Moving away from ISA’s

[Hedgehog]

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).  And if you ask six lawyers or accountants you may also get six different answers.  Anyone's opinion (including mine) is just that... an opinon and, as such, is not binding on any court.  In Tax Court, the burden of proof on factual issues is on the taxpayer, tax imposition statutes are construed against the state (tax laws should be specific) and tax exemptions (such as 501(c )(3)) are construed against the exemption (we don't want exemptions to swallow the rule).  Innocence or guilt is not determined by Tax Court -- those are criminal matters handled in District Courts.  Tax Courts merely determine the legal consequences under the tax code.

 

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.  Even if Billy and Rusty get the same, that is a private benefit because the money is able to be spent to benefit them directly by reducing costs of trips they go on.  A private benefit is not illegal -- you can't get arrested and go to jail.  A private benefit which is substantial would jeopardize the charitable organization's tax-exempt status.

 

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.  This is wrong.  If the fundraisers benefit the unit as a whole (e.g. buy new tents, cover program costs, buy merit badges, reduce the cost of summer camp for all scouts), there is no problem   A unit could support all of its activites based on fundraising without jeopardizing it's chartered organization's exempt status.  The problem is when those funds become allocated to a particular scout.

 

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.  Yes. It would be either a cost of fundraising or an insubsantial private benefit.

Edited October 5, 2015 by Hedgehog

[Hedgehog]

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.

 

I think you misuderstand what I'm saying.  If the reduction is based on the amount THAT scout raised, it is a private benefit.  If the reduction is based on the application of the amount raised to offset the cost of all scouts, it is not a private benefit.

 

Private benefit is not defined in the Internal Revenue Code or the IRS's regulations.  The meaning can be discerned (a legal word for "guessed at") based on IRS rulings, pronouncements and Tax Court and other cases.  The idea of private benefit most frequently is applied in the context of the officers of a charity getting excess compensation or a charity to fund medical expenses of cancer patients only funding the expenses of the charity's founder.  So you can see how the analogy from people running charities soley for their personal benefit to ISA's is somewhat difficult to translate.

 

What you say about fundraising for a specific event (i.e. send the scout's to Philmont) is allowed but the benefit cannot be targeted just to the scouts who raise those funds, but must be targeted to all scouts participating in the activity.  What you said is not spelled out in the Internal Revenue Code (the relevant portion was reproduced in my post on page 2), the IRS's regulations (again, I reproduced what was relevant on page 2) or in IRS Rulings (the only one requested on ISAs declined to rule and the other rulings don't address the "shared equally among the participants").

 

Another way to think of it is if you get a benefit based on the amount you fundraise... it is a private benefit.  As I've said in my prior posts, that just means you have to determine if the activities are substantial (or as the regulations say, "not insubstantial") compared to the chartered organization's activities. 

Edited October 5, 2015 by Hedgehog

[Krampus]

 

What you say about fundraising for a specific event (i.e. send the scout's to Philmont) is allowed but the benefit cannot be targeted just to the scouts who raise those funds, but must be targeted to all scouts participating in the activity.  What you said is not spelled out in the Internal Revenue Code (the relevant portion was reproduced in my post on page 2), the IRS's regulations (again, I reproduced what was relevant on page 2) or in IRS Rulings (the only one requested on ISAs declined to rule and the other rulings don't address the "shared equally among the participants").

 

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?

 

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?

Edited October 5, 2015 by Krampus

[Hedgehog]

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.ustaxcourt.gov/InOpHistoric/CapGymMemo.Gustafson.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 fundraisedâ€. 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)?

 

[Krampus]

@@Hedgehog, so if my troop raises $2000 that money has to go to ALL members, even those not going on the event for which the money was raised, as well as those who did not participate at all? 

 

Again, why would ANYONE raise money if that were the case? No one is going to participate if there's a free lunch. My troop has experienced this once and we eventually stopped the fund raising.

 

As long as we have a piece of paper for the IRS saying we are good, we're good.

[Hedgehog]

@@Hedgehog, so if my troop raises $2000 that money has to go to ALL members, even those not going on the event for which the money was raised, as well as those who did not participate at all? 

 

Again, why would ANYONE raise money if that were the case? No one is going to participate if there's a free lunch. My troop has experienced this once and we eventually stopped the fund raising.

 

As long as we have a piece of paper for the IRS saying we are good, we're good.

 

That is not what I was trying to say.  If you have a fundraiser for an event, it can be split among the people going to the event.  You can even require everyone going on the event to participate in the fundraiser (everyone going is required to spend two hours either making or selling hogies on Superbowl Sunday).  There is no need to split that among scouts not going on the activity.  You just can't provide a benefit (i.e. a discount) to those who did fundraising without creating a private benefit. There is a 2011 Field Directive (http://www.irs.gov/pub/irs-tege/booster_club_field_directive_6-27.pdf) that says as much:

 

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).

 

I agree on the participation / free lunch issue.  However, you can devise fundraisers where people are required to participate (hogie sales, bake sales, car washes, etc.) for the troop or specific events (you can make it so every scout has to do 4 hours of fundraising a year).

 

As I stated a couple of times, having a private benefit is not automatically fatal to the chartered organization's tax-exempt status.  The private benefit cannot be "substantial."

 

In my opinion (that a $1.79 can get you a cup of Starbucks coffee), having 10% of each scout's popcorn sales above $50 (about 13% of the total proceeds and less than 30% of the Troop's proceeds) used to offset expenses for camping trips would either be an incentive (cost of raising funds) or insubstantial.  You add that to event specific fundraisers (Philmont beef jerky sale, Jambo bagel sale, High Adventure hogie sale) with required participation and you have what you need.  For anyone's troop or pack, they need to get their own legal advice and should not rely on anonomous commentary on the internet.

 

The strength of the piece of paper you have depends on what that piece of paper actually is (Private Letter Ruling or something else) and what it says (as well as how close you are to what it says).

Edited October 5, 2015 by Hedgehog

[Krampus]

@@Hedgehog, and if someone going on the event says he does not want to participate in fund raising. How do you compel him to? BSA won't let you preclude him from attending if he's a paying member. So he gets the money you allocate to everyone else. There's nothing to compel him to participate.

[vumbi]

As far as I know we've never had scout 'accounts'. I'm not sure why anyone would have these things for that matter. It seems like a needless source of confusion and potential conflict.

[Hedgehog]

@@Hedgehog, and if someone going on the event says he does not want to participate in fund raising. How do you compel him to? BSA won't let you preclude him from attending if he's a paying member. So he gets the money you allocate to everyone else. There's nothing to compel him to participate.

 

I"ve never had to deal with the BSA letting someone go over a Troop's objection, so I can't comment on the ability to enforce a participation rule.  Nonetheless, I can't imagine any of our scouts objecting to being helpful and participating in fundraisers that they have picked to offset the troop's cost of an activity they want to do.

[KenD500]

@@Krampus - maybe the participation or attendance of the event hinges on his attendance and participation at the fundraising.

 

No participation at the fundraiser = no participation at the event.

 

It would really boil down to the parents' attitude.

[MattR]

I read that gymnastics document and it's kind of like reading tea leaves. Trying to compare it to a troop is a bit of a challenge. On the one hand, it did say that because all the members of the fund raising organization got a benefit there was a violation. So does that mean, since all the scouts are a member of the fund raising organization, that we can't pay for anything for a scout that a parent could pay for? But there was also the comment along the lines of "unlike a church youth group, where the primary purpose of the organization is not to raise money, it's okay to have bake sales and the like." Read what you want.

 

One thing that brought up a huge flag for me was the comment about the grocery store coupons. Kroger stores have these, we use them, and make a lot of money on them. That's going to be a topic. Where a scout actually does the work for the fund raiser I have no problem giving them most of the money but the boys are clueless about grocery store coupons. I'd rather see that money go into a big pot.

 

Here's an idea for how to divvy money up. Scouts get points for participating in any activity (outings, fundraisers, service projects). At the end of each quarter all the raised money is divided by the number of points handed out and payed out by the number of points each scout has. It's not a one for one payment and it benefits those that participate the most.

[Hedgehog]

See below...

 

I read that gymnastics document and it's kind of like reading tea leaves. Trying to compare it to a troop is a bit of a challenge. I'm glad you enjoyed it... lawyers and accountants shouldn't have all the fun.

 

On the one hand, it did say that because all the members of the fund raising organization got a benefit there was a violation. Actually, it said that the violation was that only the members that participated in the fundraisers got a benefit.

 

So does that mean, since all the scouts are a member of the fund raising organization, that we can't pay for anything for a scout that a parent could pay for? No.  A Troop or Pack can pay for or offset the cost of activities that are in furtherance of the organization's charitable purpose (e.g. outdoor adventures).  The reduction must be equal among all members otherwise there is a private benefit (e.g. reduction based on amount of time spent fundraising or amount raised by particular scout).

 

 

But there was also the comment along the lines of "unlike a church youth group, where the primary purpose of the organization is not to raise money, it's okay to have bake sales and the like." Read what you want.  This really goes to the substantiality test.  Capital Gymnastic's sole purpose was to raise funds to subsidize the cost of the trips and fees.  Most chartered organizations and scouting in general have primary purposes that are more broad and funraising is a small part of the chartered organization or unit's activities.

 

One thing that brought up a huge flag for me was the comment about the grocery store coupons. Kroger stores have these, we use them, and make a lot of money on them. That's going to be a topic. Where a scout actually does the work for the fund raiser I have no problem giving them most of the money but the boys are clueless about grocery store coupons. I'd rather see that money go into a big pot.  Agreed.  If mom and dad buy $1,000 worth of groceries and scout son gets $50 that is a private benefit.  More problematic is that the 5% is taken as a charitable deduction by Kroger and charitable deductions should not be provided for donations that are earmarked for a specific person (there was an issue with that by the LDS Church where donations were earmarked for a member's mission -- the church lost that battle and now such donations are not deductable as charitable donations.)

 

Here's an idea for how to divvy money up. Scouts get points for participating in any activity (outings, fundraisers, service projects). At the end of each quarter all the raised money is divided by the number of points handed out and payed out by the number of points each scout has. It's not a one for one payment and it benefits those that participate the most.  This constitutes a private benefit under Capital Gymnastics that also used a points system to divide up the money based on effort.  Anytime that money is allocated to a specific scout based on the effort or amount of fundraising done, it is a private benefit.

[Hedgehog]

To summarize my thinking (not legal advice, just commentary):

 

1.  Anytime the funds raised by scouts are used to reduce a specific scout's costs based on the level of their fundraising activity or the amount they raised is a private benefit.  If the amounts are credited to an ISA and then used -- this is clear.  If the unit tries to get creative (e.g. "the troop decides that the scout's credit is applied to reduce that scout's cost of the outings he goes on, starting with the first outing and continuing until the credit is expended") doesn't work either because it has the same effect.

 

2.  Fundraising for a specific purpose, such as a high adventure trip, is permissible.  However, the amounts raised must used by the Troop to reduce the cost of all participants.

 

3.  If there is a private benefit, the question becomes one of substantiality.  Some of the considerations in making that determination are:  a) is substantially all of the amounts raised credited to the scout (Capital Gymnastics was 93%); b) is there any benefit for the group as a whole (really the inverse of the first question); c) what is the magnitude of the private benefit (are we talking $100 per scout or $2,500 per scout); d) how substantial are fundraising activities that result in a private benefit related to other scouting activities (e.g. scouts fundraise every other weekend but take trips three times a year vs. one fundraiser per year); d) what is the magnitude of the private benefit in comparison to the finances of the charted organization (because it is the chartered organization's tax exemption that is at stake; and e) how substanital are the fundraising activities compared to the chartered organization's overall activities.

[CNYScouter]

It was a pretty heated Committee meeting over the weekend when this topic was brought up.

One question brought up was we have 2 or 3 families who have come out and said they don't want to participate in fundraising and just want to write a check for any of their son's expenses.

How do they fit into this?

Currently we have one fundraiser that all proceeds go to the Troop in which they do participate but that's it.

 

I would think that a point system could become a nightmare to track and cause more complaints than it's worth

here's an example

Scout A went on outings, did service projects but did no fundraising

Scout B went on outings, did no service projects but did fundraising

each got the same number of points so got an equal share of monies raised

I think we would have some parents up in arms over this

 

edited: (I didn't see Hedgehog's response which answers this question he posted while I was writing)

Edited October 6, 2015 by CNYScouter

[MattR]

See below...

 

This constitutes a private benefit under Capital Gymnastics that also used a points system to divide up the money based on effort.  Anytime that money is allocated to a specific scout based on the effort or amount of fund raising done, it is a private benefit.

Capital Gymnastics' point system was one dollar earned equals one point earned equals one dollar donated. That's pretty clear that each parent gets a reduction exactly proportional to the amount of money they spent at the grocery store. What I'm talking about is based on participation. Just to pick numbers, say every $10 raised is 1 point, as is going on 1 campout, and a service project is worth 2 points. One scout raises $100 and goes on 2 campouts, and a second scout raises no money and goes on 6 campouts and a service project. Do the math and the first scout gets $60 and the second gets $40. If the first scout had not gone camping then the two would split the money evenly. Throw in 50 more scouts and a lot more events and nobody knows how much money they'll get. The benefit is based on participation, not just fund raising. This would also handle the problem of non participants getting no money.

 

The fact that the money has to be spent evenly is a real problem with a boy scout troop because everyone is doing different things. We can't say we are just going to have a fundraiser for Philmont, especially with the Kroger cards.

 

In all honesty, nobody will ever look at our books. We asked our CO if they wanted to look at them and when we told them the numbers they said no, it's not worth their time. So the IRS will also never see them. The real questions are what kind of lessons can we teach the scouts and how do we best support the troop? For scouts that go door to door selling popcorn or camp cards, I honestly would be fine giving them all of the money. That's a good lesson for the scouts and most parents explicitly tell their kids, you want to go on a high adventure, pick one you can pay for because you will. For grocery cards and events where the adults are doing a non trivial amount of work, I'd rather distribute it based on participation. We have scouts that can't afford to shop where the grocery cards are so they aren't getting that money. When we hear about kids that can't afford camp we pay for it, whether it's the general fund or just passing a hat, but some parents won't ask.