Legal Issue for non-profit Chartering Organizations

[Stosh 3452]

Another thread popped up concerning the number of for-profit Charter Organizations (CO) and while I sit here with nothing to do except have the Mrs. nag me about not doing anything, I thought I would pose a question.

 

Not-for-profit organizations are tax exempt from moneys coming in because they hold an exemption.  They own the BSA franchise and use their tax number for this purpose.

 

However, for-profit organizations are not tax exempt from moneys coming in and must therefore declare their profits for tax purposes.  So when the boys go out selling popcorn, is that not a profit activity for the for-profit CO?  And doesn't that income need to be reported?  This may be why we have so few for-profit CO's. 

[NJCubScouter 1389]

Good question.  Perhaps @@Hedgehog might be able to shed some light on this.

[Cambridgeskip 658]

I'm going to follow this....

 

Over here I work for HM Revenue and Customs, our equivalent of the IRS. The tax law geek in me is quite interested in the answer to this question! 

Edited January 17, 2017 by Cambridgeskip

[NJCubScouter 1389]

Skip, I don't want to send this thread off on a tangent (though why should it be any different), but am I correct in thinking that this issue would not even come up in the UK?  You do not have chartered organizations, correct?  Is it the Scout Association itself that "owns" the units?  (Which, I believe, is how the GSUSA works.)

[Cambridgeskip 658]

Skip, I don't want to send this thread off on a tangent (though why should it be any different), but am I correct in thinking that this issue would not even come up in the UK?  You do not have chartered organizations, correct?  Is it the Scout Association itself that "owns" the units?  (Which, I believe, is how the GSUSA works.)

 

Kind of. Most groups are registered charities in their own right that affiliate to The Scout Association and essentially agree to run on TSA rules. Charities are not normally subject to tax except in very specific circumstances.

 

There are a handful of groups that are owned by another body, referred to as "closed groups", typically attached to a school. Again those bodies are not normally subject to tax.

 

The interesting point about the American situation is under UK tax law a company is subject to corporation tax on the profits of trade. Trading is not actually defined in statute law, instead it is a concept that has developed over many years through case law. These have lead to what are referred to as the badges of trade, essentially 6 questions to consider as to whether someone is trading. None of them is in itself definitive, you can hit 5 out of 6 and not be trading. It's all very wooly! One of those questions though is, is there a profit motive? In the case of popcorn selling to support a scout troop it charters I think there is a big question over whether there is or not as any excess is to be used to support the troop rather than pay a dividend to shareholders.

 

If is taxable profit then the next question is whether the spending of those profits on the troop is tax deductable? Is it a charitable donation? Is it effectively marketing? Or does it constitute an application of profit?

 

The whole thing is genuinely interesting to anyone involved in tax!

 

Or maybe I should just get out more

 

Sorry, looks like I digressed there..... 

[Melgamatic 16]

The BSA Foundation's statement of the tax status of units indicates that it comes strictly from the chartered org.  If your unit is chartered by a for-profit organization (e.g., a bicycle store), your unit is a for-profit organization!

 

 

The Boy Scouts of America is a public charity, tax exempt under IRC Sec. 501 ©(3). An IRS group exemption allows us to extend this tax exempt status to “subordinate organizations†- this includes all BSA local councils and approved local council trusts.

 

It has been the long-standing position of the IRS and the BSA that units - such as packs, troops, teams, posts, and crews - are NOT covered by the BSA’s group exemption, and that the BSA’s tax exempt status under IRC Sec. 501©(3) does NOT extend to units. Units are not, in themselves, legal entities. They are chartered to partner organizations of the BSA such as churches, PTAs and civic groups. Since a unit is “owned†by its chartering organization, each unit takes its tax status from that organization. Units are NOT subordinate organizations of the Boy Scouts of America.

[T2Eagle 902]

I'm a little out of my depth here, but just because you take in revenue, popcorn sales, doesn't mean you have increased your net profits for tax purposes.  In addition to the direct cost of the popcorn, other expenses, like summer camp or equipment, would offset that revenue so that the business did not actually show a net profit from popcorn.

[fred johnson 936]

So when the boys go out selling popcorn, is that not a profit activity for the for-profit CO?  And doesn't that income need to be reported?  

 

I'm not a tax lawyer but I stayed at a Holiday Inn Express last night.  

 

If I was the company, I'd be concerned, but not that much.  If you really look into how scouting units are legally structured, it's a mess ... IMHO.   

 

The key issue is how was the bank account opened.   Most units do not mix their money with the chartered org money.  Usually, the scouting unit has a separate bank account.  So the real question is:  did the charter org give the tax ID / EIN to open the bank account?  I'd be concerned if the business did provide it for the bank account.  Even most non-profits don't do that.  I really really bet that a business that has an accountant and looks at bank statements would not do such a thing.  

 

My experience is scouting units go to a bank to open a bank account.  The banker asks for an EIN or SS.  If none is available, then the banker helps the person go the the IRS web site to request a non-profit EIN / tax id.  And the EIN usually has a title of "<CITY> <Troop/Pack> ###>".  

 

That's why I say most units are legally a mess.  Some documents saying one thing.  Others saying another.  Fundraisers misstating stuff.   

 

I'm betting a unit chartered by a for-profit business still has a bank account with a non-profit EIN.

 

I often think about past unit treasurers that don't realize their names are probably still tied to their scouting units 10 or 20 years later.  I remember being with one treasurer who setup the non-profit to have her house ####.  I'm betting the non-profit is still tied to her house address all these years later.  

Edited January 18, 2017 by fred johnson

[DuctTape 1230]

And it gets even messier because of these "sales" even if for non-profits should be collected sales tax in many cases.

[Stosh 3452]

How can one "department" of a business have it's own funds and be non-profit in a for-profit entity.

 

Like any other business, the Troop/Pack/Crew is a part of the ownership of the CO, even if the income is totally offset with expenses, that would mean that every year the unit's account needs to be ZERO.  If they made more than they spent, i.e. tucked away in some commissions account for individual income, then that needs to be identified properly.  And if the unit does have it's own EIN (EMPLOYER IDENTIFICATION NUMBER) then it needs to view each individual working for them as an employee generating sales income after expenses.  Each scout needs to receive a W-2 at the end of the year for the ISA account/commission they earned during the year.  And as @@DuctTape points out, one has to account for sales tax on all for-business sales transactions.

 

Now BSA and thousands of units do a lot of self-justification of ignoring the details, one might want to consider the lesson being taught to the youth of these organizations.  It doesn't appear that the lesson has much to do with honesty.  There's even a strong argument that what athletic booster clubs got hit hard on was the individual personal accounts generated by these clubs constituted money laundering in that it hides charitable contributions that are being used for personal benefit, i.e. Clinton Foundation paying for Cheslea's wedding????  And wouldn't a company that has separate bank accounts be construed as rather suspicious? 

 

So, what is it we are teaching our boys concerning Citizenship, honesty, etc. with these for-profit and even non-profit CO's and how the units relate tot hem financially?

[Hedgehog 334]

Good question.  Perhaps @@Hedgehog might be able to shed some light on this.

 

Somebody need a woodland creature who impersonates at tax attorney?

 

However, for-profit organizations are not tax exempt from moneys coming in and must therefore declare their profits for tax purposes.  So when the boys go out selling popcorn, is that not a profit activity for the for-profit CO?  And doesn't that income need to be reported?  This may be why we have so few for-profit CO's. 

 

I've never encountered this situation, so all I can do is provide some educated speculation.  

 

I think the answer as to the profits is clear - you sell popcorn that is a gross receipt, you pay for the popcorn that is a cost of good sold, the difference between gross receipts and the cost of good sold is income.  Same answer if you are the local grocery store selling popcorn out of your inventory or the local freight company selling Boy Scout popcorn.  

 

From a technical perspective, I doubt most of the amounts paid for Scouting expenses could be properly deducted for tax purposes. Some expenses could be considered advertising or marketing such as painting "Troop 247 Sponsored by Bob's Shipping" on the side of the trailer (similar if they purchased uniforms with their name on it for a Little League team).  The general test for a deduction is if it is "ordinary, necessary and reasonable."  For example, It is hard to say that paying for a campout is an ordinary, necessary and reasonable expense incurred by a trucking company.  The amounts spent on Scouting also wouldn't be charitable deductions because amounts paid on behalf of a specific person cannot be a charitable deduction.

 

Additionally, the Scouts selling popcorn could be considered employees and scout accounts could be considered compensation.

 

However, my sense is that most auditors would nonetheless allow the popcorn "profits" to be reduced by any scout related expenses - if they even bothered to look at it.  Probably would just tell them to fix the problem by forming a 501(c )(3) entity and running it thorugh that.

 

And it gets even messier because of these "sales" even if for non-profits should be collected sales tax in many cases.

 

Correct.  Only certain sales by non-profit entities are exempt from sales tax (e.g. sales by a non-profit hospital's gift shop are typically taxable).  However, most states do not tax food, so popcorn wouldn't be taxable anyway.

 

I'm betting a unit chartered by a for-profit business still has a bank account with a non-profit EIN.

 

Although it is easy to get an EIN, it is much more difficult to get federal 501(c )(3) tax exempt treatment.  To get the 501(c )(3) designation you need to provide the appropriate formation and governance documents.

Edited January 19, 2017 by Hedgehog

[Stosh 3452]

If the IRS went after athletic booster clubs for stretching the limits on such fundraising for individuals, what's to stop them from going after BSA units especially those associated with private for-profits?  With the raising money for individual members, doesn't that also jeopardize a non-profit's exemption?  One might not see it a big deal for a single unit, but with the amounts of $$'s on the table, it could be a rather lucrative audit situation.

[Hedgehog 334]

If the IRS went after athletic booster clubs for stretching the limits on such fundraising for individuals, what's to stop them from going after BSA units especially those associated with private for-profits?  With the raising money for individual members, doesn't that also jeopardize a non-profit's exemption?  One might not see it a big deal for a single unit, but with the amounts of $$'s on the table, it could be a rather lucrative audit situation.

 

 

So our Troop of around 50 scouts makes $3,000 in income from popcorn.  At 35% tax rate that would be a whopping $1,050 in tax a year for say four years (three prior plus current) if we were not chartered by a tax-exempt church.  If you hit all the 10 scout units in the area (assuming they were all for-profit entities), that total around $40,000.  More likely, they will have to audit 500 scout units to find 10 that are for profit.

 

The booster clubs (especially the independent sports teams) often raise around $5,000 per member with a team of 20 members that is $100,000 per year which would generate $35,000 in additional tax per year and $140,000 for four years.  Do ten of those audits a month and the additional tax is $1.400,000.  Since the understatement would be more than 25% of income, the statute would be six years brining in $245,000 per entity or $2,450,000 for 10 similar entities.

[Stosh 3452]

Totally agree, @@Hedgehog and I think that is why the IRS hasn't gotten to the BSA....yet. 

 

ISA's are charitable moneys taken in and spent for the benefit of individuals.  Definitely a charitable no-no.  Yet the troops do it anyway.

 

Now, whether the scope of the abuse, fraud and money laundering is so small it flies under the IRS radar, does it mean it's okay to teach our boys that it is okay to do?  THAT is the rub I find offensive with many of the troops finding it okay to do.

 

I don't want my boys to think that the efforts they put into the program is to acquire personal wealth in an ISA account, nor do I want them to think that because the organization they work for is charity they are entitled to personally gain from that effort.

 

Yes, the Salvation Army pays some people minimum wage to ring bells at Christmas time, some charities pay professional telemarketers and accept 10% of the money as actually helping the cause and I eat MRE's that the Red Cross provides the shelter residence after a hurricane goes through because the power's out, nothing's open and money is useless at that point. 

 

Somehow I don't see these things falling into the same category as collecting money under the guise of Boy Scout programming, taking a charitable donation off of taxes so that an individual scout can go to Philmont or Sea Base.  What's to keep the parents and grandparents from "donating" the cost of the Philmont trip for their boy and taking it as a charitable donation for Scouting off on their taxes?  That's money laundering and I'm sure there are troops out there that wouldn't bat an eye on the practice.

 

Many times the goals, aims and purposes of the Scouting movement get clouded in the practices promoted by the units.

 

A Cub Pack with $5,000 in banking CD's raised $5,000 for the program of scouting in that unit and then never spent it on the boys.  Where's the honesty in that?

 

A for-profit CO is just another step further in the process of potential abuse and the lessons that are taught to justify the processes. 

[fred johnson 936]

Although it is easy to get an EIN, it is much more difficult to get federal 501(c )(3) tax exempt treatment.  To get the 501(c )(3) designation you need to provide the appropriate formation and governance documents.

 

Agreed.  I'm betting most troops don't follow through with all the required paperwork.  I'm betting there are tens of thousands of bank accounts with EINs that were created for charities / non-profits fail to follow through with the next part. 

 

That's why I think the way "most" scouting units are legally structured is a mess.  

Edited January 19, 2017 by fred johnson