What does the IRS mean by not allowing “private benefit” in a fund raiser?

Rich, a fellow CPA, wrote:

I do very little with the non-profit world these days. Our group has a
fundraiser which raises a fair amount of money (for us) $600-$1000. The
question is in regard to spending the money. Does the money have to be
spent on group activities as a whole, or can it be used to for individual
educational activities (i.e. worldview camps, etc)? In a nutshell, the
question is what constitutes private benefit/private inurement?
Thanks,
Rich

Rich,

Good questions and difficult to answer in a nutshell, but I’ll try!
Does the money have to be spent on group activities as a whole Yes, it does.

can it be used to for individual educational activities (i.e. worldview camps, etc) No; that would be inurement to the individual.

what constitutes private benefit/private inurement?

From the IRS (GCM 39862 (11/22/91)):

“Inurement is likely to arise where the financial benefit represents a transfer of the organization’s financial resources to an individual solely by virtue of the individual’s relationship with the organization, and without regard to the accomplishment of exempt purposes.”

Translation from IRS-ese to plain English: Inurement is when a group transfers some of its money to specific individuals. The individuals benefit just because they are members of the group and not because it represents the purpose of the organization.
In other words, a homeless person can benefit by receiving a meal from a charity whose purpose is to feed the poor. A family cannot fund their own child’s educational activities (worldview camp) just because they are a member of a parent booster club or a homeschool group. The benefit is supposed to be to the group (or a clas of people, i.e., the homeless) for its tax-exempt purpose, not to specific individuals.

And this from the IRS, again (1993 EO CPE Text ATHLETIC BOOSTER CLUBS: ARE THEY EXEMPT? by Debra Cowen and Gerald Sack)

“In fact, the earnings of the organization are being used directly and specifically to pay for benefits to specific individuals rather than to a class (of competitive gymnasts) as a whole. ”
“Inurement of income is strictly forbidden under IRC 501(c)(3) without regard to the amount involved. Violation of the inurement proscription is sufficient to defeat exemption.”

Translation: A gymnastics booster club was sharing it earnings with specific individuals. The IRS defines that as inurement or private benefit. Inurement is a serious issue in the eyes of the IRS and an organization can lose its tax exempt status for benefiting a specific individual with money meant for the group.
I hope that helps!

Carol Topp, CPA

Fundraising success story

BlueDollarMarching

I know that a lot of homeschool groups follow in the footsteps of other nonprofit organizations when it comes to fund raising.  They sell the same things and they even succumb to the pressure to set up individual fund raising accounts and “reward” those who do the most work.

I discourage setting up individual fund raising accounts and I have written about them here:

The IRS’s Word on Fundraising Do’s and Don’ts

Individual fundraisers and homeschool groups

I have a great story to share with you about one homeschool leader that did her fund raising right and it benefited many people:

Hi Carol,

I have to tell you that since reading your comment on my homeschool blog last week I spent some time perusing your advice on Fundraisers. I am a candlemaker who runs fundraisers, originally for young people raising money for mission trips and this year for a Homeschool organization who wanted to partially subsidize the Formal. These tickets are so often cost prohibitive…Anyway…as we began the process I had several parents come to me and basically plead for the money to be designated to those who sold the most. Without knowing that it would have been legally wrong, I felt that it was just a bad idea and said that I believed the right encouragements and positive input would bring a good result for all. I was right! The class did well and was able to drastically reduce the ticket prices for all.

Thanks for the legal back-up in case this comes up again in the future. I will gladly refer anyone to your website.

Keep up the great work!

Becky K.

I was so glad to hear that Becky did the right thing and the entire class was blesses by the fundraiser, not just a few families. I love the spirit of cooperation and teamwork!

Carol Topp, CPA

Bank account for your family homeschool

BankXSmall

This homeschooling mother in NC ran into a problem when she tried to open a bank account for her family homeschool.

I live in North Carolina, homeschool my children and want to do some fund raising for some projects and field trips and also school supplies.

I went to the bank, wanting to open an account in the homeschool’s name and they said that I would have to open up an account in my name doing business as my homeschool’s name.

My question to you is, how do I go about paying taxes on the money? I do not want to get into trouble with the IRS. Was that the right thing for me to have done? Waiting to hear from you soon!
Kim

Dear Kim,

I’ve been asked questions like yours before. I answered them in two posts on my blog.

Can we (an individual homeschool) be allowed to do fund raising similar to youth sports groups, scouts,etc?

Yes, you can participate in a fund raiser if the fund raising organization allows it. BUT, the profit you make is taxable income and you’ll need to report it on your tax return.

Can my individual homeschool have a fundraiser?

Individual fundraisers and homeschool groups

I hope that answers your question; let me know if it doesn’t.

Carol Topp, CPA

Update on the IRS and Booster Club Fundraising

I mentioned in a previous post that three booster clubs in KY were being fined by the IRS for their fund raising practices. The issue was that the booster club was giving parents credit for their fund raising efforts.

The IRS and Fundraising

The booster clubs have appealed to their congressmen for help.  But it appears the IRS is digging in its heels on this issue. From the Lexington Herald-Leader:

Lois G. Lerner, Director of Exempt Organizations for the IRS, explained in a letter to the booster clubs that any booster club that raises money to benefit an individual student rather than a group is in violation of federal law and stands to lose its tax-exempt status. Lerner said the practice was against federal law.

“The requirement that each parent/member of the club must participate in the fund-raising activities in direct proportion to the benefits they expect to receive toward their children’s expenses directly benefits specific individuals and the parents instead of the class of children as a whole,” she wrote.

Do a Google search on “KY Booster Club IRS” to read more on the story (copyright prohibits a direct link)

So my advice is as before: If your organization is sharing, dividing or distributing fund raising proceeds to individuals or families, stop the practice and leave all fund raising proceeds in the general fund to benefit the group at large.

I’ll keep watching this issue. If the congressmen have any success with the IRS, I’ll let you know via this blog and my monthly newsletter (subscribe in the upper right hand corner of this page)

Carol Topp, CPA

The IRS and Fund Raising

The IRS is playing Santa Claus this Christmas!

No, the IRS is not giving out presents this Christmas, but they are like Santa Claus and “making a list, checking it twice, gonna find out who’s naughty and nice...” and they have found some naughty children.

It seems that several booster clubs in KY were audited by the IRS and were fined for their fund raising practices. The issue was that the booster club was giving parents credit for their fund raising efforts. Like a lot of organizations, the parents worked at concessions stands, car washes, candy sales and bongo games. The booster club awarded parents monetary credit for working the fundraisers. The IRS fined one organization $61,000! The group is even facing losing 501c3 tax exempt status. Sounds like the IRS is playing Scrooge and not Santa!

It is a common practice to set up individual accounts and split the fund raising proceeds among the parents that participated in the fund raising effort. If Johnny sold the most candy, he gets the largest share of the fund raising proceeds in his account. The IRS is concerned about private benefits. They expect to see the entire group of students benefit from fund raisers, not individuals.

If your organization is sharing, dividing or distributing fund raising proceeds to individuals or families, you are on the IRS naughty list! You had better restructure your fund raising efforts and get on the IRS nice list.

If you care to read more, do a Google search on : “KY Booster IRS.” The report from the Lexington Herald-Leader at Kentucky.com is most thorough in telling the story about KY’s booster clubs. (copyright prohibits me from a direct link)

Merry Christmas everyone!

Update posted January 14, 2009: Update on the IRS and Booster Club Fundraising

Carol Topp, CPA