Booster clubs are commonly used by parents and students to help offset the costs of school or extracurricular activities such as participation in an athletic team, marching band, or academic decathlon team. Booster clubs are often parent controlled and formed; may conduct fundraising through a variety of efforts such as car washes, general solicitations, and corporate sponsorships; and may involve any number of students and parents. A booster club may also have the added benefit of qualifying as a public charity because it furthers an exempt purpose under section 501(c)(3) of the Internal Revenue Code. For example, the IRS has traditionally recognized 501(c)(3) tax-exemption for boosters clubs that promote amateur athletics. There have, however, been many issues raised by the IRS in the athletic booster club context that highlight problems that may be common to all types of booster clubs, particularly when it comes to private benefit and private inurement which can be prevalent in these environments. Below are some key issues that any booster club should consider.
No Cooperative Fundraising
Students and parents understandably may want a payout from the booster club’s funds that is equal or proportional to the amount they individually raised as compared to the other participants. That system, however, is a private inurement issue under federal tax law. (See Treas. Reg. Reg. 1.501(c)(3)-1(c)(2)). The private inurement rule applies to individuals who are in a position to exercise control or influence over the organization (also called an “insider”), such as a board member, and prohibits the organization from allowing its net earning to inure to the benefit of an insider, no matter the amount. Parents participating in certain booster clubs may be considered insiders and thus, allowing a direct correlation between those parents’ fundraising efforts and the benefit received would be a private inurement violation because the organization’s earnings are being used to directly and specifically pay for benefits to a specific insider rather than to the class of individuals as a whole such as an athletic team.
Furthermore, such a credit system still raises private benefit concerns regardless of whether a parent is considered an insider or even involved in the booster club. Lois Lerner, the Director of Exempt Organizations at the Internal Revenue Service, recently affirmed that crediting amounts raised by a participant against that participant’s costs (e.g., dues, travel expenses) is a private benefit violation that may jeopardize the organization’s exempt status.
This is not to say that individuals may never benefit from a booster club’s activities. The IRS has acknowledged, for example, that in all athletic booster clubs, there is always a class of individual athletes who receive benefits. The critical inquiry for compliance with federal tax laws is whether the benefit to the individuals (e.g., subsidized competition costs) as a whole, is insubstantial and incidental when compared to the public benefit being conferred by the same activity.
No Earmarked Funds for Individuals
It is similarly problematic if donations are being made to and accepted by the booster club for the direct benefit of a particular individual. Individuals should not be soliciting contributions from donors with any suggestion or intention that the contribution will be directly used for that individual who solicited the gift. Additionally, the booster club should not accept any contributions that have been earmarked by the donor for a particular individual. Not only would such contributions not be tax-deductible for the donor, the booster club would likely be acting as a conduit in violation of the federal tax laws regulating private inurement and private benefit by allowing such money to pass through the organization to the individual without having exercised any control, oversight, or discretion over those funds.
Be Cautious of Interpersonal Relationships
A booster club is commonly composed of and run by individuals who know each other on a personal level such as neighboring families or parents of childhood friends. Board tensions and organizational issues can become all the more complicated and difficult when personal feelings or relationships are involved. Therefore, adopting and regularly reviewing policies that help to address and resolve foreseeable conflicts and establish sound management practices can be a worthwhile investment. For example, “interested persons” with respect to a conflict of interest policy may reach beyond family members to also include domestic partners and some definition of “a close friend.” Additionally, implementing bylaws provisions that encourage board turnover and drafting policies related to check and contract signing authority could be helpful in ensuring objective eyes are always present to spot problematic practices or inappropriate uses of organizational funds.
Ultimately, those individuals forming and operating booster clubs must remember that 501(c)(3) status comes with both advantages and specific rules and responsibilities under federal tax law, some of which have been highlighted above. A booster club’s governance and activities can trigger any number of other federal tax laws such as those related to unrelated business income and excess benefit transactions, all of which help to ensure the booster club is focused on the bigger picture of its exempt purposes rather than private or other interests.
For more information, please read the IRS Exempt Organizations CPE Text (1993), “A. ATHLETIC BOOSTER CLUBS: ARE THEY EXEMPT?”