Distributing Raised Funds

March 6, 2014 4:31 PM

In the USA, are we required by the IRS to distribute funds raised for a non-profit's group trip equally among all participants?

We're in the process of planning and funding a trip to Europe for a group of our students. Fundraising is in process.

Some of our students' families can pay out of pocket for the whole trip no problem. For some of our other students, raised funds could make a difference between whether they can go at all or not.

We have a policy that all raised funds be distributed equally among all trip participants. According to our money dude, this is an IRS policy.

While I recognize this is not going to always be the case, the parents of the "haves" came to me en masse and asked if they could waive accepting funds so that the "have not" kids could better afford the trip. The prevailing sentiment is that its silly that they should accept money when they can well afford the trip without help.

Our money dude has said this is absolutely impossible. They all must accept the same amount of money, again citing IRS policy.

Not that I don't trust him, but I dove into IRS rules on fundraising and can't for the life of me find anything that supports this position. However, I also admit that reading IRS documents makes my eyes roll into the back of my head so I'm not, perhaps, the best person for this research.

Is there anyone out there who can tell me definitively whether this equal-distribution-of-funds-no-matter-what thing is an actual IRS policy and, if so, what document I should have read to determine this?

Many thanks.

posted by Joey Michaels to Work & Money (12 answers total)

I would ask him to provide a specific section of the code (and a copy) of the relevant rules. This does not seem right to me. The caveat I would have is whether your by-laws/articles of incorporation require this--or--there were written or verbal statements to your donors that this would be the case. I know for a fact there are thousands (+) of non-profits that distribute services and/or funds on the basis of some form of means testing. I would not hesitate to push him on this matter. Hope you can resolve this to the benefit of the members
posted by rmhsinc at 4:44 PM on March 6, 2014 [2 favorites]

Best answer: A non-profit's mission has to benefit the public or a group at large; you can't start a non-profit to benefit a particular person (see here). Think of the possibilities for fraud. If the "haves" parents could write a big tax-deductible check and send their particular kid on a tax-deductible European vacation, gosh, wouldn't everybody play that game? We could all make our whole lives tax-deductible! I think your tax guy is looking for that issue. If the donations are tax-deductible, the money has to benefit the group.
posted by ThePinkSuperhero at 4:46 PM on March 6, 2014 [4 favorites]

Can the have parents pledge the amount their share costs back as a donation? It's a work-around, but it gives your fundraising a boost and balances out.
posted by viggorlijah at 4:59 PM on March 6, 2014 [6 favorites]

I can't comment on the legality of it except to say that this is precisely the kind of fundraising we do at Kid BlahLaLa's school, and have done for years: a fundraiser that helps "have nots" participate in a trip that the "have" families can easily pay for with no assistance.
posted by BlahLaLa at 5:15 PM on March 6, 2014 [1 favorite]

What kind of organization are you? I contribute to a science summer camp (that I'm an alum of) that gives scholarships to participants based on need. The organization is an educational nonprofit- 501(c)(3). I have no idea about the actual way the laws work, but non-profits give need based scholarships for all sorts of activities based on tax deductible donations rather a lot, so there has to be some mechanism to do so.
posted by rockindata at 5:25 PM on March 6, 2014 [2 favorites]

Best answer: This sounds strange.

You might be able to create qualifiers (like an application) to determine who it goes to and THEN distribute funds equally. Obviously the haves would be disqualified.

We do this at my non-profit all the time. No one gets an exact equal amount of donated goods/funds. Especially goods. OR we get enough of a monetary donation that it can go to 30% of who we serve and then we figure out what qualifiers make about 30% or based on need like 'so and so doesn't have a bed.'
posted by AlexiaSky at 5:29 PM on March 6, 2014 [5 favorites]

Best answer: Ask your "money dude" to explain how a charitable organization could ever give a need-based scholarship (as, of course, many do) given that rule (which probably doesn't exist). I think it would make sense to have an application form for the needier students anyway.
posted by grouse at 6:29 PM on March 6, 2014 [6 favorites]

ThePinkSuperhero: "A non-profit's mission has to benefit the public or a group at large; you can't start a non-profit to benefit a particular person (see here). Think of the possibilities for fraud. If the "haves" parents could write a big tax-deductible check and send their particular kid on a tax-deductible European vacation, gosh, wouldn't everybody play that game? We could all make our whole lives tax-deductible! I think your tax guy is looking for that issue. If the donations are tax-deductible, the money has to benefit the group."

I think the tax guy has his logic turned around, though. The donations must further the nonprofit's mission, but this stipulation that all participants in a group activity must receive an equal amount of the donated funds actually edges closer to personal gain!

Anyway, yeah, tax dude needs to say precisely which IRS policy he's citing, because need-based scholarships/stipends are totally a commonplace and legally-done thing.

Joey Michaels, what kind of 501(c) is it, and what kind of organization?
posted by desuetude at 7:31 PM on March 6, 2014 [1 favorite]

Best answer: I've worked in a half-dozen different nonprofits, and I agree that there's no reason you can't create a need-based program to subsidize students whose families can't pay the retail cost. I'm pretty sure the relevant language concerns the idea that you have to set up a class of beneficiary individuals, not just name particular identified individuals.:

a trust to benefit John Jones is not a charitable trust even though the facts may show that John Jones is impoverished. However, an organization set up with the general charitable purpose of benefiting needy individuals in a particular community is a charitable organization and it may select John Jones as a beneficiary.

And they may not only select the beneficiary but also determine the degree of benefit. As universities and camp and school scholarships routinely do. For instance, you can't say "we're raising money so Betty and George can go on this trip," but you can have a structure that says "we're raising money so students with family incomes under [Betty and George's family income] can go on this trip." Or whatever other criteria you develop in order to create a class of people who can benefit. This is what prevents it from being a direct handout to individuals you like, which would be corrupt and discriminatory. Instead it's a benefit available to any individual who meets your criteria.

So yes, you might need to set up a qualifying system so that you can determine which individuals are eligble to receive the subsidy. I'm not personally familiar with exactly what qualities this criteria documentation has to have or who needs to see it or have it on file, but that is easily solved. The main thing to know is that it is entirely possible to work the trip funding this way. Nothing about being a nonprofit prevents that. There's a way to comply with the IRS requirements while achieving your goal of underwriting the trip for those who need it.

Can you seek a second opinion that's not your "money guy?" Your state attorney general's office can be a great place to start for resources to understand nonprofit tax code requirements.
posted by Miko at 8:20 PM on March 6, 2014 [4 favorites]

The Do's and Don'ts of Granting Scholarships:

Your scholarship cannot benefit a particular person or family, but you can put reasonable restrictions on the group of applicants. As a rule, the applicant pool should be big enough to benefit the greater community, and you should not be able to identify all of the eligible recipients ahead of time. Your applicant pool can be very small only if your charitable goal is similarly narrow (e.g., sponsoring a top Ph.D. candidate in a small scientific field when your organization is devoted to curing a rare disease). All scholarships should be awarded on an objective and nondiscriminatory basis....

Another idea, if you want to avoid setting up the necessary selection structure, might be to price the base trip at the level the have-not families can afford, and fundraise for the rest of trip cost, which everyone shares. I'd suspect the parents who could normally afford the higher trip cost might kick in the difference, and then everyone would be "sharing" equally.
posted by Miko at 8:28 PM on March 6, 2014 [1 favorite]

Does the fundraising appeal perhaps specifically make a thing out of the policy that all trip participants get an equal share of the funds?

I agree with Miko and others upthread that this whole issue should be solvable by clarifying the fundraising purpose, and the criteria for need-based aid.

The only other thing I can think of that would explain your money guy's objections is that perhaps this isn't a "what the IRS allows in general" issue, it's an internal accounting issue. As in, the accounting for the donations and distributions would have to be set up a little bit differently than your current system in order to comply with IRS record-keeping regulations.
posted by desuetude at 10:14 AM on March 7, 2014 [1 favorite]

You can call it a scholarship fund, and all fundraising can go to funding scholarships/grants for this trip. Then, one of the qualifications can be that to receive funds, each participant MUST APPLY for a grant/scholarship.

This way, the Haves can choose not to apply, and the rest of the dough can be distributed among those who do apply.
posted by Ruthless Bunny at 11:17 AM on March 7, 2014 [3 favorites]