So where exactly does it say that if Tom, Bob, Bill and Fred raise $1200 for Philmont that Zach -- who didn't sell anything, but is going to Philmont -- must get an equal share of that money?
The Capital Gymnastics case (http://www.ustaxcour...son.TCM.WPD.pdf) held that the failure to share equally among all participants constituted a private benefit.
The IRS argued:
The Commissioner objects, however, that “almost all of petitioner’s fundraised proceeds are earmarked to benefit those individuals who fundraised”. The Commissioner contends that this dollar-for-dollar arrangement constitutes inurement and private benefit in violation of section 501©(3) because the methodology furthers private interests rather than the team or the organization as a whole. (p.19)
And the Tax Court Agreed:
Applying the law to Capital Gymnastics’ facts and circumstances, we find that, in violation of section 501©(3), Capital Gymnastics 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. (p.19-20, emphasis added).
The Tax Court distingushed Capital Gymnastics' facts from other potential fact situations (some of which apply to ISAs):
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).
Now, whomever you got advice from may be focusing on the fact that those who raised money in Capital Gymnastics essentially received 93% of what they raised -- so the amount varied among those doing fund raising. To me, that was not the determinative fact in Capital Gymnastics based on the court's focus on the benefit going to those who did funraising and those who didn't do fundraising rather than the quantum amount of funds earned.
According to our inquiry to the IRS, as long as Tom, Bob, Bill and Fred get *equal* shares of the money raised it is not a private benefit and Zach is out of luck. Otherwise, Stosh -- who is neither going to Philmont nor raised any money -- would be due an equal share of the $1200 just like Zach, and that just defeats the purpose of enticing Scouts to raise money. Who is going to bust their hump selling if they can sit back and have others do it?
I'd be interested in seeing anything you have from the IRS because I've not been able to find any Private Letter Rulings on the issue. I'd be concerned that if the advice was given to someone who told it to a group to which you were part of that something may have gotten lost in translation. I agree you can raise funds divided equally for everyone participating in an activity, but disagree that you can divide it equally among funraising participants.
The organization can raise funds for a specific purpose, such as to fund the Philmont trip. Those funds need to split equally among all those going to avoid a private benefit. Those funds do not need to be split among the other scouts (whether they participated or not) because the organization decided how the fundraiser would benefit the organization. That is, a distinction can be made based on what the activity is but it can't be made based on whether or the extent to which a scout fundraises.
My concern is that your troop may think they are doing something that is perfectly fine when it may not be.
I AGREE that the rule is absurd and is contrary to everything I've been taught in life and try to teach my son about paying your own way and working hard to get ahead in life. Nonetheless, I understand its justification, why should money earned by an individual through fundraising for a charity be taxed differently than money earned by an individual through other means (e.g. a part-time job)?