Our school system has several 501(c)(3) nonprofit organizations that raise money for extracurricular activities. We all maintain our own checkbooks, file our own taxes and do everything that we have been told we need to do. Now the administration is trying to get all of the clubs to turn their monies over to the school so the treasurer at the board of education has control over the money, and the athletic director has to approve everything that is purchased. The treasurer, who is new to the school system, says that our system is "barely legal" in allowing these 501(c)(3) groups to operate on behalf of school clubs without running the finances through the school. With the school funding system as it is, and the lack of trust in the administration, we have great concern about changing the procedure that we think is best for our clubs. Can you tell me if we are "barely legal" and/or to whom we could turn to for legal advice?
There is certainly no federal tax reason why your various 501(c)(3) organizations can’t raise money for school activities, and it sounds as though you are doing what is necessary to comply with applicable requirements. I would be very suspicious about any effort to take control over the money that you raise for the school, especially when the basis is that the current situation is “barely legal.” Barely legal, of course, translates into legal, a little bit like barely pregnant translates into pregnant.
There is no way that I can tell whether there might be some real legal impediment to the present system under the local school law applicable to your district. You should consult with a lawyer who is familiar with the applicable school law on that question. But the announced rationale for the change isn’t very convincing, and if there isn’t more, actually confirms that what you are doing is okay.
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But there could be substantial issues regarding school's insurance and fidelity coverage protecting the group and its volunteers. Using the school's name could be a concern for the school. It could give the impression to donors that there is oversight and audit. -C.C. via email
Don, there are alot of compliance issues with athletics which are not tax related. -A.A. via email
I would consider the original mission statement on the application for the 501(c)(3) status of the organizations being asked to do this. In my experience generally the school systems should not and do not have control of these type organizations (generally booster clubs). The mission statements I have seen have stated clearly that they operate on behalf of the school systems and are not part of the school district but rather stand alone. Not only that but I would be very leary of comingling funds from multiple nonprofits that were not established by the school. Also I would consider where does liability fall if the school system takes over the funding, most school systems do not want to incur that risk. -K.M. via email
Nonprofits that raise money for school-related activities should to take into account the school's responsibilities for providing equal access to its programs, including extracurricular activities. Sometimes school systems are concerned that the standards that outside groups follow in supporting teams or clubs would not meet the standards that the school would need to follow. If the result is that more boys than girls get sports equipment, or there is some other inequity, the school may have some cause for concern. This just reinforces the importance of understanding the school system's concerns and seeing if it's possible to work cooperatively. -C.L. via email
Each 501c3 is its own entity with its own governing constitution/bylaws. Do the bylaws give control of the 501c3 to the administrator and athletic director? Who governs the 501c3? What's the worst that could happen if the governing board does not give government to the athletic director? I learned from this post to create a provision to prevent a hostile takeover of club funds. --J.T. via email
The reader references the school "has" several nonprofit organizations that raise. money so I would wonder if the 501(c)(3)s are Type I or II supporting organizations of the school system, which if so, the school system would have the authority and responsibility to oversee the organizations. My first reaction might be that they are as the question also references that the "do everything that they have been told to do."
Also, if the groups have the common practice like many athletic booster clubs do--to raise funds to help their own children pay for costs to participate in the sports activity--they walk a fine line on whether the fundraising is for private inurement or charitable. This may be why the school system has concerns--and used terms like barely legal.
I am in healthcare and know hospitals are moving away from auxiliaries operating with checkbooks and cash controls outside hospital operations. Primarily to assure that neither the volunteers or the organization are placed at risk. Risk opportunities go over and above filing a tax return on time. For example, if an auxiliary uses a hospital's tax-exemption or is a supporting organization of the hospital and has a relationship with an excluded person on the Office of Inspector General's (OIG) excluded provider list, our federally funded programs (Medicare and Medicare) could be placed at risk. --R.H. via email
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