501(c) Entity Refunding Money

[zddoodah]

Questions primarily for @Tax Counsel

Let's say a public high school dance troupe decides to take an international trip. The cost of the trip is $2,500 per student or family member who also goes on the trip. The booster organization for the dance troupe (which is a 501(c)(3) corporation) solicits donations for the trip (in addition to solicitation of general donations for the program). Let's say that the boosters do enough fundraising (including a $10,000 donation from Suzie Tutu's aunt, which donation is made specifically for the purpose of the trip) to reduce the trip cost to $1,500 per person.

Suzie's parents pay the boosters $1,500 in cash for Suzie to go on the trip (this is a 100% pass through of actual trip costs -- i.e., every dollar paid by Suzie's parents will be spent by the boosters for the cost of Suzie going on the trip).

The trip is then cancelled (and let's assume that neither the boosters nor the school incurred any trip related expenses or that any such expenses were refunded in full).

Questions:

1. Are the boosters legally prohibited from refunding the $10k donation made by Suzie's aunt?

2. If Suzie's aunt wants her donation refunded and the boosters don't want to do so (and want to "convert" it to a general donation), are the boosters legally obligated to give the refund?

3. Is there any legal prohibition (stemming from the boosters' status as a 501(c)(3) entity or otherwise) against the boosters refunding the $1,500 that Suzie's parents paid for her to go on the cancelled trip.

My assumption -- based on what I've seen from a quick google search is that the answers to questions 1 and 3 are no, but I'd appreciate some expert input. I didn't find anything about question 2, but I assume the answer is yes.

Thanks!

 

[flyingron]

If this organization wants to exist as a 501(c)(3) they should learn what they can and can not do.
You can not earmark a donation for the private benefit of yourself (or your child). Such contributions are no longer TAX DEDUCTIBLE and further, it jeopardizes the exemption under which the booster club is operating.

I see no reason why the club can't refund money to the donors that they don't end up needing. Of course, the donor needs to not deduct any money they got back.

Again, Susie's parents donating for the trip shouldn't have been tax deductible to begin with, so it shouldn't be a problem refunding it.

 

[Tax Counsel]

Questions primarily for @Tax Counsel

1. Are the boosters legally prohibited from refunding the $10k donation made by Suzie's aunt?

No.

2. If Suzie's aunt wants her donation refunded and the boosters don't want to do so (and want to "convert" it to a general donation), are the boosters legally obligated to give the refund?

In the jurisdictions I'm familiar with this turns on the terms of Suzie's aunt's donation to the organization. If she made the donation contingent on it being used solely for the one purpose and the organization ends up not using it for that purpose then she is entitled to get it back.

Otherwise, the organization could keep it to further its exempt purpose, though it risks angering a donor, which might hurt it later when it does future fundraisers and Suzie doesn't want to donate over hard feelings about not getting that refund.

3. Is there any legal prohibition (stemming from the boosters' status as a 501(c)(3) entity or otherwise) against the boosters refunding the $1,500 that Suzie's parents paid for her to go on the cancelled trip.

No.

 

[Tax Counsel]

You can not earmark a donation for the private benefit of yourself (or your child). Such contributions are no longer TAX DEDUCTIBLE and further, it jeopardizes the exemption under which the booster club is operating.

I disagree. A § 501(c)(3) organization making a trip for kids that falls within its exempt purpose certainly may charge the parents a fee for that to help cover some or all of the kid's expenses for the trip. You are right that the parents would not get a tax deduction for that, nor did zddoodah suggest that they would. He correctly characterized that as payment to the organization for the trip, not a tax deductible donation. Nothing about that would jeopardize the organization's tax exempt status. Indeed, this kind of thing happens all the time.

 

[zddoodah]

Thanks, TC!