We get a lot of questions about youth sports teams and I don’t remember any of them specifically stating how they treat their “fees” for participation, whether they consider them charitable contributions for the benefit of the club or simply fees for service for the benefit of specific kids, and whether they treat the money received from purchasers of products and gifts on behalf of team members as at least a partial charitable contribution.  (The gymnastic booster club may also be jeopardizing its exemption by allowing families to “fundraise” to cover the required payments.  (See Nonprofit Issues^®, 7/16/13.)

The answer is relatively straight-forward for those payments treated as fees for service and not charitable contributions.  Assuming that there is not a “no refund” clause in the agreement (and perhaps even if there is), I would refund the fees to the extent that the organization did not produce the full program for which the families paid.  The lower level gymnasts completed their season so it sounds as though they received what they paid for.  The daughter who expected to play for a season did not get a season and would be entitled to a refund for the part of the season not provided, but not for the gear that the family purchased to get ready.  The upper level gymnasts would be entitled to a partial refund of their payments for the portion of the seasons that were cancelled. 

I don’t see a reason to treat all the fee-paying families the same.  If you don’t want to make the refunds, you could offer to apply the amount toward next year’s fees (assuming the kids will be back) or, better yet, ask the families to donate the refunds as charitable contributions to the organization to cover other costs.  A lot of performing arts organizations who are unable to perform these days, like orchestras or theater groups, have had substantial success in obtaining gifts in this way.

The issues are somewhat different if the organization treats all payments (probably wrongly) as charitable contributions. In that case, none of the families is entitled to any refund since none of the payments was made on behalf of specific kids.  That doesn’t necessarily mean that you could not refund on the same basis as you refund the fees in the first calculation or ask the families to leave the funds as contributions.  The IRS recognizes that sponsorship contributions don’t have to be made if the sponsored event does not occur.  The tax regulations say a sponsorship is advertising, and is not a gift, if there are requirements for attendance at the event or broadcast ratings, but is still a gift even if it is not required to be paid if the event fails to occur.  (See Ready Reference Page: “IRS Finalizes Regs Covering Sponsorship”) I think the same reasoning could apply to charitable contributions and doubt that anyone would seriously complain about it under the circumstances.