Our small 501(c)(3) charity holds one fundraiser each year. Proceeds from the event are distributed to high school graduates and those enrolled in technical colleges to support their education in the trades. We are thinking we should require recipients to work at the fundraiser. Is this advisable? —From the Website.
I don’t think it is a good idea. The Miss America pageant went back and forth with the Internal Revenue Service for years over whether the winners of the Miss America pageant received tax-free tuition scholarships or taxable income as compensation for the services they were required to provide at events throughout the country during the following year.
I doubt that your annual fundraiser is likely to attract as much attention as the Miss America pageant, but the legal issue is the same. If the winners are required to provide services in order to receive the scholarships, there is at least some element of the payment that is not for tuition and is therefore likely to be considered taxable income.
I also think it is a little demeaning. You would probably be better off — and possibly raise more money — if you invited the winners to your event, introduced them to the participants, and showed the donors that their contributions are going to help nice young people who are studying to provide real services to the community. It should make both the students and the donors feel good about your program.
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