There are an estimated 100,000+ school, sports, band, and other booster clubs currently in existence in the United States, and as a new school year begins many local booster clubs are revving their fundraising engines in order to help offset the costs of school and extracurricular activities. Surprisingly, however, estimates indicate that less than 10% of these clubs are compliant with Internal Revenue Service Code regulations. Along with failure to register with the IRS, violation of the “inurement” prohibition under IRS Code Section 501(c)(3) is one of the most prevalent issues presently challenging local booster clubs.
The problem lies in the purpose for which tax exemption is given. Many booster clubs, seeking to increase their funding opportunities and avoid tax liabilities, file for tax-exempt status under Section 501(c)(3) of the Internal Revenue Code. In doing so, these clubs are required to certify that they are formed for, and will engage in, one of the charitable purposes for which exemption is offered (such as support of education or amateur sports). The approval of the tax exemption by the IRS is based upon this certification and is dependent upon the clubs’ agreement to continue to work only for the benefit of the charitable purposes stated. The problem then arises when these booster clubs subsequently violate their stated charitable purpose by allowing members to participate in fundraising to offset individual costs of the associated activity (i.e. competition fees, equipment, and training fees for athletics).
A recent case decided by the United States Tax Court provides an excellent example of the problem at hand. The case involved a gymnastics booster club which mandated membership by those interested in competing on the related for-profit gymnastic academy gymnastics team. The club paid for the gymnasts’ competition fees as a benefit of membership, but members were required to either pay their club “assessment,” which was equal to their competition fees, or offset the assessment through club fundraising efforts. The club set up individual accounts for each member through which profits earned by the member’s fundraising efforts were passed and then used to offset the club assessment. The tax court held that the club conferred an individual benefit on its members in violation of the inurement prohibition under Section 501(c)(3) and that the individual benefit conferred constituted evidence that the club was not operated exclusively for exempt purposes within the meaning of Section 501 (c)(3), thus allowing the IRS to revoke the club’s tax exempt status.
While students, parents, teachers, and staff understandably seek to use booster club fundraising efforts to offset costs of school and extracurricular activities, they must be aware that any system which tracks benefits in direct proportion to individual fundraising efforts is likely to be considered a private inurement by the IRS and can put the club’s tax exempt status in jeopardy. For many clubs, revocation of the exemption will be fatal to the club’s existence because participation in community rewards programs and other fundraising opportunities are often dependent upon maintenance of tax exempt status. Moreover, directors, officers and members of these clubs should also be aware that if a violation of the inurement prohibition is found by the IRS, excise taxes (immediate sanctions) may be imposed upon any insider who improperly benefited from these types of transactions as well as on organization managers, leaders, and board members who allowed the benefit.
So what can be done? It is to be expected that some benefit to individuals involved in these types of booster clubs will result from club fundraising efforts. The benefits are allowable where they are insubstantial and incidental, when compared to the benefit being conferred on the group as a whole. Fees and costs associated with sporting activities may be paid, so long as they are not paid in direct proportion to funds raised by individual members. Scholarships may be offered by the club so long as the criteria for awarding them is not based upon the amount of funds brought in by the applicants. In general, procedures and processes undertaken by the club are allowable when designed to facilitate the charitable purpose stated on the tax exemption application and the greater good of the group, rather than to benefit any one individual or class of individuals.
As always, please feel free to contact Wright Beamer if you would like more information regarding the structure and activities of your local booster club.