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Scouts individual accounts and use/tracking of funds

Hello Everyone,

I am new to Scouting and have stepped into a treasure role with my son as a new Wolf. This year is the beginning of our first year together and we are just about to wrap up Popcorn sales next week. Part of what was agreed upon was that a percentage of the sales commission would be used for Pack expenses/events and the remained held for scouts to use for Scouting expenses (Uniform, Scout Handbook, or events). We already have a family that is looking to use those earned funds towards the purchase of a uniform. Writing someone a check is out of the question, so how can we make sure that the funds that are being used are only for said item, ie. uniform? How are others doing this. Also, right now we are keeping track of all the Scouts “credits” per-say in a spreadsheet ledger. How is everyone keeping track of what credits are “consumed” by the scout? Another ledger or transaction sheet?

Sorry for all the questions. This is all very new to me. :slight_smile:

Thanks,
Ken

I can only go from my experience. First off this is an IRS NO NO. As they are gaining benefit but not paying taxes.

That being said. My unit only allows use of the funds for Unit Camping, National Events, or Scout Training. Like you said, getting into Dues, Uniforms, Books, gets messy real fast.

We use Quickbooks to track these funds, and update Scoutbook Payment log periodically to info families.

@DonovanMcNeil Thanks for the quick response.

That is kind of how I feel also. IRS is not something I want to deal with.

I had noted though, reading the BSA Product Sales Guide states:

“Unit funds may be used to reduce the cost of participation, including
the cost of attending camp or obtaining uniforms. They may be used to provide financial
assistance or awards to individual Scouts based upon their level of participation generally or
in specific activities benefiting the unit, chartered organization or community, attendance,
advancement and/or need.” -Page 9 Third Paragraph.

So I assume this really just means that as a collective account Pack/Unit account, it can be used to help Scouts afford something like a uniform or pay back dues. Or am I reading it incorrectly?

I the appreciate your experience provide from your unit!

This is a really thorny issue.

There are several sets of Bryan on Scouting articles on this topic over several years. The latest I know of is here:

https://blog.scoutingmagazine.org/2014/12/03/individual-scout-accounts/

The BSA also has a publication on this topic, which I find less than helpful personally.

There are also IRS letters of various forms out there.

ETA: If you’re really concerned, and your unit is chartered by a non-profit, I would recommend you caucus with their accounting folks about this.

Uniforms are a scouting expense, as the uniform is typically not suitable to wear for non-scouting occasions.

Reimbursing parents when they provide a receipt makes sure the money is used the way the unit specifies.

And again, chat with your CO to get their position on this. Technically, the money is theirs, as the CO owns the unit and all its resources.

One option would be to see if there is a volunteer who can pick said uniform up charging it to the pack’s account. Another is to provide a check made out to the scout shop noted for the uniform. Or call the scout shop and see what can be worked out. In my area they employees really want to be helpful.

Thanks for all the info. I will talk with the committee chair (who also happens to be the Charter Org. Rep.) about this an come to a decision about how the Chartered Org wants to proceed for better or worse.

Thanks again everyone and I’ll post back once I have more info.

Private benefit rules of the IRS prohibit those involved in nonprofit fundraising from receiving a substantial personal benefit for their efforts. Some practices where dollar for dollar credit is provided for the sole benefit of the person who sold product based upon amount sold could violate the private benefit prohibition. While the BSA has not endorsed “Individual Scout Accounts” for private benefit of individual Scouts who participate in fundraising because of the IRS rules, unit fundraising designed to make Scouting affordable is a fundamental part of Scouts “earning their way”. The best practice is that less than half of the profit / commission can be earned by the individual.
My unit sets aside 10% of the total sale for the scout. Usually the profit/commission is ~40% of the sale, so the individual is receiving only ~25% of what was earned as a unit. They may use their individual scout account funds to pay for scouting activities (camping), registration, and items that are scout or camping related (uniforms, tents, sleeping bags, etc.). They purchase the items and provide a receipt. The pack reimburses them, less any tax they paid.
We track via spreadsheet maintained by the treasurer. Each month the treasurer provides status of the ISAs as part of the Treasurer update.

Aimee,

Substantial is a tricky word and difficult to define, because of the way it is used in English. This is because it is often used in a sense of something on the weighty end of the spectrum. In contrast, insubstantial is often used only to describe something on the outer fringes of the minimal spectrum. That leaves a lot of undefined territory between what is normally described as substantial and what is normally described as insubstantial. If the two words must be able to, in combination, describe everything in existence, that gap is usually filled by the word substantial, and that means when the bar over which something must jump is labeled “substantial,” it isn’t very high.

I think it is great that you’re paying attention to this. No one really know what substantial means in this context, and the IRS will assert whatever it pleases in light of the situation it discovers. In my opinion, 25% of the profits is enough to be regarded as substantial, but I am by no means the final authority.

My pack had this discussion last year and We had found language in some IRS letter that defined “substantial” as 40% or greater and “insubstantial” as 2% or less. So anything in between sounds like a grey area. We didn’t want to risk jeopardizing our charter org’s tax exempt status, so we decided (at least for this year) NOT to put any proceeds from fundraisers into individual scout accounts. We have target sales goals at which we lower dues incrementally across the board. And we set some aside for need-based financial assistance.

J-Rob,

I provide tax advisory and planning services for a living. No one reading this or any of my other posts should regard what I am saying as tax advice.

That being said, here are some quotes directly from IRS Information Release 2002-0041 along with my comments:

The distribution method you are proposing - the creation of a reserve fund within the Pack where a portion of the money that an individual Scout raises during a fundraising event is reserved for xxx use alone, is a troublesome one. Earmarked accounts may not be compatible with continued tax exemption.

Note that the Service uses the word “troublesome” to describe arrangements that result in the creation and maintenance of Scout accounts. Shouldn’t folks feel uncomfortable, when they see a word like that?

Section 501©(3) of the Code provides, in part, an exemption to the federal income tax for organizations organized and operated exclusively for educational, charitable or other exempt purposes. Under the Income Tax Regulations, an organization will be considered operated exclusively for exempt purposes if it engages primarily in activities which accomplish those purposes. If more than an insubstantial part of an organization’s activities do not further its exempt purposes, it will not be considered operated exclusively for exempt purposes. In addition, an exempt organization must serve a public rather than a private interest. Thus, an organization must establish that it is not organized or operated for the benefit of private interests, such as designated individuals.

The word “substantial” is discussed in several posts above. The IRS knows that this word means different things to different people in different contexts. The Service avoids using this word. Instead, they use the phrase “not insubstantial.” J-Rob has said that he and others found insubstantial to mean less than 2%. It is important to note that the IRS leaves this word undefined. There is no 2% safe harbor. The Service can take a position that 1.9% is not insubstantial, and it could likely successfully defend that position in court, if it came to that.

It is worth noting that they are addressing whether the chartered organization can remain exempt from income taxes, if it allows Scout accounts to be used. Many do not grasp the gravity of this situation. The church that breathes life into your unit could become a taxable business corporation. Who wants to sit down with the pastor and have that conversation?

The private benefit prohibition is broad and includes the individual Scouts and their parents. The amount of private benefit that will be permitted depends on the magnitude of that benefit in relation to the public benefit derived from the organization’s activities and whether that private benefit is necessary for the organization to achieve its exempt purposes. In considering whether a private benefit, such as earmarked accounts for the personal benefit of individual Scouts, is substantial enough to jeopardize your exemption, one must examine all of the facts and circumstances. In relation to the public benefit inherent in the Scouting program, this may be a small private benefit. Whether the private benefit to the individual Scouts is necessary to achieve the goals of the Scouting program, however, is not clear.

The author of this release clearly did not want to issue a binding ruling. This is for information only. Nevertheless, it represents guidance about how the IRS would address this matter, if it needed to make a decision. The Service uses the word “substantial” here, but only within the phrase “substantial enough,” indicating the IRS recognizes there are degrees of “substantial.”

I cannot advise anyone here about what they should do, but I will tell you that shortly after I got involved with my pack, we decided there would no longer be any Scout accounts. A Scout is obedient, and Scout accounts you maintain that go undetected by the IRS mean the law is not being followed.

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It’s because of these ambiguities that we decided to simply not do scout accounts at all. Well, we have scout accounts, but we’re not putting fundraising proceeds in there. It’s really a just a vehicle for tracking payments and reimbursements and such. Instead, for incentives, we’re just using the council’s prize program, lowering costs across the board, and letting top sellers throw pies at the leaders.

Our Council (Baltimore Area) allows us to opt out of the Popcorn sales prize program, and instead take an extra 3% of the sales to run our own prize program. So I’m guessing the prizes what the council is interpreting as an “insubstantial” benefit (whether the IRS concurs, I couldn’t say).

To the original poster:

It sounds like your pack has never done Scout accounts before. My advice (hard earned at that) is don’t start. Once you start down that road it becomes ingrained in the Pack culture and it becomes difficult to excise.

My Pack didn’t do it. All popcorn went and paid for Pack expenses and it allowed us to keep our annual costs low. The pack paid for books and certain uniform pieces (numbers, council patch, hat and neckerchief) for the Cubs. So the membership got a lot of benefit from it, but we didn’t tangle with Scout accounts.

My Troop has Scout accounts and as CC I’ve been having to deal with this problem now for the past three years. It’s resulted in a large number of negatives, not the least of which is the fact that the “rich” families choose not to participate in fundraising in any way. Yet of course they’re the first to complain about high dues and expensive trips. But the main reason I’ve been trying to do away with it is the IRS rules put our charter org at risk.

That’s an important point - by having Scout accounts you are risking the non-profit status (if they have one) of your Charter org. You’re also creating a personal liability to your membership.

But to answer your questions:

  • We keep track on a spreadsheet.
  • Each Scout account is independent. It may not be used by siblings or parents.
  • It is generally only used for activities and uniforms FOR OUR UNIT. Yes, we had one ask to pull money from our Troop’s account to buy his Venturing uniform. We said no. See the next point.
  • Your finances are owned by your charter org. Which means the Scout account money is not transferable outside the charter org. So, when you Cubs bridge to Scouts, they may not take their money, unless the Scout Unit they go to is also chartered the same. Our charter org only owns our Troop, so when Scouts leave for Venturing, money stays here.
  • After a reasonable time after they leave, we convert any Scout account funds to our Angel Fund - which we use to help pay expenses for families in need. I say reasonable time because usually our Scouts don’t “Eagle Out” - generally they stay until 18, and then they usually reregister as Adult as College Scouting Reserve and continue to come to meetings and outings, giving them opportunity to drain their accounts.
  • Other than aged out Scouts, we don’t track Scout Accounts for Adults. But the Troop pays for training and registration out of the general fund.
  • Most funds are used to pay for outings. The person just says they want to use their account and the relevant amount gets deducted.
  • They can use for uniforms, but they need to buy it and bring the receipt to our Treasurer and a check would be written. I actually can’t recall that ever being done.

There’s a major problem with the administration of the accounts - reporting. It’s difficult and time consuming to track and report the accounts. Many of our families have balances and don’t know what it is or how much they can spend on an upcoming trip. We don’t want to publish everyone’s balances to everyone, so reporting balances to each family is a problem we continually struggle with.

My suggestion - don’t do it. Take all the popcorn money and put it in the Pack fund. Then keep your annual fees low and reduce the costs of your annual lock-in and summer resident camp for everyone who goes. Or use some of that money to pay everyone’s FoS requirement for the year. Everyone benefits from a better program, it costs them less and frees up the personal money for those things that the IRS considers of personal benefit.

Here’s the way I’d look at it - Do you want to start processing 1099 Misc forms for every one of your families every year? If not, don’t start doing Scout accounts.

I hope that helps some.

  • Steve
2 Likes

J-Rob,

The prizes are an interesting technical question, but they aren’t interesting enough for me to look into it in a comprehensive way. So here are my unresearched thoughts.

I don’t see the prizes earned by Scouts as a problem for the chartered organization’s tax-exempt status. The problem arises when any part of the earnings inures to the benefit of a private individual. The profits from pack fundraising are part of the earnings of the organization. However, the prizes are not. These are really in the nature of sales commissions earned by the Scouts themselves. This is their share of the take on the product sale. It is promised to them by the product vendor, and the organization never really has access to it.

The prizes are gross income of the Scouts and should be reportable on the Scouts’ income tax returns based on their fair value. For nearly all of them, the total amount, coupled with any other income they may have, will not rise to the level that would create a filing requirement.

I’m calling them “prizes,” because that is what the vendors call them. From a tax perspective, a prize is something one wins at a contest. These “prizes” are actually sales commissions. As Scouts sell more product, they earn larger commissions. So, the next question becomes whether the fair value of these “prizes” should be reported as earnings from self-employment or as other income. If they are net earnings from self-employment, the Scouts would be subject to self-employment tax, if the value of the prizes received was $400 or more.

The key element in determining whether the prizes are self-employment earnings or other income is whether the Scout is engaged in the trade or business of selling the products. This determination is made based on the facts and circumstances of the situation. Although Scouts do not engage in these product sales all year, many activities constitute trades or businesses even if conducted only seasonally. Suppose I rent an ice cream truck for four months every year. I am clearly engaged in the business of retail ice cream sales. Scouts may engage in the selling of popcorn for several weeks each fall, and that pattern may push the analysis toward concluding it’s a business.

On the other hand, Scouts have no capital invested in this activity and bear no risk of financial loss. They can either earn the prizes or earn nothing. It can never cost them anything. This differs from a lemonade stand, where the Scouts must invest in the lemons and other ingredients, and may lose money, if they fail to sell lemonade. So the lack of risk indicates that Scouting product sales may not be a trade or business.

There really is no cookie cutter answer to this. Different conclusions about different Scouts could be reached based on their individual fact patterns.

If a Scout is engaged in a trade or business, s/he would be entitled to deduct ordinary and necessary business expenses. An example might be bus fare to the mall, where the products will be sold.

Also, a Scout engaged in the trade or business of selling products would be entitled to make a contribution to an IRA, based on his or her earnings. S/he could probably even adopt a Simplified Employee Pension (SEP) plan and make contributions to it, based on his or her profits. However, model SEP agreements generally restrict participation to those 21 and older. So, s/he would have to engage a professional to draft a custom document for the plan. Of course, legal fees paid would be deductible as ordinary and necessary expenses incurred in carrying on a trade or business.

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Personally, I’m totally in favor of individual scout accounts to help pay for camp, dues, uniforms, etc.

My reason for this is that my kids work hard for themselves and the troop (formerly pack) to fundraise. They should be the ones that get the larger benefits from that work. There’s a word for all the money going into a single pool that pays for everything - socialism.

The units we have been involved with have always kept a “scholarship fund” for those that could not afford scouting, even with some fundraising, and I have no objection to helping out. However, my daughter used to be in a different scouting organization that required all funds to belong to their troop regardless of who worked for it. Like anything, eventually those supporting everyone else will get sick of the deadweight.

It should appear obvious to anyone that Scouts BSA is not a private enterprise regardless of their bookkeeping techniques (unless someone is actually skimming the profits). However, I understand that the IRS doesn’t always make sense.

I think that the individual accounts (typically just kept in Excel or whatever) is much better for the Scouts. If my kids need to give up the commission from popcorn, I’m not sure how much effort they would put into it compared to working so they can afford to go to camp.

This is just my opinion and we all know what they say about those…it’s unfortunate that the IRS is pushing BSA into a socialist economy.

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Please leave your politics and political assumptions out of the discussion.

I was discussing economic policy, not politics.

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I would note that another scouting organization which does not allow any distribution of funds at a troop level also carries the full weight of any negative IRS decision.

The BSA issues guidance because individual units are essentially a franchise of the program and have their own individual tax status. (And contrary to popular belief there are units which are not chartered to a charity.)

In the end, what another unit does (or does not) do is really their decision. In this case someone wasn’t asking if they should nor not account some portion to the scout. They were asking about how to handle the use for something outside the workable realm which at the same time seemed reasonable.

Herb,

Unfortunately, even though your points are well taken, this has nothing to do with ideology. The tax law does not anticipate the existence of anything akin to a BSA unit that is part of the youth program of a tax-exempt charitable organization.

As a tax practitioner, I hope you can understand that the IRS does not have a bone to pick with Scout accounts. If it did, it could have issued a far more authoritative level of guidance than the memo cited above. The Service is in the position where it is required to enforce the laws Congress wrote. Even if everyone at the IRS loves Scouting, they cannot allow that opinion to color their judgement.

The best remedy to getting to getting Scout accounts allowed would be to petition Congress and ask that an exception be inserted into section 501©(3) of the Internal Revenue Code. It would not be too difficult to draft such an exception with an objective test that a Scouting unit could easily meet.

Your petition would likely enjoy broad public support. Then, members of Congress would be faced with being labeled as the one who wanted to tax the Scouts. None of them would want that.

This isn’t the first time something like this has ever come up. For instance, in many states, prepared beverages might be subject to sales tax when sold. In some of those states, it might matter whether those beverages can be consumed on the premises of the vendor. Then, it might matter what is considered part of the premises.

So, what does this mean for the eight-year-old with a lemonade stand? Could the kid really be required to register as a vendor and file sales tax returns with a state tax department? Does this cause recordkeeping requirements to kick in for which the kid could be harshly fined for noncompliance? Might the kid need a local business license the absence of which is a misdemeanor? Is registration with a health and safety regulator required?

Without an exception, a state tax department cannot simply decide not to bother the kid without the law authorizing it to do so. For this reason, we see de mimimis exceptions in many areas of the law and regulations to avoid capturing things like lemonade stands.

You need somebody to enact an exception in order to achieve the objectives you expressed, which are noble ones.

If by another organization we refer to the GSUSA, I can speak to this, since I am a volunteer for that organization.

Girl Scout troops do not have chartered organizations. The local council forms service units (which are sort of like districts but much smaller geographically). These service units form troops and help them find a place to meet, if needed.

As Kirk correctly stated, GSUSA troops may not distribute any funds to their members. However, there is no problem with buying each girl a pair of Brownie knee socks. They could buy each girl a handbook. Since the GSUSA has the greatest fundraising gig ever invented and supplements it with a fall product sale, many girls participate at little or no cost. Even things like campsite fees and food on trips can be paid for by the troop.

What Girl Scout troops ordinarily do not do (and should not do) is track the earnings of specific girls and apply portions of that money to fees the girls might pay. If the troop is partially or completely subsidizing and event, all girls get the same treatment, even if they didn’t sell a single cookie.

My daughter’s Girl Scout troop had two overnight trips last program year, one of which was in an expensive cabin and the other of which was two nights in a backcountry campsite. The girls paid nothing to attend. In fact, they devoted an entire meeting last spring to deciding how much of their fundraising earnings they would donate to charity and which charities would benefit. The settled on 10% and split it between an shelter for victims of domestic violence and a shelter for sick and injured wild animals.

Through the chain that includes the service unit, a Girl Scout troop’s bank account belongs to GSUSA, not to the organization that owns the troop’s meeting place. If a Girl Scout troop folds, it may donate the funds in its account to charity. If it doesn’t do that, the money is transferred to the service unit to be used for program expenses.

The structure of BSA unit organization means this problem is a burden of the chartered organization, the last place you want it to be. Further, the sweat equity built up from the effort of fundraising encourages BSA folks to want to reward that accordingly. In contrast, GSUSA troops generally have little reason to create Scout accounts and usually don’t do it.