Exhibit A on why we need tax reform

Last updated on: February 24, 2015 at 9:14 pm by Jane the Actuary

Exhibit A on why we need tax reform 2015-02-24T21:14:37-06:00 Jane the Actuary

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No, not nonsense about per-child or other kids of tax credits.

But instead, a change in IRS regulations that’s causing a lot of headaches for non-profits, specifically youth organizations.

In my sons’ Scout troop, the annual wreath sale splits its profits two ways: half to the troop, half to individual Scouts’ accounts which fund their expenses during the year, for outings or summer camp. Lots of other youth organizations do the same — my oldest son’s marching band has similar “accounts” to which money flows whenever they have fundraisers, based on the student’s individual sales of Butter Braids, cheesecakes, and, I’m sure, more to come in the spring, in order to fund their biennial Spring Break trips.

These fundraisers are a means of enabling the tweens and teens to, in part, pay their own way, both as a lesson in personal responsibility, and, for financially struggling families, to make the trip possible in the first place. And the fact that this requires individual initiative on the boys’ part means that it really doesn’t make sense to require that the funds raised be pooled in order to offset the cost for camp as a group.

But the IRS has up-ended, or at least put a great deal of uncertainty, into this system.

Here’s an article describing a series of IRS rulings on such fundraising accounts. Its key paragraph:

In a series of rulings, both recent and over the last few years, the IRS has examined the issue of what they term “private benefit” from activities of non-profit organizations (usually called “501(c)(3)” from the section of the IRS code that regulates them). In order to remain eligible for non-profit status, money raised by the organization must be used for the public good, not to enrich the members personally, either in the aggregate or directly attributable to an individual’s portion of the fundraising. Scouting units are owned by their chartered organizations, and their non-profit status is conferred upon them by the CO, most of which are 501(c)(3) organizations. Private benefit to members in anything more than an insubstantial amount may jeopardize the non-profit status of the parent organization. Initially, the IRS ruled in a case involving sports booster clubs, but have also passed judgment in a similar manner when a ruling in a Scout context was requested. The same approach applies as well to church youth groups, marching bands and academic clubs.

Now, this isn’t new — the primary ruling itself dates from August of 2013 — but everyone’s still trying to figure out the implications. What is this “insubstantial” amount of benefit to individual members which is still allowable? No one really knows. Is the practice of my sons’ troop, with its 50/50 split, still allowed? Or is “insubstantial” defined with respect to the overall budget of the chartering organization, in our case, our church? My husband, an Assistant Scoutmaster, spent quite some time trying to figure this out, and found all manner of answers, but he ultimately threw his hands in the air, and said, “I’ll ask the lawyer among the troop leaders to figure this out.”

What makes this particularly unfortunate is this: I imagine that, as a matter of general principle, most families wouldn’t be too upset at a policy that treats these boys’ earnings similar to other ways that kids can earn money, such as a paper route or babysitting — especially since, in this day and age, paper routes and babysitting jobs (OK, I don’t know about the latter — I have boys, though my middle one wants to find a way to get a babysitting gig) are harder to come by as a means of earning money when you’re too young to get a job or can’t get hired or commit to a “regular” job in any case.

But it doesn’t seem possible to just say, “OK, no big deal, this’ll just be taxable income for the boys.” The reporting and all the other compliance issues seem to mean that this is a nonstarter. And when our taxation system is so hideously complex that perfectly reasonable* fundraising programs are at risk — that’s what we need tax reform for. Not to dole out more money to favored groups via “tax credits,” or to hike taxes on disfavored groups. But simply to make the entire system more functional.

(* I’ve long been a fan of fundraisers that oblige the children to do real, meaningful work to earn the funds they raise, especially when it comes to older children. I’m not a fan of parents taking the fundraiser order forms to work, and I’m not thrilled with products with an enormous profit margin either, even though I’m “Popcorn Kernel” — yes, cheesy name — for the Cub Scouts. But the wreath sales, and car washes, and pancake breakfasts are all opportunities for the kids to raise money and learn a bit about work as well.)

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