NONPROFIT QUICKTIPSSM
An electronic publication of Pfau Englund Nonprofit Law, P.C.
Disclaimer: This publication is designed to provide accurate information in regard to the subject matter covered. However, it is not intended to provide legal or other professional advice. If legal advice is required, the services of a competent professional should be sought.
Individual Fundraising Accounts
Some nonprofit groups create individual fundraising accounts to give credit to those who participate in fundraising activities. It is often asked whether such accounts are legal under IRS charity rules and if so, whether the individuals may control how the funds in their accounts are used. For example, a school parent teacher organization sponsors a candy bar sale to support the fifth grade class trip to Washington, D.C. The trip costs $250 per student. Each student gets "credit" for the funds earned through his/her sale of candy bars (50 cents for each $1.00 bar sold). If a student sells 500 candy bars he or she may be credited with $250 and have no additional cost for the trip. If the student sells 1000 candy bars, he or she may be recognized for his outstanding fundraising efforts, but may only be credited with $250 to cover the full cost of his trip. The extra $250 earned should be used for the organization's tax-exempt purposes, perhaps to support an activity that benefits the entire school or fifth grade class. The extra funds can not be paid to the student.
We are aware of no specific IRS rules or guidelines on this topic. However, in our opinion, individual fundraising accounts are legal if:
individuals are credited only with amounts they raise or help raise selling a product or performing a service (such as selling candy bars or assisting with a car wash); straight contributions which are tax-deductible by the donor may not be earmarked and credited to support a specific individual.
individuals understand that the money raised is really the property of the tax-exempt organization; the tax-exempt organization must control the funds and determine what portion, if any, of the amounts raised may be credited to individuals who assisted with the fundraising;
all amounts raised are used for the tax-exempt purposes of the organization; the organization, and not the individuals, must determine how the funds are used; and,
individuals may not withdraw funds to use as they wish; individuals who leave the organization can not take amounts credited to their name with them; the funds stay with the organization to be used for the organization's tax-exempt purposes.
The IRS has a strict rule against private inurement – the transfer of any of an organization's assets to, or for the benefit of, an individual for a nonexempt purpose. Therefore, individuals may not control any fundraising accounts set-up in their name, nor may they withdraw funds from the "accounts" to use as they wish. The tax-exempt organization must at all times determine how its funds, even funds credited to an individual with respect to their fundraising efforts, are used. And, all funds must be used for the organization's tax-exempt purposes.
The IRS also prohibits earmarking of contributions. You cannot make a tax-deductible contribution to a tax-exempt organization and earmark or designate the funds donated for the support of a specific individual. If you could, parents could make tax-deductible contributions that they earmarked to pay for specific expenses of their own child.
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