Blue Shield of California Loses CA Tax Exemption

In August, the Franchise Tax Board actually revoked Blue Shield of California's state tax-exempt status and ordered it to file returns and pay taxes going back to 2013.  Although Blue Shield was not tax-exempt for federal tax purposes, it had attempted to retain its state tax-exempt status which it has maintianed for over 70 years.  Although the reasons for the revocation are not public, it is likely due to the fact taht the company is reported to hold massive billion dollar reserves, but makes annual charitable distributions that are much smaller.  The operative question is whether Blue Shield, as a non-profit company, was actually benefitting the public to such an extent that it merited its tax-exempt status. 

This is a good reminder to all charities, no matter how big or small, to constantly reexamine and evaluate their operations in light of the public good they proclaim to advance.  It is not uncommon for operations to slowly drift away from the charities original, core purposes.  In the case of Blue Shield, drifting too far can trigger a heavy consequence. 

Booster Clubs Beware: The Tax Man Cometh

As school begins and high-school football kicks into gear, parents, schools and athletes are concerned with ensuring that enough funds are raised to cover the often expensive costs of sports teams and extra-curricular activities.  More often than not, parents, with occasional assistance from school administrators, set up booster clubs in order to help support and raise funds for the school's athletic programs.  Typically, these booster clubs seek tax exempt status as 501(c)(3) entities so that income is not taxable and so that donations are tax-deductible.

Because one requirement of a 501(c)(3) entity is to ensure that there is no "private inurement" I have often wondered why the IRS did not more closely scrutinize booster clubs both in their exemption applications and in their operations.

Apparently, the IRS may have awoken from its slumber as a recent U.S. Tax Court ruling could ensare thousands of booster clubs across the country.  In Capital Gymnastics Booster Club v. Commissioner, [T.C. Mem. 2013-193 (Aug. 16, 2013),] the court uhpeld the revocation of the tax-exempt status of a parent -run booster club in Virginia that supported student gymnastics.  Although this ruling only applies to this particular group, it could have a much wider impact nationwide.  Often, booster clubs operate on shoe-string budgets and are more focused on fundraising than compliance.  The key in the gymnastics case was that funds raised by parents were specifically earmarked for their children.  If parents paid out of pocket certain costs, then they would have to fundraise less.  Because of this structure, the court determined that there was "private inurement" because specific dollars raised were earmarked for particular gymnasts, and not the group generally. 

Although not discussed in the ruling, one possible way to get around this ruling is to simply suggest, and not require, that members of the club make donations in a manner that is "fair".  In other words, if your child raised little to no funds, it would be socially expected--though not required--that you would make an additional donation to the booster club.

Recently, our office gave a presentation to a group of tax-exempt entities discussing issues related to fundraising and, in particluar, what requirements the entities are to follow when funds have been raised and what are "best practices" they can implement to help ensure that their donors can take a charitable deduction for any donations made.  The vast majority of the time, charities are not following these requirements.  During our presentation, a detailed hand-out discussing these rules was provided and can be accessed here. 

Don't Make Section 501(c)(4) The Patsy of the IRS Scandal

The Visalia Times-Delta recently published an editorial of mine defending section 501(c)(4) organizations that have been vilified as of late as a reactionary response to the IRS tea party scandal.  I defend both their tax-exempt status and the fact that donors' names are kept confidential. 

The IRS Targeting Scandal--An Engaging Infographic

Below is a fascinating infographic that attempts to fill-in the details and give the back story of the IRS tea-party targeting scandal.  (admittedly the tone is a bit left-leaning)

IRS: Bureaucratic Blunder or Political Profiling
Source: TopAccountingDegrees.org