IRS says certain associate member dues could be UBI.

In two recent rulings, the IRS ruled that dues income received by tax-exempt membership organizations from certain "associate members" was subject to unrelated business income tax (UBIT).

In Letter Ruling (TAM) 9345004, the Service determined that annual dues received by a Sec. 501(c)(6) trade association from certain suppliers designated as "associate members" were in essence advertising payments subject to UBIT. In reaching its conclusion, the IRS found that, other than being able to advertise in the organization's trade and membership journals, the associate members received little or no other benefits (e.g., no right to participate in and control the organization's affairs) for their membership. The Service concluded that the associate members were not "bona fide" members of the organization and that the income derived from their dues payments was subject to UBIT.

In Letter Ruling (TAM) 9416002, the IRS determined that certain annual dues received by a Sec. 501(c)(5) agricultural association from "associate members" were merely payments for access to and participation in the organization's insurance programs. The Service noted that the associate members' rights and privileges differed materially from that of "regular" members; associate members were not permitted to vote on the affairs of the organization or serve as directors or voting delegates at annual meetings.

While the IRS has informally stated that most exempt membership organizations generally need not be concerned with these rulings, it has made it clear that it will scrutinize membership arrangements in which "associate members" are denied full participation in an organization. The Service has identified as "red flag" issues those situations in which such an associate member does not gain full participation in the organization (as evidenced by lack of voting rights or restrictions on board representation), and receives "identifiable economic benefits" not related to the organization's exempt purposes (e.g., advertising to the organization's membership).

Exempt membership organizations should reevaluate their current tax treatment of dues from "associate members" in light of these recent rulings. Such organizations should also bear in mind that even when unrelated income is determined to result from such payments, such amounts can be offset by the expenses attributable to the activity that generated the income.