There is no “I” in Team: Common Private Benefit Problems for Booster Clubs

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?

15 thoughts on “There is no “I” in Team: Common Private Benefit Problems for Booster Clubs

  1. Gene Takagi
  2. Holly

    We have a newly formed booster club that staffs concession stands to raise funds — those funds are credited to the individual accounts of the volunteers that worked. There is a limit of how many people can work each stand – is it legal to restrict who is allowed to volunteer to work those stands? (i.e. Only allow one adult volunteer per benefitting athlete regardless of how many members of the booster club support an individual athlete?). We have a first-come; first-serve sign up policy currently that is under heated discussion. Thanks

    • Gene Takagi

      It doesn’t sound like volunteering, if volunteers get credited with funds to the individual accounts of their children. Problematic. Talk to a knowledgeable lawyer in your jurisdiction.

  3. Jo

    We have a parent booster group that helps support the activities of a for-profit dance studio. Recently the dance studio began a fundraiser without our participation, knowledge or permission, but using our name, saying sponsorships would be tax deductible. Further, an extravagant prize is offered. Do I need a personal attorney to protect myself?

    • Gene Takagi

      If your booster group is a 501(c)(3) organization, it should probably engage an attorney to represent its interests here.

  4. Todd

    There are many music booster Clubs in our state which are set up to support a public school music group such as a high school band/orchestra or choir. Many of these Clubs have a Private Lesson supplement program where they assist individual students with the cost of private music lessons. Example, a student of the band will take a weekly private lesson and pay a reduced cost with the Club picking up the remainder. Question: CAN the Club limit this benefit to ONLY those students whose parents have joined the Club by paying a membership fee, or must they offer this benefit to ALL students who are normal members of the school group regardless of their membership status in the Club?

    • Gene Takagi

      We can’t comment on individual circumstances, which may widely differ. But there are potential private benefit issues raised by limiting financial benefits to persons who contributed to the same organization, and organizations should look at those potential issues carefully.

  5. Janice Tarson

    We are a public high school athletic booster club. Our booster organization never applied for 501(c)(3) tax exempt status. How does that impact our status as a non-profit? Are we considered a charitable organization? Are there considerations regarding private inurement and cooperative fundraising. I am trying to determine if we as a group should use IFAs. If so, how do you recommend handling when a child’s family cannot or will not participate in any fundraising?

    • Gene Takagi

      It appears that there are a lot of complexities involved. Best to retain an attorney in your jurisdiction to advise the organization. If an organization isn’t tax-exempt, it’s taxable (possibly from both federal and state income tax perspectives). Whether an organization is a nonprofit (a taxable one) depends on how it was formed. There may be self-dealing and charitable trust issues related to nonprofit corporate status even if an organization isn’t exempt under 501(c)(3). IFAs may be problematic and inconsistent with nonprofit and 501(c)(3) laws and regulations.

  6. Jennifer

    Can a booster club force you to participate in a fundraiser, like making it mandatory to purchase raffle tickets??

    • Gene Takagi

      You should confer with your own attorney on this matter, but I think it’s problematic on different levels to make it mandatory to purchase raffle tickets, particularly as a condition of being a member of a booster club.

  7. Amanda

    Can a booster club only pay for the meet fees of its members? Or does it have to pay for non-members on the team who are competing as well?

    • Gene Takagi

      Generally, a 501(c)(3) booster club must contribute to the team as a whole, and not any of its individual members. Private inurement and private benefit issues may exist where a parent or participant feels they should receive a payout in proportion to the amount they contributed or raised as a member.

  8. joanne

    I’m confused as to donation versus sponsorship. Our booster club raises money thru donations but also gives families forms for sponsorships that go directly to the sports member. The sponsorship that is supposed to go to my daughter directly is now going to be put in a general fund. Help?

    • Gene Takagi

      Generally, funds transferred to a 501(c)(3) organization for which an individual takes a charitable contribution deduction (regardless of whether it is called a “donation” or “sponsorship”) must not be used to provide a return benefit to such individual or directed by the individual to provide a benefit to a specific other person (including relatives). If someone pays a fee (and doesn’t take a charitable contribution deduction for such payment), then she or he may specify that the fee is to benefit a specific individual (e.g., child participating in the organization’s program).

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