DDev -
Be careful -- I didn't actually say that, but maybe I'm not being clear.
You are required to get a mechanical license for the distribution of any copyrighted works. That's the law. But, as we all know, the law is an interpretive thing.
The fact that you sell or give away the CD is not important to the copyright laws. It is the quantity of copies that is really the deciding factor. (I suggested the "give away" CD for a donation for a small number, just to keep things separate).
"Fair use," in addition to what dafduc said above, also covers recording and copying songs for personal use. Again "personal use" is something that could be interpreted. You are perfectly within your rights to buy the Monkees Greatest Hits and make a copy on you mp3 player, a cassette, and even another CD or two. You are NOT within your rights to make 100 copies and give them as Xmas presents to all of your friends. In your specific case, it would probably (and I'm no lawyer, so don't rely on anything you pick up in an internet forum as true legal advice) be OK to give a copy to each band member. To make many many copies for the express purpose of fundraising would probably not be scene as "fair use."
The questions in your case really comes down to: Are the songs you are recording and distributing under copyright (if they've been written within the last 90 years or so, chances are the answer is "yes.")? How many copies do you plan on making and distributing? To whom will those copies go?
There are legal answers to all of these questions, and there are ethical answers, which may be even tougher to come up with. To be safe, I would call the Harry Fox Agency and talk to one of their reps. Tell 'em what you want to do, and do what they suggest.
BTW - I know from experience that YOU are personally subject to being sued for infringement if you record, copy and distribute this CD. You are, in essense, acting as an indie label, and even if the band were to tell you that they have rights to all of the songs, if they don't and there is litigation, the RIAA can and probably will go after you.
I'm an advocate for the rights of songwriters and musicians, but don't get me started on the RIAA ! :- /