A booster club fundraising program that allowed parents to meet the mandatory assessment for their children’s participation by raising funds from others has cost the club its 501(c)(3) charitable exemption. The Tax Court has upheld the IRS’s revocation of exemption. The Court ruled that the club “operated in a manner that allowed substantial private inurement and promoted private, non-public interests.” The Court concluded that the club did not operate exclusively for charitable purposes.
The Capital Gymnastics Booster Club served as an organization to support youth gymnasts at the Capital Gymnastics National Training Center in Virginia, a separate for-profit corporation. Each athlete’s family paid monthly fees directly to the Training Center ranging between $200 and $330 depending on age of their children, plus other costs of equipment, uniforms, travel, etc. They had to pay the club $40 dues for its operating expenses, and between $600 to $1400 a year per child for each athlete’s costs of competition, including entry fees and coaches’ travel costs.
The parties stipulated for the litigation that the Club’s “primary purpose was to raise funds.” A parent could simply pay the child’s assessment in cash, but had the option to offset the assessment by voluntary fundraising. Fundraising included selling wrapping paper, discount cards, cookie dough, candles, ornaments and grocery store certificates bought by the Club at a discount and resold at face value.
Families who participated in the fundraising were awarded “points” based on the profit from their activities. Some also earned additional points for organizing the efforts or serving on the board of directors. The points reduced their direct payment requirements. Slightly less than half of the parents participated in the points program, but many were able to cover 50% to 70% of their fees with the work. Only 7% of the money raised from fundraising was used for the organization as a whole. The rest was allocated directly to the family that raised the funds.
The organization provided no scholarships and based its fundraising program on the deliberate effort to prevent those it called “freeloaders” and “moochers” from benefiting from the fundraising activity of others.
The IRS examined the Club in 2005 and revoked its 501(c)(3) exemption. It said that the Club failed to establish that its income “did not inure to the benefit of private individuals and shareholders” and that it was “operated for a substantial private purpose.” The Club petitioned the Tax Court for a declaratory judgment that would reverse the IRS determination.
The Club argued that it operated exclusively for a charitable purpose and that its method of unequal sharing of fundraising profits did not give rise to a “constructive distribution” because the organization never paid money to any of its members and spent the money on expenses of the athletes, a “well-defined charitable class.” It argued that its policy should be recognized as a “best practice” for similar organizations. The IRS did not “quarrel” with the purpose of the organization as fostering amateur athletics, but said that the almost dollar-for-dollar allocation of fundraising for the benefit of those who raised the funds constituted inurement and private benefit.
The Court agreed with the IRS. The Club “allowed substantial private inurement to the parent-member-insiders who fundraised (by providing to those insiders relief from an economic burden in the form of ‘points’ applied to their assessments) and thereby conferred an impermissible substantial private benefit on the child-athletes of those parents only (as opposed to its child-athletes generally). Capital Gymnastics authorized parent-members to raise funds for their own benefit but under the name of Capital Gymnastics and trading on its tax-exemption ruling. Capital Gymnastics rigorously assured that its fundraising did not generally benefit all the child-athletes in its programs but rather benefited only the children of parents who did the fundraising.”
The Court went on to say: “This is not a circumstance (like, say, a school band’s sale of candy or a church youth group’s carwash for a once-a-year event) in which fundraising is a tiny fraction of the organization’s overall function; here, the fundraising is, instead, the admitted ‘primary function’ of the organization. This is not a circumstance in which the individual’s contribution of his share of the cost is optional or where scholarships are made available for those who cannot afford the cost. Nor is this a circumstance in which every member is required to perform fundraising and no one can buy his way out; rather, the fundraising was an option chosen by those who wanted to earn their assessments.” It also said that the assessments were not “de minimis charges” that might be covered by a paper route or babysitting but were “serious parental obligations” of as much as $1400 a year.
The Court said it did not overlook the Club’s legitimate charitable activity in fostering sports competition. “The issue here,” it said, “is not whether Capital Gymnastics had any charitable purpose but whether (as the statute requires) it was operated exclusively for charitable purposes. We hold it was not.” (Capital Gymnastics Booster Club v. Commissioner, T.C. Memo 2013-193, 8/26/13.)
YOU NEED TO KNOW
This case illustrates many of the problems arising in youth sports and booster club fundraising and how easy it is to go wrong in administering programs. This club apparently aggregated a whole series of questionable policies into one that the IRS finally said crossed the line.
There are a number of other potential issues that were not decided in this case because they were not directly relevant. The Court said in a footnote that it did not consider whether the Club “facilitated improper claims of tax deductions by members.” The Club had said that it told its members that payments were not deductible, but it acknowledged that some of its members might have deducted the payments. The Court did not characterize the payments by outsiders who participated in the fundraising and did not say whether there was any charitable element in the payment. It did not consider whether the “points” parents earned by fundraising were really a form of taxable income to the parents because they relieved the parents of a financial obligation.
Nor did the Court consider whether the Club was providing a private benefit to the for-profit Training Center, since all of the participants were paying the Center for instruction and would not have been able to participate in the competitions without the Club’s payment of extra expenses.
The IRS didn’t raise the issues and the Court had no reason to decide them. But for a full analysis of the tax implications of the operation of the Club they are clearly relevant.