Friday night lights, football uniforms, cheerleaders, marching bands, nachos with bright yellow cheese served by Booster Club parents. All signs that fall has arrived in Texas. But the summer is when the action begins. The stadium needs a new scoreboard; the band needs new uniforms; the cheerleaders need to go to camp. Booster clubs around the country are actively seeking donations for one need or another.
Here is the situation – the band is invited to march in the Macy’s Thanksgiving Day parade. The band booster club is raising funds. They have determined that it will cost $1,000 per student. Each student is asked to raise funds by selling cookie dough. The students are given individual credit towards the cost of their trip for the amount individually raised. The shortfall is funded by the parent or as a scholarship by the booster club if need is demonstrated.
Lois Lerner, Director of Exempt Organizations for the IRS, issued a directive on June 27, 2011 that clarifies the possible tax consequences for the organization where “a booster club reduces the amount a participant is required to pay based on the amount of fundraising done by that participant.” The news is frankly disturbing – references to private benefit, loss of exempt status, and employment taxes.
The directive suggests that the booster club is providing a private benefit to that participant. Private benefit is a very nasty phrase in nonprofit circles. The directive says “such practices could result in the organization failing to be described in Sec. 501(c)(3).” That could mean loss of exempt status or could mean demotion to a different type of exempt organization with no tax deductible contributions allowed. Either way, not a good result.
Furthermore, the directive hints that the amounts credited to the participant would be income from services. Therefore, the organization could be subject to employment taxes and the student would have taxable income. Double whammy!
The IRS doesn’t tell us how this type of fundraising ought to be done, but I think the issue is that individual accounts are maintained. If a booster club wants to be safe, the fundraising must be done for the group. It can’t matter that 40 kids more than paid for their trip through fundraising and the rest fell short. Each student should be asked to pay the same amount. I believe that scholarships can be available for those with a need with no negative tax consequences to the organization or the student. But the organization needs to have an application and process for determining need.
Just another example of how fundraising really isn’t all that fun.