The bylaws of a 501(c)(3) youth sports organization prohibit board pay but specifically provide that the children of board members do not have to pay the registration fees associated with each sport.
The full cost of each sport in season is about $130 so a parent board member with one child playing 3 different sports over the course of a year receives a benefit valued at approximately $390. However there are board members with 3 kids playing 3 sports at a benefit worth over $1,000. Would this benefit be considered taxable income to these board members?
I think you are on to something here. This benefit is more than incidental. It’s not like a free lunch at the noon board meeting or free attendance at a ticketed event where they are performing some official function for the organization. The IRS is likely to consider it compensation.
If the IRS looks and the directors have not treated the benefit as compensation in the year they received it, the IRS could call it an automatic excess benefit. (See Ready Reference Page: “IRS Issues Tips to Agents on Collecting ‘Automatic’ Excess Benefits Taxes.”) Then they would not only have to pay the benefit back to the organization, but would also have to pay the 25% excess benefit tax and the late reporting fee. Any board member knowingly approving the benefit might also have to pay a tax, and a person signing the Form 990 tax information return without reporting it might also have a problem.
Since the compensation would not seem to be unreasonable—and therefore not itself an excess benefit—it may be a lot wiser to treat it as compensation and have the directors pay the income tax. They would still end up paying a lot less out of pocket for their kids’ participation than the general public.
Comments from our Readers
Aside from the IRS implications, there is the governance issue. In the absence of a strong nominations process (a problem for many small organizations) such a policy of free service can attract people to your board who are more interested in the benefit than in serving the organization's interest. As a board member, when I lobbied for a change in such a policy, one member asked why anyone would want to be on the board without the freebie. 'Nuff said! --N.D. Via e-mail
State Charitable Solicitation Statutes: Everything You Wanted to Know But Were Afraid to Ask
Charities that seek contributions nationally must typically register in 39 states and the District of Columbia before starting to solicit. Furthermore, for-profit fundraisers are also required to register and file their contracts and other documentation with many states. Since many states are increasing their enforcement efforts to ensure that charities and fundraisers are complying with initial and annual registration requirements, it's important that charities and fundraisers abide by these statutes.
Program materials include an extensive review of the statutes and their provisions, plus a copy of the Uniform Registration Statement for multi-state filings. Purchasers will receive an e-mail receipt that includes a link that will take them to the product download. The download is a pdf file. Learn More
Weekly question and answer
Notice of each full edition
and its free stories
Report on 501(c)(3) electioneering
What our readers say about Nonprofit Issues
Once again you've tackled a tricky question and explained it so we all can understand the issue.--M.V.
Thank you for your informative and keen advice on nonprofit matters. I believe it's a unique and concise place to get answers to this often wispy area called nonprofit. --R.T.
Have a question?
Other ways to
Talk to the Editor
Next Conference Call:
Thursday, September 25, 2014
Participate in this bi-monthly telephone seminar conference call and ask your questions directly to Editor Don Kramer.
Access the entire site
($9.95/24 hours, $17.95/3 months).
Full Day Program
A well-received full-day program that covers the current hottest topics in nonprofit law. Qualifies in Pennsylvania for Continuing Education credits.
Don is available for programs and speaking engagements ranging from a one-hour presentation to a full-day primer on nonprofit law. Contact us if you are interested in having him speak at your program.