As school begins and high-school football kicks into gear, parents, schools and athletes are concerned with ensuring that enough funds are raised to cover the often expensive costs of sports teams and extra-curricular activities. More often than not, parents, with occasional assistance from school administrators, set up booster clubs in order to help support and raise funds for the school's athletic programs. Typically, these booster clubs seek tax exempt status as 501(c)(3) entities so that income is not taxable and so that donations are tax-deductible.
Because one requirement of a 501(c)(3) entity is to ensure that there is no "private inurement" I have often wondered why the IRS did not more closely scrutinize booster clubs both in their exemption applications and in their operations.
Apparently, the IRS may have awoken from its slumber as a recent U.S. Tax Court ruling could ensare thousands of booster clubs across the country. In Capital Gymnastics Booster Club v. Commissioner, [T.C. Mem. 2013-193 (Aug. 16, 2013),] the court uhpeld the revocation of the tax-exempt status of a parent -run booster club in Virginia that supported student gymnastics. Although this ruling only applies to this particular group, it could have a much wider impact nationwide. Often, booster clubs operate on shoe-string budgets and are more focused on fundraising than compliance. The key in the gymnastics case was that funds raised by parents were specifically earmarked for their children. If parents paid out of pocket certain costs, then they would have to fundraise less. Because of this structure, the court determined that there was "private inurement" because specific dollars raised were earmarked for particular gymnasts, and not the group generally.
Although not discussed in the ruling, one possible way to get around this ruling is to simply suggest, and not require, that members of the club make donations in a manner that is "fair". In other words, if your child raised little to no funds, it would be socially expected--though not required--that you would make an additional donation to the booster club.
Recently, our office gave a presentation to a group of tax-exempt entities discussing issues related to fundraising and, in particluar, what requirements the entities are to follow when funds have been raised and what are "best practices" they can implement to help ensure that their donors can take a charitable deduction for any donations made. The vast majority of the time, charities are not following these requirements. During our presentation, a detailed hand-out discussing these rules was provided and can be accessed here.