The IRS has issued (yet) another adverse determination for an exempt Section 501(c)(3) youth athletic booster club for private inurement in Private Letter Ruling 202334016. The primary reason for the revocation was the maintenance of separate accounts for the student athletes where their fundraising totals were recorded and from which disbursements for the athletes’ competition expenses were paid. This ear-marking of funds for individuals based on their participation in fundraising activities runs afoul of Section 501(c)(3) because it benefits the individual and not the organization as a whole.
Since 1993 the IRS has been warning exempt booster clubs to refrain from directly tying an athlete’s fundraising efforts to their entitlement to offset expenses. Exempt Organization CPE Text Athletic Booster Clubs: Are They Exempt? gives specific examples of how organizations run into trouble, including by making parent participation in a booster club mandatory and allocating points for participation in fundraising campaigns that directly translates into decreased financial obligations for the participants. The IRS maintains that these groups cross the line from organizations supporting the promotion of sports competition, a public interest, to organizations primarily supporting their own children’s training, a private interest. However, not all organizations got the message. In 2013 the Tax Court weighed in on the side of the IRS and ruled in Capital Gymnastics Booster Club v. Comm., TC Memo 2013-193, that maintenance of separate accounts enables the booster club to reward those that engage in fundraising efforts with disbursements that result in private inurement, which is prohibited by Section 501(c)(3). The Tax Court held that tax-exempt organizations must benefit the entire group regardless of volunteer or fundraising participation.
In order to not run afoul of the private inurement prohibition as an athletic booster club, tax practitioners recommend the following best practices:
- Do not maintain separate accounts tied to individuals and no ear-marking of funds.
- Do not require fundraising participation in order to participate in athletics.
- Do not make booster club membership mandatory.
- Do not have for-profit gym owners serve as officers or directors of the booster club and do not use funds to purchase equipment or improve facilities.
- The officers and directors of the club should have say over all disbursements (individuals should not direct how funds are spent) and such disbursements should benefit all members whether they participate in fundraising activities or not.
- Fundraising programs should be broad-based including corporate sponsorships and grant solicitations, and not reliant on specific individuals’ sales.
Finally, it should be noted that the organization in PLR 202334016 filed Form 1023EZ Streamlined Application for Recognition of Exemption Under Section 501(c)(3). While this short-form application is much simpler, it is not always suitable for organizations that lack experience to know where tax pitfalls lie.