Latest Guidance on Individual Scout Accounts

[ParkMan]

On 6/23/2020 at 10:01 PM, T2Eagle said:

 

 it simply isn't true that the law is clear on this, and that use of these accounts within reason is a clear violation of the law or IRS regulations, or is contingent simply on the idea that one won't get caught.  I hold a law license, I asked a friend who is a tax practitioner to take a hard look at this, and their conclusion was that individual accounts, at least as we use them and as most troops  do, are not a violation of either the letter or the spirit of the federal statutes and IRS regulations.  As Fred8033 said, ask a different tax lawyer and you can get a different answer, I would bet that if you ask a third you'll probably get yet a third answer.  Some day, maybe, a federal court will provide a clarifying opinion that will most likely fall somewhere amongst those three legal opinions. 

Laws are often not written in a way that they can provide an answer to every question that might arise.  Regarding scout accounts, it just is not at all clear that Congress in writing its laws, or the IRS in promulgating their regulations interpreting and implementing those laws, intended to remove the protections of non exempt status from our large, complex, several thousand member CO church just because Johnny scout only pays $100 for summer camp while Jimmy scout has to pay $300 because Johnny out hustled Jimmy at popcorn selling.

You can feel strongly that your interpretation of the law is more correct, but that doesn't mean that those with a differing opinion are acting in bad faith.

I've watched this issue for years and had countless discussions with countless Scouters and even a few professionals on the topic.  After all this, my understanding matches that of @T2Eagle.  Where the IRS was initially pushing back was on booster organizations that existed for the purpose of sending individual kids on trips - i.e., that the express purpose of the organization was to raise funds so that a kid could go on a trip.  Scouting is the same, yet different.  I've interpreted these letters and statues every which was and then some.  In the years of doing it, I've seen exactly zero IRS action on the topic against Scouting groups.  Why?  Because helping Johnny to fundraise a bit more to go to Scout camp is not an inherently had thing and no-one is joining Scouting so that their kid gets a bunch of paid for trips.

My sense is that the kinds of accommodations we've all reached are in the best practices of the concepts - don't but equipment for him, don't cut him a check, keep the money with the troop.  But I certainly wouldn't hesitate at this point to find a way to help him pay for camp through a Scout account.

One caveat though - my troop was very much like one of the ones mentioned where the idea of Scout accounts destroyed the concept of unit level fundraising.  When every fundraiser is looked at as a way to pay for a trip, the idea of raising money together for the betterment of the troop can get lost.  That's regrettable.

[Eagledad]

14 minutes ago, ParkMan said:

My sense is that the kinds of accommodations we've all reached are in the best practices of the concepts - don't but equipment for him, don't cut him a check, keep the money with the troop.  But I certainly wouldn't hesitate at this point to find a way to help him pay for camp through a Scout account.

 

This is exactly how my wife handled our troop account. One word of warning, we learned to explain to the families that the money had to stay with the troop if the scout transferred to another unit. 

Barry

[fred8033]

10 hours ago, ParkMan said:

One caveat though - my troop was very much like one of the ones mentioned where the idea of Scout accounts destroyed the concept of unit level fundraising.  When every fundraiser is looked at as a way to pay for a trip, the idea of raising money together for the betterment of the troop can get lost.  That's regrettable.

I've seen that too.  Recently, I've seen units that begin to charge unusually high dues, but give all fundraising back to the scouts directly to subsidize those charges.  The net result is they collect very committed scouts who do fund raise or who's parents can afford the program.  There is no middle ground for scouts who don't want to raise funds or who's parents can't afford the costs. 

[elitts]

There are actually two different restrictions that come into the issue of scout accounts. The first is "private benefit" and the second is "private inurement. Private benefit is when organizational assets benefit an individual as opposed to being used for the group purpose. While private benefit isn't generally permitted, it is allowable if the amount is "incidental". By contrast, "private inurement" is entirely prohibited.

With scout troops, "Private Inurement" isn't usually going to be an issue (as opposed to the sports club letters where much of this originates). The private inurement doctrine generally applies to persons, commonly referred to as “insiders,” who are in a position to influence or control use of the organization’s assets for personal gain such as founders, directors, or officers. So unless the CO's founders directors or officers (or their families) are benefiting, inurement isn't an issue.

That just leaves "private benefit" as the potential problem and for that I have two points that I haven't yet seen refuted:

1. I have yet to see anyone suggest that a "non-profit" can't sell a product by offering a commission So if a scout sells a Christmas tree for $50, that sale could be recorded as $40 revenue to the troop and a $10 payment to the scout's balance owed. So rather than recording this as "Scout A has a $10 balance with the troop" it would be "Scout A owes -$10". I realize that to the layperson, this seems like B.S., but technicalities of labeling and using different columns on the same page is pretty much what Accounting is all about. And in fact, this is exactly the sort of reasoning Trails End uses with the whole "Scholarship Program" with popcorn.

2. An important aspect to the concept of "incidental private benefit" is that it has to be considered in the context of the whole Chartering Organization, NOT just the scout troop (because the CO is the entity in question and the troop doesn't technically exist on it's own). So while allocating $2500 of a troop's annual $10,000 budget to 15 scouts might seem like it would obviously be  "other than incidental", that's not the correct math for this analysis. Instead you would need to compare the $2500 to the entire annual budget for the CO.  So, to give you an example, my troop credited roughly $3500 to scout accounts last year from our two main fund-raisers (popcorn and wreaths).  Given the size of the church that is our CO, I'd expect the annual budget for the organization to be $750k-$1000k per year.  That means the worst case scenario is that 0.47% of the church's annual expenditures went towards "private benefit". 

My personal feeling is that as long as the "scout portion" of a sale could be reasonably considered a fair commission for the product in question, things are far less likely to set off warning bells rather than if you had a troop selling a $5 coffee mug for $25 and crediting $10 to the scout making the sale.

[MattR]

Not sure if this is considered legal, given all the lack of clarity, but our take was that scouts had accounts and any money earned could be used to defer expenses that pertained only to scouting. So, paying for summer camp or uniforms was okay but buying gear that could be used outside of scouting was not. After the scout left the troop the remainder of the account went to the general fund. So, the money was used in the context of scouting and the scout gained experience at earning money and managing it, both of which are skills we want them to learn. It didn't bother any of the CPA's in the troop and they were much happier that scouts couldn't use the money to buy skis or bikes. They were extremely happy that we wouldn't write a check for the balance once scouts turned 18, which is what was going on before I was SM.

Pick your battles.

Edited June 28, 2020 by MattR
clarity

[fred8033]

On 6/27/2020 at 6:06 PM, elitts said:

My personal feeling is that as long as the "scout portion" of a sale could be reasonably considered a fair commission for the product in question, things are far less likely to set off warning bells rather than if you had a troop selling a $5 coffee mug for $25 and crediting $10 to the scout making the sale.

I have mostly the same understanding.  IRS allows commissions as it helps raise funds for the non-profit.  It's a common fundraising tool.  But if you go beyond "significant" such as 30%, then the commission begins to outweigh the non-profit benefit.  

I'd argue "inurement" is still an issue as often the CC and SM are key personnel deciding how to spend funds and it can directly affect their own costs.  For example, the troop that pays for the SM's costs on a trip even though there are multiple other adults willing to go and it's mostly the SM's sons going on the trip and maybe one or two others.  

Either way, it's often a matter of "risk".  Troops are too small usually and IRS is too busy.  And, it would usually be the "church" that needs to be audited and troop finances rarely appear in church book keeping.  It's like a magical line-item that's never mentioned. 

[Tron]

Let me churn the fire of this thread back up. The following link is getting posted everywhere else today. Looks like scout accounts are probably a big no-no. https://www.irs.gov/pub/irs-wd/02-0041.pdf

[InquisitiveScouter]

48 minutes ago, Tron said:

Let me churn the fire of this thread back up. The following link is getting posted everywhere else today. Looks like scout accounts are probably a big no-no. https://www.irs.gov/pub/irs-wd/02-0041.pdf

Thanks @Tron  I have also had these discussions with others many time.

Two key points in the letter you cited:

"Accordingly, we are not ruling definitively at this time. "

"The information provided here cannot be relied upon as a ruling on the matters discussed. "

So, I take it all with some grains of salt to season my food for thought...

We do Scout accounts, and we allocate back to Scouts a portion of their sales proceeds to use to pay their Scouting costs.  But the majority of what they earn goes to the Troop kitty to pay for Troop-level costs that benefit everyone.

[skeptic]

Another example of some individuals looking for problems that really are not there.  Unless some individual scout ended up with an account from popcorn under his name in big dollars, it would never even float a butterfly.  Use commons sense, and be even handed with all youth and do not favor one over another, meaning solid rules in place that apply to all.  We finally went to the unit just paying for as much as possible directly and not trying to account for individuals directly.  

[InquisitiveScouter]

17 minutes ago, skeptic said:

Another example of some individuals looking for problems that really are not there.  Unless some individual scout ended up with an account from popcorn under his name in big dollars, it would never even float a butterfly.  Use commons sense, and be even handed with all youth and do not favor one over another, meaning solid rules in place that apply to all.  We finally went to the unit just paying for as much as possible directly and not trying to account for individuals directly.  

Yes.

Our unit does our own fundraiser.  We also advertise to our Scouts that they can participate in the council popcorn fundraiser with online sales.

For those that participate, at the end of the fundraiser, the council gives us a check, with a list of the Scouts participating and how much is allocated to each Scout.  We deposit it in the unit fund and credit their Scout accounts in Scoutbook.  We have a Scout who did this for his first two years with us.  He has not had to pay a single cent for any Scout-related costs, and has plenty of coin left to take him through his next few years.

He has learned the value of getting out there and earning his way.

And he fully understands that any fundraised money left over when he leaves the Troop goes to the general Troop fund, or is disbursed, as he wishes, to Scouts in the Troop who might need a little assistance.

 

Edited December 13 by InquisitiveScouter

[Tron]

17 hours ago, skeptic said:

Another example of some individuals looking for problems that really are not there.  Unless some individual scout ended up with an account from popcorn under his name in big dollars, it would never even float a butterfly.  Use commons sense, and be even handed with all youth and do not favor one over another, meaning solid rules in place that apply to all.  We finally went to the unit just paying for as much as possible directly and not trying to account for individuals directly.  

I know of at least 3 scouts in my area that have potentially thousands of dollars in their scout accounts, I know of 1 scout that for sure has over 10k.

I look at these scout account discussions more along the lines of, when is the IRS going smack a unit, not if. When you look into all of the case law that has been discussed, the public positions, etc ... it's all about the IRS doesn't want the media black eye unless they can really get something bigger than a handful of dollars of abuse. 

[InquisitiveScouter]

2 hours ago, Tron said:

I know of at least 3 scouts in my area that have potentially thousands of dollars in their scout accounts, I know of 1 scout that for sure has over 10k.

I look at these scout account discussions more along the lines of, when is the IRS going smack a unit, not if. When you look into all of the case law that has been discussed, the public positions, etc ... it's all about the IRS doesn't want the media black eye unless they can really get something bigger than a handful of dollars of abuse. 

Agreed.  Some hold this issue as black and white.  I respect their position.  I hold it as grey, and I am comfortable operating in "my" grey area on this one. 

Until IRS makes a definitive ruling (and council stops giving us checks for Scouts), that is 😜 

[qwazse]

Nothing new to see here.

So a scout assigned responsibility of 10k in the troop treasury. He spends it on gear to be properly prepared for some high adventure trips. The skills gained preparing for those trips inspire in him some ideas for a community service project and he mobilizes 700 volunteer hours to complete the project. The scout is publicly recognized for his benefit. Logging those hours, BSA will translate that many hours into a dollar value amounting to about 10k benefit.

It has nothing to do with P-R. Any private benefit is balanced by the public good. That is why it is much harder for IRS to go after scouts compared to athletes who raise funds to attend an elite competition.

[Eagle1993]

This looks like a response to a request from a Pack for the IRS to provide tax guidance.  I think it has been clear that scout accounts are in the grey area of tax regulations.  This is a case of don't ask permission and you will likely be fine.

If some kid buys a C8 Corvette with his scout account, the IRS may have some questions.  Outside of that, I have never seen evidence of a single issue with the IRS.

[fred8033]

22 hours ago, qwazse said:

So a scout assigned responsibility of 10k in the troop treasury. ...  Any private benefit is balanced by the public good. That is why it is much harder for IRS to go after scouts compared to athletes who raise funds to attend an elite competition.

That's the grey area.  Similar things can be said for band booster clubs, but IRS did go after them.  Individuals are charged for their experiences.  If only one kid (the kid who earned the money benefits), then that's a strong argument for private benefit.  

On the other hand, if the scout has $10,000 in his account because he raised $50,000 for scouts, then it can be argued it's an incentive that raised more money for scouting than if the private benefit incentive was not there.  

There is nothing new here.  No new information or updated guidance.