It is a common, often necessary, component of competitive gyms throughout the United States to have a tax-exempt parent-run booster club designed "to foster national or international amateur sports competition” as provided in Internal Revenue Code (“IRC”) 501(c)(3). In fact, like it or not, there is often a symbiotic relationship between the success of the booster club and the success of the gym. These booster clubs are sometimes run by the very same parents whom the gym and its coaches would just as much prefer take a “less active” role in their child’s day to day gymnastics activities, to put the matter gently. However, recent decisions by the Internal Revenue Service (“IRS”) confirm that these parents cannot be ignored; and likewise, the booster club’s activities cannot be ignored by the gym, because the possible adverse tax implications on an otherwise successful gym, caused by intentional or even inadvertent mishandling of the booster club’s operations, are potentially severe. Of course, the potential rewards from a well-run booster club for the gym, are likewise, similarly beneficial.

IRC 501(c)(3) is clear: gym owners, shareholders, managers, coaches and employees must stay off of the Board of Directors for a booster club, and must in no way control the booster club’s decision making with respect to the use of booster club funds. Sitting on the Board, or taking an active role in the booster club’s use of funds could be perceived as exerting direct or indirect control over the Booster Club for purposes of benefiting the for-profit gym, which is prohibited by IRC 501(c)(3) and Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii). An example of such prohibited decision making would include the gym owners, managers, coaches and the like, participating in the decision making process to host a meet and split the gate receipts from admissions at the hosted meet between the booster club and the gym. Does that mean the booster club should be kept completely separate? Yes. Does that mean the booster club should not be monitored? No.

A gym’s relationship with the booster club is important. The gym should play the role of advisor on issues with respect to which the gym has unique experience, lending its wisdom, but absolutely without any vote or final say on where the proceeds go or how the booster club’s funds are spent. After all, most parents have limited experience in the world of gymnastics, and remain knowledgeable and involved only so long as their child participates. A gym’s input is invaluable in that regard in furthering the booster club’s goal of exploring how to best support the gymnasts.

While respecting the prohibitions against direct or indirect control, the reasons why the gym must monitor the booster club’s activities are critical to the gym’s own interests: potential exposure to unwanted tax liability for the gym created by the booster club’s decisions. In the 2013 IRS Tax Court decision in In Re Capital Gymnastics Booster Club, and in the IRS’ more recent Private Letter Ruling issued on February 13, 2015 in PLR 201507023 (IRS PLR), the IRS made clear that it continues to monitor, and penalize, booster club’s that confer private benefits to the gym, directly or indirectly. Examples of impermissible benefits that may result in the gym having to pay back taxes on benefits it received, but did not previously pay taxes for:

1. Equipment purchased for the gym by the booster club;
2. Profits split or shared with the gym from booster club hosted meets and functions;
3. Fundraising for the gym, not the athletes;
4. Proceeds received by the gym from a booster club-run gift or snack shop, shared with the gym;

This list is not fully inclusive, as there are many other subtle variations of potential benefits that a gym might receive. In a new twist however, the IRS’ February 13, 2015 Private Letter Ruling in PLR 201507023 (IRS PLR), has raised an entirely new concern. Specifically, the IRS ruled that “[t]he fact that all of the money that [the booster club] raise[s] enables athletes to compete on teams sponsored by the gym is a substantial private benefit,” in violation of Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii). This can be interpreted to mean that because a booster club helps the gymnasts compete for a for-profit gym that the gym is privately benefiting. A closer look at what sparked the IRS’ interest in PLR 201507023 (IRS PLR) may reveal some clues as to what the IRS was thinking. The IRS identified several problems with the booster club's operations in PLR 201507023, including that the gymnastics club owner sat on the Board of Directors; the booster club had mandatory membership dues; the booster club put fundraising money raised by parents into accounts earmarked in direct proportion to that family's fundraising, rather than into the booster club's general account; and the Booster Club used 25% of its fundraising dollars to purchase equipment for the gym. These activities raised concerns of both private inurement to parents, and private benefits to the gym.

Now, relating back to that most concerning portion of the ruling in PLR 201507023 (IRS PLR), that all of the money that the booster club raised enabled the gymnasts to compete on teams sponsored by the gym, conveying a substantial private benefit, it is entirely possible, if not likely, that the above-identified problems with the manner of the booster club's operations significantly contributed to this conclusion, and that the IRS has not started targeting gymnastics booster clubs for this specific issue. Support for this proposition can further be found in the IRS’ 1993 EO CPE Text found at www.irs.gov/pub/irs-tege/eotopica93.pdf, in which the authors concluded that, with respect to gymnastics booster clubs, the fact that the for-profit gym's reputation is enhanced and the public is encouraged to patronize the facility, does not constitute more than an insubstantial, incidental benefit to the gym. The IRS went on to appropriately note that, in reference to the gym’s reputation being enhanced thereby encouraging the public to patronize the gym:

“[i]n the context of the purpose of [IRC 501(c)(3) and IRC 501(j)] this intangible benefit received by gyms … is only incidental to the public purpose of furthering national and international sports. A conclusion that the private benefit is incidental finds support because there is strong reliance on the private sector to provide athletic facilities and training. Thus, the linkage of the booster club to a for-profit facility will not, in and of itself, be a disqualifying factor. It will, however, call for close scrutiny of all the activities of the booster club to assure that it does not actively benefit the for profit gym.”

What does this mean for your gym? You should be closely scrutinizing the activities of the booster club to assure that it does not actively benefit your gym in more than an incidental manner. The booster club in PLR 201507023 (IRS PLR) benefited the gym through enhanced reputation, but it also bought equipment for the gym and the gym’s owner sat on the Board and controlled or participated in the vote of how booster club funds would be spent, presumably encouraging the booster club to use its funds to buy equipment for his gym. This saved the gym owner from having to use the gym’s own for-profit dollars from having to buy the equipment purchased with the booster club funds. Avoiding a similar adverse outcome as the gym’s discussed in this article requires a review of your gym’s interaction and relationship with the booster club; close review of the booster club’s activities to identify any potential direct or indirect benefits the booster club is conferring on the gym that are beyond incidental, and an analysis of the substantiality of that benefit; and review of the gym’s accounts to see what funds, if any, are received from booster club hosted or sponsored events, amongst other items for review.

As has previously been observed in prior articles, the benefits of a properly run booster club are substantial. Your gym should not be discouraged from working with a well-run booster club to improve the competitive opportunities for the gymnasts. Ultimately, it is the gymnasts who benefit from a properly run booster club and a well-run gym. Respecting and monitoring the relationship between the booster club and your gym, rather than ignoring or avoiding it, however, is the key to accomplishing that goal.