Section 501(c)(3) of the Internal Revenue Code allows for tax exemption for organizations organized and operated to foster national or international amateur sports competition so long as no part of the net earnings inure to the benefit of any private shareholder or individual. In cases of athletic or other types of parent run and organized booster clubs, it is the last part of this provision that can prove problematic.
A parent run booster club must be organized so that it benefits the entire class of athletes or participants and does not benefit certain individuals over others. One way to ensure that this private benefit does not occur is to distribute the money raised from fundraising events equally among participants. Additionally, a booster club must take care to ensure that money is not given directly to a participant and/or his parents, but rather used to offset the cost of his participation in the program.
Booster clubs must take care to avoid adopting the “work and pay or don’t play” method of funding their activities. In this method, there is some sort of point system used where participants are given credits for the amount of time they or their parents spend fundraising; the more fundraising activities you participate in, the more funding you will receive. The IRS views this method as private benefit and will not grant tax-exempt status to organizations that use it. However, there are certain cases where cooperative fundraising will not preclude a booster club receiving tax-exempt status. Where cooperative fundraising is allowed, it must only account for a small amount of the organization’s activities. Additionally, funds may not be given directly to participants, but rather must be applied directly towards the cost of participation. If the participant decides not to participate in the activity for which funds are raised, the funds must revert to a general fund for the use of all participants.
In the case of booster clubs that conduct their activities at a private facility, the organization must take precautions regarding any private benefit flowing from the organization to the for profit facility. The organization must ensure that the owners of the private facility do not exercise influence over the operations of the booster club. If this occurs, the IRS may take the position that the booster club serves the purpose of promoting private business interests. Also, if the organization purchases any equipment for use at the private facility in which their sponsored teams train, if more than insubstantial in nature, the IRS is likely to conclude that a substantial purpose of the organization is supporting a commercial enterprise.
Organizations that support public school programs, however, are subject to an element of public control in that participants are selected based on the objective and nondiscriminatory criteria set by the schools and the funds raised are turned over to the public facility which then exercises discretion over expenditures to benefit all participants or, if the booster club maintains control over the funds, they are limited in the type of expenditures they may make. This public control often negates the elements of private benefit and inurement that can occur in the private arena.
In order to ensure that a booster club is operated exclusively for charitable purposes, it should follow a few basic guidelines: (1) participants must be selected based on objective and nondiscriminatory criteria; (2) all selected participants must be allowed to participate in club activities regardless of parent participation in fundraising; (3) cooperative fundraising must only account for a small amount of the clubs activities and students must not exercise control over funds raised for their benefit; and (4) when the club uses a for profit facility, the clubs activities must not support the for profit organization.
Ellis Carter is a nonprofit lawyer licensed to practice in Washington and Arizona. Ellis advises tax-exempt clients on federal tax matters nationwide.