New tax developments: Several of these rulings can help you. (Taxing Issues).

The Internal Revenue Service (IRS) has given nonprofits some good news recently on several fronts. These new positions can possibly provide a new opportunity for donations, can ease your burden in complying with tax regulations, and, in some cases, can allow you to raise income without worrying about unrelated business income tax.

Leave donation programs

In response to the September 11 tragedy, a number of employers approached the IRS about establishing leave donation programs. On October 24, the IRS issued Notice 2001-69, I.R.B. 2001-46 to explain the tax treatment of these programs to both employers and employees.

A leave donation program involves employees who agree to forego accrued vacation, sick or personal leave in exchange for employer contributions of the value of these items to charitable organizations. The employees will notify the employer as to the number of hours they wish to donate. The employer will convert the hours to payroll dollars and will issue a check to the charitable organization.

The key tax issue in this situation is whether the employee has assigned income to the charity. This concept, which dates back to a U.S. Supreme Court case in 1930, prevents someone from assigning future income from services to another taxpayer. You can transfer property to someone else, and thereby transfer the future income, but you cannot transfer just the income, or "the fruit of the tree."

Therefore, under this general tax principle, the employee has already earned the accrued leave. Directing the employer to transfer its value to a charity would be viewed as though the employer paid it to the employees who then made the contributions, known as "constructive receipt." This would result in the employees including the leave in their income and claiming a charitable deduction. However, most taxpayers do not itemize their deductions, but claim the standard deduction. Thus, the deduction will not reduce their taxes.

In the notice, the IRS asserted that the application of assignment of income and constructive receipt principles depends on the facts and circumstances of each case. Using this authority, they indicate that they will not assert that payments made to charities by employers on behalf of employees who have foregone accrued leave are income to the employee.

The only condition is that the payments to charity are made before January 1, 2003. The notice goes on to provide that the employer should not show the amounts on Form W-2. The employer can deduct the payments as business expenses rather than charitable contributions.

Finally, the contributing employee will not get a charitable deduction for these amounts.

As charitable organizations, this notice provides an opportunity for you to contact friendly employers in your area and let them know about this program. A new source of revenue may be available in these tough times to help you meet your programs and obligations.

Electronic acknowledgments

The IRS has been studying the tax consequences of the Internet for some time now. Last year it requested comments on various tax issues. The IRS received more than 4,000 comments on different aspects of the Internet's impact on nonprofit taxation.

We haven't heard much from the IRS up until now. However, in a recent speech, an IRS representative gave out a little bit of good news. It appears that the IRS is going to revise Publication 1771 to allow electronic acknowledgment of charitable contributions. Publication 1771 discusses the various substantiation rules, including the requirement that donors obtain written substantiation for contributions of $250 or more.

It is expected that the electronic acknowledgment will have to contain all of the required information, including an indication of whether goods or services were provided in exchange for the contribution, and an estimate of their fair market value. The acknowledgment will likely have to be in a form that allows donors to print it and save it as part of their tax papers.

If this actually comes to pass, you should be able to save money on postage if your donors are electronically savvy. Any cost savings are always welcome.

Exclusive providers

In the past few years, a number of manufacturers have approached nonprofits with proposals to pay them to become the exclusive provider of some product or service. This has especially occurred with soft drink manufacturers and various schools.

A number of large universities are reported to have received large 7-figure payments to become a Coke or Pepsi campus. Manufacturers have approached many other organizations with exclusive provider offers.

The tax treatment of these payments has not been clear. IRS representatives have expressed concern that these payments caused Unrelated Business Income Tax (UBIT). Organizations that received the payments have made several arguments as to why they do not constitute UBIT.

Among the arguments advanced are: (1) there is no trade or business involved in not allowing other manufacturers to sell products; (2) the payments are for corporate sponsorships; (3) the payments are royalties for the use of some intangible assets of the organization; and (4) the payments are from an activity carried on for the convenience of students or employees.

Last year, the IRS issued proposed regulations on corporate sponsorships. One of the most controversial proposals provided that an exclusive provider relationship represented a substantial return benefit to the sponsor. Therefore, the value of that benefit did not constitute a qualified sponsorship payment. The proposed regulations didn't say the payments were UBIT, they just said they weren't qualified sponsorship payments. For 18 months after the proposed regulations were issued, nothing further was heard from the IRS on this subject.

However, a field memorandum written in August by Thomas Miller, then IRS acting director of EO Rulings and Agreements, was made public on October 3. The memo's purpose is "to suggest a framework for handling issues that may arise" in exclusive provider cases. The examples in the memo discuss universities, but it makes clear that the principles apply to all nonprofit organizations.

The memorandum includes several examples. In the first, a university enters into a multi-year contract that allows a soft drink company to be the exclusive provider. The company agrees to provide, stock and maintain on-campus vending machines as needed. The agreement leaves little or no obligation for the university to perform any services or conduct activities in connection with the enterprise. In that case, the annual payment is not UBIT to the university, as there is no trade or business. The memo indicates that if the university undertakes promotional or marketing efforts in connection with the agreement, these services need to be considered in determining the level of activity.

If the university also grants the soft drink company the right to use the university's name and logo, the university can treat part of the payment as a royalty.

The next example involves a similar contract for sports drinks. However, the university agrees (1) to guarantee that coaches will make promotional appearances on behalf of the company, (2) to assist in developing marketing plans and (3) to participate in joint promotional opportunities. In this case, the memorandum concludes that the activities "are likely to constitute a regularly carried on trade or business" that is unrelated to the university's mission.

A third example discusses a university that negotiates discounted rates for the soft drinks it purchases for its cafeterias and other food services as a part of an exclusive provider arrangement. The memo holds that discounts and rebates are adjustments of the purchase price and do not constitute gross income. Therefore, the value of the discounts is not subject to UBIT, regardless of the treatment of any other consideration.

This memorandum represents a major clarification of the IRS attitude toward exclusive provider arrangements. It should provide a framework for you to negotiate and manage the tax consequences of possible arrangements for your organization.

It is especially good news for universities and other large organizations that have negotiated the arrangements in the past, but it does open up possibilities for many other organizations as well.

These developments, while unrelated to each other, all represent particularly favorable results for nonprofit organizations. Hopefully they will be useful to you in coping with the new economic situation in which we now find ourselves.

Harvey Berger is a partner and national director of not-for-profit tax services in Alexandria, Va., for the accounting and management consulting firm Grant Thornton LLP.