Moving away from ISA’s

[CNYScouter]

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

[gumbymaster]

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).

[walk in the woods]

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. .

[DuctTape]

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

[Stosh]

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.  

[Stosh]

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?

[Krampus]

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 October 2, 2015 by Krampus

[Stosh]

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.  

[gumbymaster]

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 October 2, 2015 by gumbymaster

[Hedgehog]

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:

 

http://www.ustaxcourt.gov/InOpHistoric/CapGymMemo.Gustafson.TCM.WPD.pdf

 

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.

[Hedgehog]

Again, not legal advice but commentary...

 

 

• ISAs - for example a virtual account for each scout maintained by the troop is fine.  Not controversial.
• Scouts / Parents deposting personal funds (check/cash) into the ISA for the scout to later use for activities and events (also ok) Not controversial.
• 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)  Agreed.  This constitues a private benefit and could impact chartered organization if the fundraising for a private benefit is not an insubstantial part of the charted organization's overall tax exempt activities.
• 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)  Probably is a good answer.  The fundraiser benefits all members whether or not they participate which is distinguishable from the Capital Gymnastics case.  However, there appears to still be a private benefit because each member gets to spend it to offset expenses they otherwise would have to pay.  If there is a private benefit, then you have to address the substantiality issue.
• 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.  There appears to be a private benefit conferred in exchange for participating although it is not dollar for dollar.  If there is a private benefit, then you have to address the substantiality issue.
• Troop has a fundraiser to reduce the cost of going to the 2017 Jamboree and the money raised by the Troop are used to reduce the cost for each scout regardless of whether they participate.  That doesn't run afoul of the rules because it reduces the cost for everyone participating in the activity.

Edited October 3, 2015 by Hedgehog

[SSScout]

Rule one:  No ISA can have a non-Scout, personal benefit.  The Scout cannot draw money to buy his own boots.

Rule two:  The Scout can work on a unit fundraiser and benefit from it for a Scout activity, in a personal way.   He can pay for his share of the unit dues. Or mom and dad can pay for the dues.  He can pay for his share of the summer camp, or m&d can pay for it. 

Rule three:  The unit sets the necessary dues for the unit to function. Patches, awards, fees to reserve camp, How the budget is met is the question, what share of the budget is appropriate for each Scout?   If you want to get really picky, you would have to bill each Scout for the individual cost of each badge/necker/Cub Cap/share of room rental he earns.  Sterling silver Eagle badges are expensive!

Rule four:  The ISA, if any, does NOT go with the Scout if and when he leaves the unit.  Any left over stays in the "general account".    I know one unit that had an Eagle graduate and he bought , with his accrued ISA, a new trailer for the Troop.

Rule five:  Assuming the fundraiser is "selling": A set proportion of each sale goes to the unit general fund, a set proportion goes in the Scout's ISA.  He sells more, he accrues more. But it is still the unit's money, not his.  The unit ultimately decides what it can be used for, up to his balance.  Unit dues? Scout camp?  Jamboree?  New trailer?  Up to the unit, NOT the Scout. Or his parents.   The balance only determines how much more they must come up with, for that purpose.

[Hedgehog]

@@SSScout Any amounts set aside for a scout account most likely is a personal benefit requiring an analysis of the substantiality of the fundraising activity in the context of the chartered organization's overall operations. 

 

in thinking about substantiality, I took a look at a lot of charities cost of fundraising and program expenses.  A good charity has a cost of fundraising of around 10% to 15% (ie.g. it costs 12.5 cents for every dollar of donations) and overhead of around 15% resulting in program spending of around 70% to 75%.  In many ways, the scout account is an incentive to raise funds for a unit when the scout receives a percentage.  That is why the Trails End awards and even Troop or Pack incentives do not present a personal benefit issue -- those incentives are part of the cost of obtaining the funds raised by the sale.  Arguably, the amounts set aside to scout accounts are part of that incentive provided they are not dollar for dollar (which was the case in Capital Gymnastics).

 

Additionally, the organization in the Capital Gymnastics case SOLE purpose was to raise funds.  Thus, providing a private benefit in terms of a dollar for dollar credit for the amounts raised caused the overwealming majority of the organization's operations to NOT be for a charitable purpose (i.e. a private benefit is not a charitable purpose).  Scouting, as well as charitable charter organizations, does more than just raise money so the kids can go on trips.  There is the educational portion of the program, there is the development of children as leaders, there is the service to the community, the giving back in terms of Eagle Projects (of which scouts in our troop tend to use their scout accounts to fund) and the religious component.  Further, Scouting is likely only part of what the charitable chartered organization does.  

 

The real test is whether the the private benefit portion of the fundraising activities is a substantial portion of the chartered organization's activities or whether those fundraising activities are insubstantial when you look at the chartered organization's activities.

 

Based on that, see comments below:

 

Rule one:  No ISA can have a non-Scout, personal benefit.  The Scout cannot draw money to buy his own boots. A non-scout personal benefit seems to be worse than a scout related personal benefit, but a personal benefit is a personal benefit whether it is buying a $100 pair of boots or putting $100 toward the costs of summer camp.  However, I agree that limiting scout accounts to paying for activities conducted by the Troop is a good idea.

 

Rule two:  The Scout can work on a unit fundraiser and benefit from it for a Scout activity, in a personal way.   He can pay for his share of the unit dues. Or mom and dad can pay for the dues.  He can pay for his share of the summer camp, or m&d can pay for it. This is still a personal benefit but is only problematic if it is a substantial part of the chartered organization's activities.

 

Rule three:  The unit sets the necessary dues for the unit to function. Patches, awards, fees to reserve camp, How the budget is met is the question, what share of the budget is appropriate for each Scout?   If you want to get really picky, you would have to bill each Scout for the individual cost of each badge/necker/Cub Cap/share of room rental he earns.  Sterling silver Eagle badges are expensive!  The problem is that when the differential in costs is determined by the amount of funds raised, it is difficult to distinguish those facts from the facts in Capital Gymnastics because a reduction in cost is the the same as income.

 

Rule four:  The ISA, if any, does NOT go with the Scout if and when he leaves the unit.  Any left over stays in the "general account".    I know one unit that had an Eagle graduate and he bought , with his accrued ISA, a new trailer for the Troop.  This is essential because it has to be the chartered organization's funds.  Funds can transfer from a Pack to a Troop within the same chartered organizaiton becasuse that isn't really a transfer.

 

Rule five:  Assuming the fundraiser is "selling": A set proportion of each sale goes to the unit general fund, a set proportion goes in the Scout's ISA.  He sells more, he accrues more. But it is still the unit's money, not his.  The unit ultimately decides what it can be used for, up to his balance.  Unit dues? Scout camp?  Jamboree?  New trailer?  Up to the unit, NOT the Scout. Or his parents.   The balance only determines how much more they must come up with, for that purpose.  It seems that this is semantics if the unit allows the scout to offset costs that they would otherwise have to pay.  In that case it becomes a private benefit.

 

The bottom line is that any reduction in cost to a particular scout based on the amount of funds they raise for the unit is a personal benefit.  Then the question is whether the extent of the activities generating that personal benefit is substantial enough to determine that the charted organization is not primarily engaged in activites furthering its charitable purpose.

 

This post is commentary and not legal advice directed toward anyone's particular situation.  Everyone is advised to consult their own laywer or accountant.

Edited October 3, 2015 by Hedgehog

[boomerscout]

It has been shown several times in the past that if you ask six different practicing IRS agents for an opinion, you will get six different answers -- none of which may help you if you are hauled in to tax court (where you are NOT innocent until proven guilty).

 

The main problem, as I perceive it, is that if Billy sells more than Rusty, then Billy gets more money than Rusty added to his ISA.  That would be a private benefit, and is illegal.

 

Other problems are some units having funders quarterly or even monthly.  They are starting to cross the line from their avowed non-profit purpose into that of commerce.

 

You can still offer motivational incentive awards if they are announced ahead of time.  For instance, the high seller could win a pair of boots in the larger fundraising activities.

[Krampus]

 

The bottom line is that any reduction in cost to a particular scout based on the amount of funds they raise for the unit is a personal benefit.  

 

 

If that were true than fund raising itself would not be allowed given your definition. Private benefit is defined in the code. Non-profits are allowed to raise funds for a particular event. They are allowed to target those funds -- as long as they are applied evenly -- to all scouts who raised funds. This is spelled out in the code.