Because so many youngsters are eager to compete for money in their favorite sport, parents often take on the role of manager of the activity. This involves funding the child's efforts to become a professional athlete, and to share in prize money. Plus, there are tax benefits involved.

The IRS tends to regard management agreements between parents and children as inherently suspect. These �contracts,� from the IRS standpoint, are just a ruse for paying personal expenses of the child and taking improper tax deductions for those costs.

Many management contracts between parents and children are perfectly legitimate. Numerous Tax Court cases that have approved management contracts between parents and children, thus permitting the parents to deduct the costs of funds contributed to the undertaking.

In cases where parents have lost, the court usually found that there was only a loose verbal agreement, and that the �contract� was motivated solely by parental affection rather than by the anticipation of economic profit.

Based on numerous Tax Court cases, the key points to observe are as follows:

1. The contract -- which can be called a management or sponsorship contract -- should be drafted by a lawyer. It should be for a one-year term, renewable at the option of the parent or parents.

2. The contract should specify goals or financial conditions that have to be met, a minimum number of tournaments to be played for instance, or other markers to be achieved, and there should be a stated cap on expenses. In some situations the goal might be to work towards landing a lucrative scholarship to a university -- which could amount to a substantial amount of savings to the parents in the long run.

3. Before entering the contract, it is important to do some sort of market study to see how you can make a profit from the arrangement. It is important to calculate how long it will take before the youngster will be eligible to compete for the higher-end prize money. Ideally, one should consult experts on how to make money in the particular sport, and draw up budgets, cost projections, or other financial information that sheds light on this. In situations such as Olympic sports, where prize money might not be the main goal--it is important to set forth the objectives and the benefits that could accrue to the parents.

4. During the term of the contract, it is important to keep track of prize money available and to map out strategy for competing for it. Any prize money earned should be distributed according to the terms of the contract.

5. It is important to observe the terms of the contract. In cases where parents were denied tax deductions, one reason was that they failed to observe the terms of the contract.

6. In order to withstand IRS scrutiny, the parents should not renew the contract once it becomes apparent that the child's future winnings cannot possibly be enough to recoup expenses. Or, if as a manager you incur a history of losses, it is important to change strategy in an effort to increase the chances of making a profit.

7. As manager, you should have a separate checking account for the activity, and your records should at minimum include prize money available for each of the tournaments, and the amount of money actually won.

8. In some instances, it may be important or helpful to diligently seek out sponsorship money for your child's activities, or even to hire a PR firm to help.

9. Personal living expenses should not be part of the contract. Parents may provide these funds, if they so wish, separately from the contract, but they may not be considered tax-deductible expenditures. The costs associated with a management contract pertain to things such as entry fees, training fees, travel costs to tournaments, private coaching, equipment, hauling fees, etc.