IRS Rejects Gymnastics Booster Club’s 501(c)(3) Application and Orders It to Pay Back Taxes
The IRS’s increasing scrutiny over parent-run booster clubs added a new twist on February 13, 2015 when the agency rejected a gymnastics booster club’s (“Booster Club”) Internal Revenue Code (“IRC”) 501(c)(3) application, and ordered it to pay back taxes for prior tax years, identifying potential tax liability for the gym as well. In IRS Private Letter Ruling PLR 201507023(IRS PLR),the agency determined that the Booster Club failed to establish that its income did not inure to the benefit of private individuals and shareholders, which is prohibited by section 501(c)(3).
The IRS stated that the Booster Club was properly organized for an exempt purpose, to “foster the education and development of children’s interest by participating in the activities of dance, gymnastics, Tae Kwon Do, child care, tumbling, cheer, and other children’s social/athletic events.” The agency also found that “Congress specifically identified fostering amateur sports as an exempt purpose that would entitle an organization to exempt status if it meets the other requirements of § 501(c)(3).” However, while organized properly, the IRS determined in PLR 201507023 that because the manner of operation provided inurement to the Booster Club’s members, and private benefit to a business owned by one of the directors, it could not recognize the Booster Club as exempt under § 501(c)(3).
The IRS identified several problems with the Booster Club’s operations, including that the gymnastics club owner sat on the Board of Directors; requiring mandatory Booster Club membership dues; putting fundraising money raised by parents into accounts earmarked in direct proportion to that family’s fundraising, rather than into the Booster Club’s General Account; and the fact that the Booster Club used 25% of its fundraising dollars to purchase equipment for the gym. These activities raised concerns of both private inurement to parents, and private benefit to the gym. The IRS also identified the fact that the Booster Club’s fundraising efforts provided a special benefit to the to the director who owned the gym as problematic because the money raised enabled athletes to compete on teams sponsored by the gym (resulting in a substantial private benefit to the gym owner).
This decision highlights numerous cautionary tales relating to running a booster or gymnastics club. These include, without limitation, avoiding booster club connections with the gym, avoiding private inurement stemming from fundraising systems that benefit family’s proportionally in any way, mandatory fundraising, and private benefits inuring to the gym’s benefit as well. Failure to do so properly can result in the booster club paying back taxes on funds raised, and the gym paying back taxes on benefits it received. However, perhaps most striking about PLR 201507023 was the IRS’s conclusion that use of fundraising dollars to enable athletes to compete on teams sponsored by the gym results is a substantial private benefit to the gym, with potential tax consequences for the gym. This represents a new, significant change in direction by the IRS that potentially concerns all for-profit athletic club “booster clubs” that raise funds for athletes competing on teams at a for-profit club. It remains likely that the manner of the Booster Club’s operations contributed to this conclusion, and that the IRS has not started targeting gymnastics booster clubs for this specific issue. However, to avoid IRS problems, immediate review and evaluation of booster club documentation and operations to ensure IRC compliance is recommended in light of PLR 201507023.
BY MARC R. JACOBS ON APRIL 14, 2015, Published on https://www.mrllp.com
Further review of the article, “Operating an IRS-Compliant Gymnastics Booster Club” is also recommended.
This article is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.