Carolyn A. Hegge
We’ve all been there before. You are at a Badgers tailgate or youth baseball game when a cute kid asks you to buy a gas or grocery gift card for the benefit of his or her sports team, band, or youth group. It seems like a great deal for everyone involved – you get a useable product at face value and you support local kids in the process. But, could your donation actually cause the organization to lose its tax-exempt status?
Many charitable organizations rely on their tax-exempt status to operate. Similarly, many charitable organizations rely on group fundraising activities to support their charitable purpose. In Capital Gymnastics Booster Club, Inc. v. Commissioner of Internal Revenue, the United States Tax Court discussed how, under certain circumstances, group fundraising is not consistent with tax-exempt status for booster clubs.
Capital Gymnastics was a booster club organized for the charitable purpose of fostering youth sports competition. Specifically, under a commonly used operations model, the club served as a fundraising entity that collected, held, and disbursed costs on behalf of its youth athletes for the payment of gymnastics training and competitions. The athletes’ parents were charged dues and assessments in exchange for this service. The parents could choose to pay the full dues and assessments in cash, or their child could participate in various group fundraising activities administered by the organization. Parents of athletes participating in the group fundraising would be allocated “fundraising points” as a reduction in their dues and assessments. Parents of non-participating athletes, on the other hand, did not receive a benefit from the fundraising and had to pay dues and assessments in full.
A program known as “scrip” was the focus of the Tax Court opinion. Scrip is a system where a business sells gift cards to the tax-exempt organization at a discount. The athletes then sell the gift cards to parents or third parties for face value. The profit, or the difference between the face value sale and the discounted cost, is awarded to the organization. In effect, the buyer gets 100% purchasing power for a useful product such as gas or groceries, and the organization profits.
The Tax Court found that the fundraising point system utilized by Capital Gymnastics provided the resulting benefit to the parents of the participating athletes rather than to the organization as a whole. Specifically, virtually 100% of the funds raised through group efforts went to the participating athletes rather than to the group as a whole. In essence, parents of participating athletes were relieved of their obligation to pay for part or all of their child’s gymnastics activities, and this benefit resulted from the scrip program that was only available due to the organization’s tax-exempt status. As a result, the IRS revoked Capital Gymnastics’ tax-exempt status.
Group fundraising itself is alive and well. However, a tax-exempt organization should be mindful of the structure of its group fundraising programs. The rule provided by Capital Gymnastics is that if a tax-exempt organization is performing group fundraising, then the funds raised should benefit the group as a whole, regardless of whether a member or the member’s family participated in the fundraising activity. Unfortunately, the Tax Court in Capital Gymnastics declined to elaborate on some of the resulting gray areas, such as an allocation of proceeds favoring the organization while still providing some incentive to participating members and their families. Until clarification is provided, tax-exempt organizations performing group fundraising activities should be cautious to protect their tax-exempt status.
If you have any questions about how the information in this article may affect you or your business, please call (608) 257‑2281 or contact your Stroud attorney.
DISCLAIMER: The information in this article is provided for general informational purposes only, is not necessarily updated to account for changes in the law, and should not be considered tax or legal advice. This article is not intended to create, nor does the receipt of it constitute, an attorney-client relationship. You should consult with your own legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.