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Moving away from ISA’s

fundraising scout accounts

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#21 DuctTape

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Posted 29 September 2015 - 04:24 PM

I take a very different approach. One of the benefits I and others who posted gained from scouting had to do with financial management. The way I see it, the isa and even troop accounts done "all legal" far too often take away the opportunities from the patrol and the individual scouts to learn something about money and finances. One troop I volunteered at did great fundraising, it was all organized by the parents. The scouts just showed up to "work". The amt of $ raised was considerable. Every campout (all activities for that matter, even dues) were funded by this event. The only exception was a partial funding of summer camp. So besides the event being adult run, the biggest problem I saw was the spending of the $. Campout with 4 patrols, they all show up to the store with their menus and are "allowed" $10 per boy. The patrol gathers up all their food and goes to checkout with the troop treasurer (adult) who writes a check for the food as long as it came in under the maximum. The boys were denied the opportunity to learn about collecting $ from patrol mates, remembering to even bring it, etc... When I mentioned it to the SM, the response was "its easier this way". Well of course it is easier, the boys didnt do much and learned nothing. Stosh would point out the boys learned that they dont need to do anything because the adults do it all for them. What is most sad, is I have seen many financial systems in troops which deny the boys the opportunity to learn to do things for themselves. Isn't that kind of the point of all this?

So my take is not what is legal, blah blah, but instead what provides the best opportunities for the boys to learn to do for themselves. Certainly not accounts managed and controlled by the adults.

Edited by DuctTape, 29 September 2015 - 04:26 PM.

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#22 Krampus

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Posted 29 September 2015 - 04:35 PM

Nice thoughts @DuctTape, but getting more than 4 boys together to do anything with all the things they're involved in is terribly difficult these days.


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#23 desertrat77

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Posted 29 September 2015 - 04:37 PM

I take a very different approach. One of the benefits I and others who posted gained from scouting had to do with financial management. The way I see it, the isa and even troop accounts done "all legal" far too often take away the opportunities from the patrol and the individual scouts to learn something about money and finances. One troop I volunteered at did great fundraising, it was all organized by the parents. The scouts just showed up to "work". The amt of $ raised was considerable. Every campout (all activities for that matter, even dues) were funded by this event. The only exception was a partial funding of summer camp. So besides the event being adult run, the biggest problem I saw was the spending of the $. Campout with 4 patrols, they all show up to the store with their menus and are "allowed" $10 per boy. The patrol gathers up all their food and goes to checkout with the troop treasurer (adult) who writes a check for the food as long as it came in under the maximum. The boys were denied the opportunity to learn about collecting $ from patrol mates, remembering to even bring it, etc... When I mentioned it to the SM, the response was "its easier this way". Well of course it is easier, the boys didnt do much and learned nothing. Stosh would point out the boys learned that they dont need to do anything because the adults do it all for them. What is most sad, is I have seen many financial systems in troops which deny the boys the opportunity to learn to do things for themselves. Isn't that kind of the point of all this?

So my take is not what is legal, blah blah, but instead what provides the best opportunities for the boys to learn to do for themselves. Certainly not accounts managed and controlled by the adults.

DuctTape, well said.

 

The troop sounds like more like a cub pack than a scout troop.   Unfortunately, we are seeing this more and more, not only in scouts but also in school and sports.  Mom and dad doing everything and the kids show up and have fun.   As you said, the best way is to learn for themselves (how to organize, budget, raise funds, etc.).

 

As I look back, the best way I learned about money was as a young patrol member, planning a menu, making a food list (after checking the patrol box/cupboard for what was on hand), collecting money, and shopping as a patrol.   The concept is sound.   Learning what a dollar is worth...how to hunt for a bargain...how to plan...all good stuff to be used in real life, which is right around the corner when you're a scout.


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#24 qwazse

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Posted 29 September 2015 - 05:17 PM

I was one of those who insisted for the usual fare (including amassing a couple grand over a couple of years for an HA), this is a non-issue. But let's suppose you want to go forward with making the treasurer's life a little easier and phase out ISA's.

 

It's simple. Johny's $1000 for Philmont stays allocated to that purpose. He can also add to that from his electronic device consulting service (the modern lawn-mowing equivalent) to pay his fees. Jimmy's $50 debt for camp overages will either be payed by him (from his online game-FAQ writing business) or out of the troop's operating budget. He defaults, you all owe. 'Nuff said.

 

Treasure then says, "No more splitting fundraisers into ISA's."

 

Done.


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#25 Hedgehog

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Posted 29 September 2015 - 08:41 PM

I was one of those who insisted for the usual fare (including amassing a couple grand over a couple of years for an HA), this is a non-issue. But let's suppose you want to go forward with making the treasurer's life a little easier and phase out ISA's.

 

It's simple. Johny's $1000 for Philmont stays allocated to that purpose. He can also add to that from his electronic device consulting service (the modern lawn-mowing equivalent) to pay his fees. Jimmy's $50 debt for camp overages will either be payed by him (from his online game-FAQ writing business) or out of the troop's operating budget. He defaults, you all owe. 'Nuff said.

 

Treasure then says, "No more splitting fundraisers into ISA's."

 

Done.

 

That makes the most sense.  The answer is one of balancing prior commitments (you get what you raise) and compliance with your reading of the BSA/IRS guidelines.

 

However, there is a lot of grey area in the BSA/ IRS guidance (and I wrote that before rereading the Bryant on Scouting article "But it’s not that simple. And the explanation won’t be as black and white as you’d like. That’s because the IRS rules governing things like individual Scout accounts have a lot of gray areas.")  I've read the IRS guidance that  is out there and it is less than clear what "substantial" private benefit means.  It is clear that running a fundraiser for a soccer club and having all the net proceeds pay for the individual players expenses is a substantial private benefit.  Beyond that, it is a judgment call.

 

What if a scout gets of the gross proceeds of the popcorn they sell?  A portion goes to National/Council (36%), a portion to the Troop (18%) and a portion goes to the Scout's ISA (15%) to offset costs realted to Scouting.  Is that "substantial" especially in light of the other activities of the chartered organization (of which all of the funds are used for example, church purposes) and the de-minimis level of popcorn sales (e.g. say $10,000 of which the CO/Troop gets $3.400 and puts $1,500 into the ISAs)?  BSA says 30% has been found to be substantial but this is 20% (15%/70%).  If you look at the $1,500 as part of the CO's fund raising (let's say $1,000 a week for 52 weeks for a church), the percentage is 2.8% which BSA says 2% has been held to be insubstantial.  

 

The IRS guidance in response to a Cub Scout Pack's ruling request was "Earmarked accounts may not be compatible with continued tax exemption. Such a decision cannot be made without considering all of the facts and circumstances. "  Talk about being equivoqual.

 

The safest route is not to use ISAs.   If you do use them, don't credit the scout the full amount of the net receipts of their sales.  If you are doing a fundraiser for High Adventure (which would entail more than the typical amounts done for popcorn sales), have all the scouts who are going participate.  Then the funds received offset the cost of the trip in total rather than being applied to any specific scout.  

 

Ultimately, the answer is my favorite lawyer answer... "it depends."


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#26 Lurking...

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Posted 29 September 2015 - 08:42 PM

Nice thoughts @DuctTape, but getting more than 4 boys together to do anything with all the things they're involved in is terribly difficult these days.

This is why I like the dynamic of patrol accounts where the boys in the patrols work together for a common goal.  The benefit is a shared benefit and not singularly personal.


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#27 boomerscout

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Posted 02 October 2015 - 07:58 AM

"I wonder how many kids' parents are claiming those popcorn prizes -- especially those gift cards -- given by council as untaxed income"

 

If the gift card is awarded and given to the Scout, then it is doubtful there is any income tax liability.  Most Scouts' income is rarely even as large as the standard deduction.

 

"But money earned from fundraisers must primarily be used in a way that benefits the entire unit, McGowan says. The nonprofit status of the BSA and of the unit’s chartered organization is at stake." -- from the article mentioned

 

Comparing money raised by the troop with the total amount of money raised by a chartering organization seems to be an effort to game the system rather than embracing the spirit of the law and of BSA rules & regs -- which say no to ISAs


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#28 CalicoPenn

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Posted 02 October 2015 - 08:53 AM

A few thoughts:

 

Thought one: it's unlikely that any CO, unit or individual will be investigated by the IRS for the use of ISA's - the IRS just doesn't have the resources to investigate every unit - it's only likely to happen if your CO is being investigated which might trigger a look at their unit's operations, or in the case of someone filing a complaint with the IRS (perhaps by a parent ticked off that Johnnie Scout got $2K from fundraising dollars to go to Philmont while their own son got nothing (and no, the IRS doesn't care if Johnnie worked hard at fundraising and Billy did nothing).

 

Thought two: if your unit is investigated, the "But it's not against BSA rules or policy" won't be an effective defense.

 

Thought three: I'm always leary of "work-arounds" to IRS rules and laws - they tend to make things worse for people if the IRS does come knocking.

 

Thought four:   don't rely on the precentage game as means to determine if an inurement is substantial or not - there are cases where it's been found the percentage can be as low as 4% for something to be considered an illegal private inurement - and it's not necessarily 4% of a great deal of money that triggers a violation - in once case, 8% or $875 was enough to be considered a private inurement.

 

Thought five:  Be careful as you try to parse what the IRS means by "private individual having a personal and private interest in an organization"  In general, the IRS considers that any individual member of an organization meets the definition of a private individual with a personal and private interest in an organization.  In addition to the teamwork that comes with working with his Troop and Patrol and working towards the benefit of all that comes in the Patrol structure, a Scout simutaneously has their own personal interest in Boy Scouting through the earning of ranks, up to Eagle Scout - desiring and earning Eagle Scout, or Life, or First Class, is not a group project - it's an individual goal and project.

 

Thought six:  Despite the poor direction from the BSA (really, how difficult is it to just flat out state that ISP's are allowed in a "banking" sense, where a Scout can deposit their own money with the Troop to help save up for camp or Philmont, etc. - like an old fashioned Christmas Club account - but that dollars raised in fundraisers are not allowed to go into ISP's at all, though a unit may provide funding help for camp and Philmont provided that all Scouts are given that equal opportunity) it should be pretty clear that ISP's are simply more trouble than they're worth. 

 

Thought seven: In regards to thought one - having said that it's unlikely a unit will get caught, there is a more important principle here at work, and I'm reminded of it in a resurrected thread about Win All You Can and the takeaways from this  Wood Badge activity - one of those takeaways is that living the Scout Oath and Law is neither limited to Scouting only nor is it limited to the youth.  We're Scouters, we should be modeling the Scout Oath and Law to our Scouts in our everyday lives, and especially in our Scouting life and should not be trying to find work-arounds to IRS rules or ignoring the rules altogether because "we probably won't get caught".  We should eliminate ISA's completely, simply because it's the right thing to do. 

 

 

All that being said, and knowing it's an imperfect solution, I agree with Qwaze here in that making the transition shouldn't be abrupt where past promises are no longer honored.  Honor the past promises but eliminate continued private enrichment from fundraising dollars starting right away.


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#29 Lurking...

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Posted 02 October 2015 - 09:22 AM

I love the analogy of safety in numbers.  That works as long as you are buried deep in the herd, but if the wolves are at the edges, where you are, it could be a bad day coming down the road.  I have noticed how this works every day.  The vast number of drivers out there drive over the speed limit and for some reason a lot of people are caught and fined, their pocketbooks take a hit.  The added risk to oneself and the people's safety entrusted to you in your vehicle is also increased as the speed increases.  

 

So if someone bends the speeding laws, why not other laws?  Everyone threshold of lawbreaking varies, do you wish to entrust your son to someone when you don't know their threshold for legal compliance?

 

I drive my wife nuts with my driving at or less than the speed limit depending on weather, road conditions and traffic.  Haven't had a speeding ticket since the early 1970's.   The last time I was pulled over by a police officer was for having fuzzy dice hanging from the mirror of my '74 Nova.  :)  

 

I guess I do a lot of risk taking in the woods in search of adventure, but when it comes to everyday safety and the safety of others (CO's non-profit status) I get very serious about sticking with the rules.  Just remember, Al Capone was taken down for tax fraud, you could be next.  Sport booster clubs have already felt the sting.


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#30 Krampus

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Posted 02 October 2015 - 10:53 AM

ISA's are not prohibited nor will it raise a red flag just because you use them. That is a myth backed up here. You need to avoid private benefits and a few other things. You'd be surprised how easy it is to get a tax attorney or CPA to review the applicable tax code and advisories and your unit's approach. Many people will do this pro bono if your paperwork is good. We had a parent (with this background) look over our stuff.


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#31 CNYScouter

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Posted 02 October 2015 - 11:17 AM

From further reading it looks like the only way to be safe is to just not use ISA's

 

I also see that way we run some of our fundraisers just won't fly under these rules

For can & bottle drives not only do scouts get credit but parents and siblings time count towards how much a Scout earns.

 

Also, our CO is a church.

Due to low membership it is combining with another church.

I don't know if this would trigger any type of audit but I would think that our books would be at least looked over when this happens


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#32 gumbymaster

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Posted 02 October 2015 - 11:42 AM

I drive my wife nuts with my driving at or less than the speed limit depending on weather, road conditions and traffic.  Haven't had a speeding ticket since the early 1970's.   The last time I was pulled over by a police officer was for having fuzzy dice hanging from the mirror of my '74 Nova.   :)

 

Yeah, my co-workers won't let me dive (them) to functions if they can help it, I'm too slow (compliant).  My wife has learned to live with it, if it's my car; but is always ready to take over if I "need her to drive" (hopefully asked).


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#33 walk in the woods

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Posted 02 October 2015 - 11:51 AM

So if someone bends the speeding laws, why not other laws?  

 

 

Yeah, my co-workers won't let me dive (them) to functions if they can help it, I'm too slow (compliant).  My wife has learned to live with it, if it's my car; but is always ready to take over if I "need her to drive" (hopefully asked).

 

Both you guys stay to the right then during rush hour. :).


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#34 DuctTape

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Posted 02 October 2015 - 01:07 PM

My wife always has me drive, then complains I am not going fast enough.
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#35 Lurking...

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Posted 02 October 2015 - 02:22 PM

Both you guys stay to the right then during rush hour. :).

 

If you are driving the speed limit, what difference does it make what lane you drive in?  The only people that would be passing you would be those who are driving illegally.  :)


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#36 Lurking...

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Posted 02 October 2015 - 02:26 PM

ISA's are not prohibited nor will it raise a red flag just because you use them. That is a myth backed up here. You need to avoid private benefits and a few other things. You'd be surprised how easy it is to get a tax attorney or CPA to review the applicable tax code and advisories and your unit's approach. Many people will do this pro bono if your paperwork is good. We had a parent (with this background) look over our stuff.

 

Okay, I'm game to learn more about this but I'm having a difficult time trying to figure out to avoid private benefits and some other things and still have an individual account based on their efforts.  I.e. a salesman gets paid by what he sells, and others get paid for the time they work.  Isn't this nothing more than compensation for participation in the fundraiser?  Sorry for being thick on this, but isn't this the rationale for the problems the booster clubs were getting into?


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#37 Krampus

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Posted 02 October 2015 - 02:45 PM

Okay, I'm game to learn more about this but I'm having a difficult time trying to figure out to avoid private benefits and some other things and still have an individual account based on their efforts.  I.e. a salesman gets paid by what he sells, and others get paid for the time they work.  Isn't this nothing more than compensation for participation in the fundraiser?  Sorry for being thick on this, but isn't this the rationale for the problems the booster clubs were getting into?

 

My advice would be to talk to a tax attorney because I am sure I am glossing over the details. What I understood from our meeting with ours I posted here. What was clear was that you could not hold a generic fund raiser and deposit what the boys sold into their ISAs. You could have a generic fund raiser and put all money in the general account and then split equally among all scouts. You could also have a fund raiser for all scouts going to [insert activity] and all participating scouts should have an equal share of those proceeds put in their ISAs while excluding those scouts who did not participate. While this looked like a private benefit, our guy noted a few IRS guidelines that negated the appearance of private benefit for that scenario.

 

It's convoluted as you would expect from tax code and guidelines, that's why we hired an expert. ;)


Edited by Krampus, 02 October 2015 - 02:46 PM.

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#38 Lurking...

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Posted 02 October 2015 - 03:02 PM

I can see equal amounts for all boys, and in our troop it applies whether they worked on the activity or not.  But we don't need ISA's for that.  On the other hand you have boys that did work pay $XX and those that didn't pay $YY.  Still no need for ISA's.

 

What I'm trying to figure out the scenario of what actions necessitate the need for ISA's.  Little Johnny needs $XXX for Philmont.  Troops says he has to raise $YYY to qualify for the troop to pay his way for the trek.  He can come up with that amount by participating in selling so much popcorn or writing a check.  No account necessary.

 

The part that bothers me is that the "account" is viewed as a bank account whereas the money somehow belongs to the scout.  It doesn't it belongs to the CO and distributed through the unit.  I can see where that might be interpreted as private benefit.

 

:) I also get a little leery of IRS interpretations because they come right out and tell you that what they say up front doesn't mean anything to an IRS auditor.  


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#39 gumbymaster

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Posted 02 October 2015 - 05:45 PM

OK, I'm not a CPA but I did stay in a Holiday Inn last night  (ok, not really)

 

As I understand it ... (largely based on interpretation of Bad Wolf's unit's former IRS accountant)

  • ISAs - for example a virtual account for each scout maintained by the troop is fine.
  • Scouts / Parents deposting personal funds (check/cash) into the ISA for the scout to later use for activities and events (also ok)
  • Troop sells a widget as a fundraiser.  Troop makes $5/widget and puts $2 of that into the Scout ISA and $3 into the general fund (does not pass the IRS litmus test - individual level of effort differentiates the contributions to the ISA)
  • Troop sells widget as a fundraiser and makes a total of $1000.  $400 is evenly divided between all the scouts of the troop and credited to their ISAs the rest to the Troop general fund.  (Probably passes the rule as long as Scouts cannot withdraw more from the ISA than the personal funds contributed if they leave and other funds are restricted to a scouting purpose - remaining amount goes to the troop)
  • Troop sells widget as above and the $400 is evenly divided only among the scouts participating in the fundraiser.  (more questionable, but seems to pass the rules)

All numbers are arbitrary and do not represent thresholds of actual values that make things allowable or disallowed.

 

In all cases, a departing scout cannot cash out anything more than what they personally contributed.  Scouts cannot transfer ISAs to other units if they transfer.  There are restictions on use of the raised funds (camp fees, activity costs, maybe camping equipment or uniforming) and a mechanism to verify validity of of any reimbursements for stuff outside the unit.

 

---

Key things to remember:

 

even if you talked to an actual IRS agent for guidance (1) prove it (2) IRS agents are not liable for misinformation they provide a taxpayer and that does not excuse you from the due funds (but it might get you out of interest and penalties if you have the guidance in writing).

 

I'm not an Attorney or a CPA, but I do run the books for several companies and a non-profit.  This advice is only as good as any other advice from the internet (i.e. worthless), consult the appropriate experts if the answer really matters.


Edited by gumbymaster, 02 October 2015 - 05:47 PM.

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#40 Hedgehog

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Posted 02 October 2015 - 07:21 PM

Comparing money raised by the troop with the total amount of money raised by a chartering organization seems to be an effort to game the system rather than embracing the spirit of the law and of BSA rules & regs -- which say no to ISAs

 

 

BSA rules do not prohibit Individual Scout Accounts or a portion of the proceeds of fundraising going to those accounts.  The BSA's Product Sales Guide (Updated August 2014) provides:

 

Private benefit rules of the Internal Revenue Service prohibit those involved in nonprofit fundraising from receiving a substantial personal benefit for their efforts. Some practices where dollar for dollar credit is provided for the sole benefit of the person who sold product based upon amount sold could violate the private benefit prohibition. While the BSA has not endorsed “Individual Scout Accounts” for private benefit of individual Scouts who participate in fundraising because of the IRS rules, unit fundraising designed to make Scouting affordable is a fundamental part of Scouts “earning their way” (emphasis added).

 
Not endorsing something is a fancy way of saying do what you want but we aren't liable if you run afoul of the IRS rules.  The BSA knows how to say you can't do something when it wants to.
 
So that takes us to the tax rules.  Let's start with Internal Revenue Code Section 501©(3) which provides an exemption for charitable organizations:
 
Corporations, and any community chest, fund or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or education purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual... (emphasis added).
 
The Internal Revenue Service's regulation, 26 C.F.R. section 1.501©(3)-1©(1), provides:
 
An organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501©(3). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose” (emphasis added) 
 
The IRS's regulation, 26 C.F.R. sec. 1.501©(3)-1(d)(1)(ii), continues to provide:
 
An organization is not organized or operated exclusively for one or more of the [tax-exempt] purposes * * * unless it serves a public rather than a private interest. Thus, to meet the requirement of this subdivision, it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests (emphasis added).
 
Read together, the IRS's regulation provides that any private benefit would not be an exempt purpose and therefore any activities related to providing the private benefit would not be in furtherance of an exempt purpose.  If that is the case, then an inquiry needs to be made whether those activities are more than insubstantial part of the organization's activities.  It the activities are more than an insubstantial part, the organization loses its tax-exempt status because it is no longer engaged primarily in activities furthering its tax exempt purpose.
 
The case that has caused all the concern about ISA accounts is the U.S. Tax Court's decision in Capital Gymnastics Booster Club, Inc. v. Commissioner, T.C. Memo. 2013-193.  If you are really bored and need something to help you fall asleep, you can read it here:
 
 
In that case, the Tax Court held that a gymnastic booster club was not tax exempt because $32,920 or 93% of the funds it raised were used to offset expenses which otherwise would have been paid by its members parents based on the members participation in fund raising.  The Tax Court found that "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."  However, the Tax Court distinguished Capital Gymnastic's activities from other fundraising, stating:
 
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. 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. 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).
 
Under the BSA, each Pack, Troop or Crew is "owned" by its chartered organization.  It is part of that chartered organization -- just like a church youth group is part of the church (this is why Packs, Troops and Crews can use their CO's tax exempt status to purchase items free of state sales tax).  So the question is whether allocating a portion of the proceeds of a once-a-year fundraiser to Individual Scout Accounts with the remainder of the proceeds going to another charitable organization (the BSA) and to the Troop as a whole results in the chartered organization to no longer be primarily engaged in tax exempt activities.  Such a question requires looking at the proportion of the fundraising that goes to an individual (as did the Tax Court case as well as the cases cited in that decision) and the relationship to the other activities done by the charted organization (see the band example in the Tax Court's decision).
 
As I said in my original post, this isn't black and white but a lot of grey. 
 
This post is commentary and provided for informational purposes.  Do not rely on this post as legal advice.  Please consult your own attorney or accountant for any determination of how the above discussed statutes, regulations and cases apply to you or your charted organization.

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