed in their accounts. I don't see the difference.

I know this sounds like a small issue, but it really does mean the difference in some kids being financial to attend this trip. Any advice you can give would be GREATLY appreciated.

Replies 10/15/04

(California)

This is not a small issue, although it is one that should not come up in booster organizations. The reason is that people should first recognize that they are all working together for the common good. But if someone complains, even if they don't have all of their facts right, there could be a problem if you are not following certain rules.

It all rests with how the money is spent. On the side is the issue of the board of directors. The board cannot receive any benefit from the organization or they become "interested" persons, having a personal, financial "interest" in the business of the nonprofit.... The problem occurs when one looks at the families of board members -- and other booster members -- who, in the case of your organization, benefit from money earned.

The boosters, then, should be raising money for the entire booster organization. No money should be raised and earmarked for particular individuals. Any contributions should go to the entire organization and not into individual trip accounts. Yes, there will be an appearance of inequity in that some students, who can contribute less, will benefit more than those who can contribute more. The way to deal with that is to explain to everyone that no individuals may be seen to be benefiting from the fundraising. All fundraising must be for the entire group so that they may serve the school. The trips should be handled by paying one bill for everyone, not individual bills. Some people will contribute a lot. Some will contribute little and put in more volunteer hours.

The mission, then, is to support the school. The booster club does that through participation. Participation is possible through fundraising. All participants are volunteers getting no pay, but their expenses are paid through fundraising. The fundraising is to allow the volunteers to do their volunteering. None of the money is identified for individuals so that they will "be able to go on the trip." Individuals are not the issue. ONLY the entire group of volunteers, giving their time to the school is the issue. The group's participation in the trip is not so that people will have an opportunity to travel -- but rather it is to be there to provide support for the school. Everyone is in it together and no individuals are identified in the expenditure of money -- and no one's participation in making donations or helping with fundraising can be a factor in whether or not a person in their family gets to go.

Making this work means that you need some serious cheerleaders, planners, and get-it-done people leading your organization. If you have become an organization that is divided between the people with money who just pay and then sit back, with another group doing all of the work so their kids can go on the trip, that needs to change. Everyone should be involved in fundraising activities. Fundraising should always be first and everyone does it. "And, oh, by the way, if any of you booster mom's and dad's can chip in and make a donation in addition to all of your fundraising work, that would okay, too."

(Washington)

I've been through this as a parent whose child was involved in an exchange to New Zealand. Your accountant is basically right. You need to divide monies into two categories: trip accounts assigned to a student (as a means of keeping track who has paid their share) and undesignated contributions.

The student account monies are not tax deductible--for parents, aunts, uncles, or grandparents.

You can do general fundraising and credit some of that money to accounts. But it has to be done with an unbiased rationale. You could 1) just give everyone an even share of the general fundraising, or 2) set a "needs" criteria in advance so that everyone knows what circumstances will qualify for support. In that case, one or two may get a lot and several may get nothing from the general fundraising.

While there was some leeway created by a court decision regarding the support of young people doing mission work (i.e., family members could give to help a family member defray the cost of traveling on a religious mission) that decision largely rested on the special status of religion within the 501 c 3 and charitable deduction arena.

(California)

That is exactly how our community foundation handled several special funds on behalf of students in our local public schools. In our case, a school would ask us to conduct a solicitation to support a program. If the total money raised was not sufficient, the program was canceled. If the money was sufficient, any student who wanted to participate was accepted whether or not that student's family donated.

Further, we solicited the entire community, not merely parents of the students. We collected some donations from residents who had no children in the affected school. Thus, these were true donations (to be itemized on their Schedule A when filing a tax return), not a fee for a service.

Finally, the money collected was paid as a grant to the school, not to any of the students. The grant specified the program to which it was to be applied. The school -- as a government agency -- then had its own standards for subsidizing any student participating in the specified program. We had no involvement in selecting those students. Since we made the grant to a government agency, the IRS had little interest in how that grant was used. (The IRS has little authority over how state and local government agencies spend their funds.)

There is another issue here. If the program involves students from a particular school and occurs during the school year, it should be conducted by the school. Involvement by the school should be mandatory. This would address such issues as insurance and liability, excused versus unexcused absences, authority of adult supervisors, etc.

(Alaska)

The IRS published an article discussing booster clubs in general, including the practice of establishing "player accounts," in a 1993 a training document entitled "Athletic Booster Clubs: Are They Exempt?". Click here. (You will need Adobe Reader if you want to view this.)

Here is the conclusion the IRS reached:

"The private benefits conferred on the parent-members...are not incidental, they are intentional.... Such organizations are, in effect, providing a co-operative funding mechanism for...the substantial costs of their children's competition.... We must conclude that the substantial private benefit to the parent-members negates the charitable intent and exemption under 501(c)(3)."

Sandy Deja
Author of Prepare Your Own 501(c)(3) Application -- an ebook for lay people
Fairbanks, Alaska

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