Originally published on Forbes.com Sept 15th, 2013
I latched onto the Tax Court decision in Captial Gymnasitic Booster Club mainly because I thought it was a little amusing. First of all, I have this aversion for competitive activities that are not decided by metrics that are crystal clear to the non-cognoscenti. Can’t we just be satisfied watching people fly through the air with the greatest of ease ? Do we have to have judges score them ?
Then there is the apparent narcissim of people engaging in “fund-raising” to cover the expenses of their own kids and wanting to make sure that their “fund-raising” does not benefit “freeloaders” or “moochers”. I had to give them extra points for chutzpah as they maintained that their method for allocating fundraising profits was not only permissible and lawful, but also that it should be recognized as a “best practice for similar organizations to follow”. It made me want to write an essay entitled “What It Would Take To Get Ayn Rand To Sell Girl School Cookies “. As it turns out, the implications of the decision may be far-reaching.
Lois Lerner’s Letter
The world of boosterism, which is larger than I first realized (ParentBooster USA, for example, has 1,400 member organizations) got a bit of a shocker in June of 2011 when Lois Lerner put out a brief letter clarifying a previous technical assistance document:
In a recent Program Manager Technical Assistance (PMTA) requested by R&A (attached), the Office of Associate Chief Counsel (Income Tax & Accounting) concluded that booster club participants may be eligible to deduct the amount contributed under § 170 to the extent that the contribution exceeds the value of the return benefits received, if the participants intended to make a charitable contribution in the amount of the excess of the contribution over the value of the benefits received. To clarify for agents and tax law specialists, the PMTA is focused solely on the tax consequences to the individual participants. It does not address the tax-exempt status of the organization, specifically, the possible tax consequences for the organization in situations where a booster club reduces the amount a participant is required to pay based on the amount of fundraising done by that participant. Crediting of Fundraising Amounts. If a booster club confers a benefit on a participant in return for their fundraising activities, such as by crediting amounts raised by a participant toward that participant’s dues requirement, or by crediting amounts raised against the cost of a trip, the booster club is providing a private benefit to that participant. Consequently, such practices could result in the organization failing to be described in § 501(c)(3).It is also possible that amounts credited to a participant’s account due to fundraising would constitute income from services, and could result in employment taxes.
One venerable organization was quick to react.
Love Those Thin Mints
If we could go back in time and erase from history whoever first thought of financing charitable activities by having kids and their parents sell a variety of food items and other miscellany such as Christmas cards, the world would be a better place. With one very large exception. That would be Girl Scout Cookies – specifically Thin Mints (I don’t know why they bother with the other kinds). Thin Mints by themselves make up for the annoyance of all the other junk. At any rate, the Girl Scouts were right on top of Ms. Lerner’s announcement with a policy change.
GSUSA has provided Councils with guidance on Girl Rewards* and Troop Proceeds. This guidance follows a clarification from the Department of the Treasury, “IRS Directive 6-27 Subject: Booster Club Dues and NonExempt Activity**,” issued on June 27, 2011. If appropriate practices are not followed, actions could be considered a “Private Benefit” to the participant by the IRS and could also result in the organization (Girl Scouts of Central California South) paying “Unrelated Business Income Tax” or losing its tax-exempt status altogether.
Among other things tracking of receipts by “girl” is proscribed.
Are The Boy Scouts Prepared ?
As I went poking around, I found that the Boy Scouts are frequently cited as precedent for using Individual Fundraising Accounts. BSA calls them Individual Youth Accounts.
Units utilizing individual youth accounts have traditionally had stronger programs with less turnover of youth. Individual Scout accounts, whereby the unit keeps track of how much a youth member or his family has raised toward his year of Scouting goal, are critical to the success of this program. The bigger the fun, the bigger the price and the more important individual youth accounts become. When Scouts are credited for their efforts, they develop a sense of personal responsibility and participation. If your unit has individual youth accounts, managing them is an important job and one of the most questioned by parents. These accounts are bookkeeping accounts, not separate bank accounts. Make sure to keep the information up to date and readily available. Paying your own way is a fundamental principle of the Boy Scouts of America. It is one of the reasons why no requests for contributions from individuals or the community are permitted by units. Young people in Scouting are taught early on that if they want something in life, they need to earn it. An annual unit participation fee, too often completely contributed by parents, does little to teach a boy responsibility.
The Tax Court does seem give organizations like the Boy Scouts quite a bit of room to distinguish themselves from groups like Capital Gymnastics:
Moreover, 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 the fundraising is a tiny fraction of the organization’s overall function; here, the fundraising is, instead, the admitted “primary function” of the organization
The Individual Youth Accounts of the Boy Scouts are also supposed to be part of the character development program – A Scout is Thrifty. Also some of the charges that are offset are fairly de minimis unlike those of Capital Gymnastics.
The assessments at issue were not arguably de minimis charges that might be covered by a child’s paper route or babysitting, but rather were serious parental obligations of as much as $1,400 per year (on top of already considerable tuition of up to $330 per month, plus national dues, registration fees, equipment expenses, and travel expenses).
All in, anyone running a pure booster club had best avoid individual fundraising accounts, even if they still see them working for Scout Troops.
You can follow me on twitter @peterreillycpa.