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Keeping the "Fun" in Fundraising: Avoid Inadvertent Violations of the Internal Revenue Code - May 2012

May 22, 2012

School booster clubs, such as those formed to support bands or sports groups, have become a popular way for parents to get involved in their children’s extracurricular activities. One of the common activities that booster clubs participate in is assisting the students in fundraising, such as selling candy bars or washing cars. Naturally, some of the students may raise more funds than others. It would seem only fair to credit those individuals in accordance with his or her efforts by “earmarking” the funds for the individual’s use. By doing so, however, the booster club may be in danger of forfeiting its tax-exempt status or being fined by the IRS.While there appears to be nothing in the Internal Revenue Code that specifically addresses the topic of individual fundraising accounts, there are some inferences that can be made.

A booster club may qualify for tax-exempt status if it is organized and operated exclusively for an educational, charitable, religious, or other exempt purpose under 26 U.S.C. § 501(c)(3). An organization is generally considered to operate exclusively for an exempt purpose if the organization engages primarily in activities which accomplish the tax-exempt purpose. Thus, if a substantial portion of the booster club’s activities does not further its tax-exempt purpose, the booster club may forfeit its tax-exempt status. In other words, if the activities benefit a particular individual, as opposed to a group, then there is a potential that the club could be deemed to promote private, as opposed to exempt interests.  If the booster club consistently “credits” individual students for his or her efforts, an argument could be made that the booster club is operating for the benefit of private interests.

The IRS forbids any earnings of a § 501(c)(3) organization from inuring to the benefit of any director or officer of a tax-exempt organization, or any person having a personal or private interest in the activities of the tax-exempt organization. See 26 U.S.C. § 501(c)(3). The booster club must be careful that it is not organized or operated for the benefit of private interests—such as the interests of individual students by way of “earmarking” funds that he or she raises. Similarly, if a donation is made to a booster club on behalf of an individual student and is set aside for his or her benefit, it could violate § 501(c)(3).

Although a booster club may be able to comply with the Internal Revenue Code and still recognize and reward individual students according to their fundraising efforts, care should be taken to avoid jeopardizing the organization’s tax exempt status. Regardless, any funds that are donated to or raised by the booster club should always be controlled by the booster club. Above all, the funds should always be used to further the tax-exempt purposes of the booster club as a whole. To avoid any potential violation of the Internal Revenue Code, however, it is recommended that booster clubs do not establish individual fundraising accounts or “earmark” funds for individuals.

For more information, or if you are interested in learning more about incorporating your booster club, please contact Kristen R. Jurjevich at Pender & Coward.

NOTICE REGARDING TAX ADVICE: Any tax related material contained within this Opinions & Observations article is subject to the following disclaimer required pursuant to IRS Circular 230: Any tax advice contained herein is not intended or written to be used, and cannot be used, by any taxpayer for purposes of (i) avoiding penalties imposed under the United States Internal Revenue Code or (ii) promoting, marketing or recommending to another person any tax-related matter; and (iii) any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any federal tax transaction or matter referenced in this article. No taxpayer may use any part of this article in promoting, marketing or recommending an arrangement relating to any federal tax matter to one or more taxpayers.

Written by Kristen R. Jurjevich.