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legalg, Attorney
Category: Business Law
Satisfied Customers: 7123
Experience:  General Practitioner. Research Attorney
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I have a High School Bank booster club that has received

Customer Question

I have a High School Bank booster club that has received non-profit status about 1 1/2 years ago. They currently run the concession stand for outdoor athletic events and in the past we have added a $7 credit to student accounts if they or their parent(s) worked at the concession stand, crediting $7 per person that was their for the student. For example: Tom and both his mom and dad worked for the baseball game on Tuesday. Tom's student account was credited $21. These student accounts are set up simply to show the balance owed for students who wish to participate in extra-curricular activities such as marching band. Once the money goes in, it stays there; there are no refunds given and money is never taken from a students account and given to them for any reason. At the end of their senior year, if there is a credit in the account it goes into the general fund. For other fundraisers, such as selling chocolate bars, fruit, etc., we sometimes set it up to where a percentage of the profit goes to the student (it ranges based on need; sometimes from 10% up to 50%). The other percentage goes into the general fund. This is set up because some students end up selling a whole lot of product and some students don't sell anything. We can't require students to participate in fundraising, so we set it up to give a small percentage to student accounts based on what they sell. There are not actual individual accounts set up with a bank. Our booster account is one individual account and a record of student activity including charges and payments is maintained through a software program we have. The credits that students earn or add funds to are used for marching band, winter guard, indoor percussion, and any band trip we may take (i.e. Disney).
My question is: is this ok? I have a parent who says this is illegal and we shouldn't be doing this. She claims that the IRS prohibits the transfer of funds to a student's individual account from a fundraising event for non-profit groups. According to the parent, the funds from all fundraisers are suppose to go into the general fund. However, in my research, I could not find any evidence that this was strictly prohibited. I did find that it could cause us to loose our non-profit status if the amount credited to student accounts was "substantial." I am not sure what amount "substantial" is.
When student accounts are credited for participating in the concession stand and/or for fundraising efforts, the credited amount is never given to them where they can take it out of an account and spend it on whatever they want. The funds are used to help offset band fees so that families who need financial assistance don't have to shell out a lot of money so that their child can participate in something the want to do. Again, once they graduating, and excess amount in their account goes into the general fund.
Submitted: 5 months ago.
Category: Business Law
Expert:  legalg replied 5 months ago.
It will be a few more minutes - I am checking case law for this.
Expert:  legalg replied 5 months ago.
Unfortunately case law does indicate that crediting a student account can lead to the loss of one's non profit status, because that individual's account is not a non profit purpose, but rather is a benefit to that particular family. For all of the above reasons, Capital Gymnastics operated in a manner that allowed substantial private inurement and promoted private, non-public interests. Therefore, the organization did not operate exclusively for an exempt purpose. We conclude that Capital Gymnastics did not satisfy the requirements of section 501(c)(3) and consequently did not qualify for exemption from tax under section 501(a). Please see the case here
Customer: replied 5 months ago.
So, if they just had a Booster Club that did fund raising (not a non-profit) there would not be an issue? What if they had the "Booster Club" that did fund raising that was to be designated per child, then the amount that was for general purpose was "donated" to the Non-Profit. The non-profit money was only used for overall Band expense. They would still have the Non-Profit for anyone that wanted to make a charitable donation and they still had a way for students to earn credits.
Expert:  legalg replied 5 months ago.
The booster club that is raising money needs to have some kind of tax designation ;if they are not a non profit they would need to pay taxes or it is illegal. The IRS calls it illegal private inurement. here is a discussion by the IRS re: booster clubs and fundraising efforts:
Expert:  legalg replied 5 months ago.
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