In a recent decision, Capital Gymnastics Booster Club v. Commissioner, T. C. Memo 2013-193,
the Tax Court held that a gymnastics booster club did not satisfy the requirements of Section
501(c)(3) because its fundraising programs operated in a manner that allowed substantial
private inurement and promoted private, non-public interests. The case raises questions for taxexempt
organizations that conduct fundraising activities for the benefit of organization leaders
and members.
The case involved a situation where parents each paid a gymnastics club (the “Club”) $40
annually in dues as well as an assessment of $600-$1,400 to pay each child’s competition costs
(e.g., entry fees and coaches’ travel costs). 54% of the parents simply paid the assessment,
while 46% chose to engage in fundraising on behalf of the Club to offset the assessment
amount. The fundraisers included selling wrapping paper, discount cards, cookie dough,
candles, ornaments and scrip. The parties stipulated that the primary function of the Club was
to raise funds.
For the families that chose to fundraise, the Club awarded points worth $10 in proportion to the
fundraising profit that each family generated. Managers of fundraisers and board members also
received additional points. The annual assessment for each fundraising family was reduced
according to the number of points that the family had earned. Parents who did not participate in
the fundraising did not receive a benefit from the Club’s fundraising activities. Families who
fundraised were able to offset on average 50% to 70% of their annual assessment.
Although the IRS agreed that (i) the Club’s mission was to foster amateur sports competition as
provided in Section 501(c)(3) and (ii) the Club’s athletes were members of a charitable class,
the IRS objected to the dollar-for-dollar apportionment of fundraising proceeds as inurement and
private benefit in violation of Section 501(c)(3) because the methodology furthered private
interests rather than the Club as a whole. Consequently, the IRS revoked the Club’s taxexempt
status.
The Club argued that its fundraising activities were appropriate because they benefited a
charitable class of children who competed in amateur athletics. In addition, the Club compared
its fundraising activities to the fundraising activities regularly conducted by organizations such
as church youth groups, Cub Scouts, and public-school athletic booster clubs.
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The Club stipulated that its parent-members were “insiders” for purposes of Section 501(c)(3),
meaning that the parents exerted direct or indirect control over the organization. Therefore,
although the court decided the case based upon principles of private inurement and private
benefit, the analysis centered on benefits that inured to the parent “insiders.” Specifically, the
court found that the fundraising structure allowed substantial private inurement to the parents
who raised funds. In addition, the court found that there was a substantial private benefit
conferred on the child-athletes of the fundraising parents.
The court’s decision suggests that the IRS could subject the fundraising activities of sports and
community organizations to greater scrutiny. However, the court also cited several factors – not
present in the Club’s situation – that may have led to a different result. First, the court
distinguished situations where fundraising is a “tiny fraction” of an organization’s overall function
(e.g., a school band’s candy sale or a church youth group’s carwash). The Club, on the other
hand, stipulated that the fundraising was its primary function. In addition, the court noted that
the Club’s assessments were not optional and that scholarships were not available for those
who could not afford the assessments. Finally, the court noted that the Club did not require all
members to raise funds (with no option to buy one’s way out of fundraising).
The court’s decision indicates that sports and community organizations should take a careful
look at the structure of their fundraising activities to make sure that they do not create private
inurement or private benefit. Such organizations will be in a stronger position if fundraising is
not their primary activity, all members participate in fundraising, or if fundraising dollars are used
to support individuals who cannot afford the full cost of the organization’s activities.