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May booster club share surplus with participants?

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May booster club share surplus with participants?

All families with a child on our gym team are required to be members of our gymnastics booster club. Each year, we pay a specified assessment to the club. Part of it goes into a general fund. Part goes into an escrow account for our child. We run a large gymnastics meet each year as our primary fundraiser and have some smaller fundraisers as well. At the end of the year, any surplus in the general fund is divided by the number of family members and is moved to the individual escrow accounts. If a family leaves the gym or has a child who is graduating, any balance in their escrow is paid out to them; they leave with cash. I don't think this practice is allowed under 501(c)(3) regulations (for a variety of reasons); however, our gym owner is convinced that it's okay because the money is distributed evenly and equally to all members. What do you think?

I agree that this system is asking for trouble, in a number of ways.

The IRS has revoked the exemption of a gymnastics club that it said was fundraising for the private benefit of its members.  The IRS said its fundraising program allowed substantial private inurement and promoted private, non-public interests.  (See Nonprofit Issues, 7/16/13.)  While that fundraising program rewarded individual fundraisers with a direct reduction in their personal fee obligation in return for their fundraising effort, the concept of measurable private benefit is certainly present here.

Even if this is not a tax violation sufficient to cost your exemption, it is very likely a violation of nonprofit corporation law.  The surplus of a nonprofit corporation may not normally be distributed to the members (except in some cases upon dissolution of a non-charitable organization).

There may also be an issue with misrepresentation on solicitation.  What are you telling your donors?  That you are fundraising to give cash back to the members?  I doubt it, because that would undoubtedly depress contributions. 

Ironically, you could probably avoid the entire issue by saving the surplus every year, and using it to set the budget for the next year.  You could determine the individual family assessment based on your estimate of the amount necessary to cover the remaining costs of the program.

When you think of it, a lot of charitable giving is used to reduce the cost for the participants in the program.  Although some in Congress are apparently upset by the size of the endowments of colleges and universities, many of them want to be sure that a substantial part of the income is used to lower the tuition cost to students.  (See Ready Reference Page: “Congressional Research Service Lists Options to Regulate University Endowments”)  You might even be able to provide scholarships to accept members who couldn’t afford the cost on their own.  That sounds a lot more charitable.

Tuesday, April 12, 2016

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