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Rakhi Vasavada
Rakhi Vasavada, Financial and Legal Consultant
Category: Finance
Satisfied Customers: 3857
Experience:  Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
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If a 501c3 youth sports organization requires each player to

Resolved Question:

If a 501c3 youth sports organization requires each player to do mandatory fundraising and 20% of that fundraising is kept by the organization and the rest of the monies is returned to the individual players, is that legal? For instance, players are required to secure sponsors for a car wash-a-thon and receive $.50 per car from 90 sponsors. They wash 250 cars and collect $11,250. The checks are made out to the organization. The organization keeps $2,250 and $9,000 is returned to the player.  Also, is the $9,000 taxable to the player or player's family if player is a minor?  How is it taxed? 
Submitted: 2 years ago.
Category: Finance
Expert:  Rakhi Vasavada replied 2 years ago.
Dear Friend,

YES.. this is certainly not legal and MORE it is SQUARELY UNETHICAL. Let me try and point out why.

As per one of the white papers released, :::

1. If the self-inurement principle is violated, the mission and long-term interests of the charity may become secondary to the worker's personal interest and self-gain. The donor's (and public's) interest and needs may no longer be foremost.

2. Donor attitudes can be unalterably damaged in reaction to undue pressure and the awareness that a commission will be paid to a fund raiser from his or her gift, thus compromising the trust on which charity relies.

3. Percentage-based compensation or commissions can foster inappropriate conduct by individuals whose self-interest is oriented to immediate results, irrespective of the donor's best interests.

APART from this, you should know that non profits are regulated and watch dogs are active against unethical practices. This can land you further in trouble.

http://www.nonprofitmaine.org/all_about_nonprofits.asp#how_governed

Hope this helps.. You may use "CONTINUE CONVERSATION" to revert with additional queries if you have. Rate this answer ONLY IF you are done with this and if this helps and satisfies you.

Warm Regards,
Customer: replied 2 years ago.
Thank you for your response. This confirms my initial reaction to the information as well. However, it would be most helpful if you could cite specific IRS violations this creates in relation to the sports organization's 501c3 status. It is my understanding that there is a violation by making this fundraising mandatory for each player, also by having a minimum amount of funds each player must raise and by returning funds directly to the players after keeping 20% to be used by the organization. If you could provide specifics, I would greatly appreciate it. In addition, if the money is returned to the player - does that create a taxable event.
Expert:  Rakhi Vasavada replied 2 years ago.
Dear Friend,

Let me begin from the end. First of all, returning money to the players itself is unethical and secondly, it is illegal too. No money can be raised under the disguise of non-profit purpose, only to be returned to the fund raiser as a commission. you can end up losing your non-profit status itself.

Even if the eyes of IRS, if they find the funds being misused or abused, you may end up losing the non-profit status.

It is correct that making fund raising mandatory for players is illegal and thereby specifying the minimum amount he has to raise and returning a part thereof too is illegal.

Coming to the specifics, some of the key points which can in fact make you lose the status would be Private benefit / Inurement (what you are trying to do), Unrelated excess income, etc.

Also note that if the worst happens, i.e. losing your non-profit status, and the IRS revokes your nonprofit's tax-exempt status, get ready for financial trouble. Your ex-nonprofit will be treated as a regular taxable corporation as of the date of revocation. This means all the income it receives will be taxable, and donors will not be able to deduct their contributions.

Paying the players would be equal to lying to the donors as to how the money would be used. Gifts obtained under false pretenses -- for example, in cases where donors were lied to about how the money would be used -- are taxable income to the ex-nonprofit. If that's not bad enough, the ex-nonprofit's officers and directors may have to pay excise taxes if they engaged in excess benefit transactions.

Further, any compensation paid to the players / fund raisers would be their income and would be treated according to their tax status on individual basis.

Hope this helps.. You may use "CONTINUE CONVERSATION" to revert with additional queries if you have. Rate this answer ONLY IF you are done with this and if this helps and satisfies you.

Warm Regards,
Rakhi Vasavada, Financial and Legal Consultant
Category: Finance
Satisfied Customers: 3857
Experience: Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
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