Taxing associate member dues.

Where IRS enforcement is heading and what associations should do in response.

In two recent rulings, the Internal Revenue Service has reclassified membership dues paid by associate members of associations as unrelated business income subject to taxation. In both of these rulings, the IRS ruled that associate members were not bona fide members of the organizations, but joined primarily to receive benefits unrelated to the tax-exempt purposes of the organizations. A close analysis of these rulings, as well as numerous conversations with senior IRS officials, reveal a coordinated IRS enforcement effort that may have widespread implications for trade associations, professional societies, and other membership organizations.

In the past, except in clearly egregious circumstances, if an association called someone a member, all membership dues received from that person would be treated by the IRS as tax-free income. This seemed like a logical enforcement policy, especially considering the fact that, historically, membership organizations were granted tax exemption largely to exempt dues income from tax.

IRS scrutinizes membership categories

Now, however, the IRS is scrutinizing exactly why certain classes of members join an organization, what role (if any) they have in the governance of the organization, and what benefits they receive (and use) from their membership. If associate members receive services or benefits unrelated to the organization's exempt purposes and if the organization cannot demonstrate (and document) substantial involvement by these members in exempt-purpose activities, then income received from these members will be reclassified as taxable income. The potential tax implications from aggressive IRS enforcement of this policy are enormous.

If the labels member and dues are no longer sufficient to shield dues income from tax, then what is? Must associate members be given the identical voting and office-holding rights and membership benefits as regular members? Are there other reasons for making such changes? Are there other alternatives?

While there are not yet definitive answers to these questions, largely because the scope and contours of this rejuvenated IRS policy are still being formulated--audit guidelines on this issue are expected this summer--certain preliminary lessons can be drawn.

First ruling looks at advertising

The first shot in what appears likely to be a protracted battle in the ongoing unrelated business income tax (UBIT) war came in late June 1993, when the IRS issued Technical Advice Memorandum 9345004. This ruling found that membership dues received by a 501 (c)(6) professional society from firms ("patron" or associate members) that offer products and services to the organization's regular members are, in fact, payments for advertising subject to UBIT.

In this case, the organization holds educational programs and trade shows and publishes a membership list, a special buyers' guide, and a quarterly journal. Classes of members include industry professionals (regular members) and firms providing products and services to the industry (associate members).

The IRS took into consideration what associate members receive as membership benefits, including

* a listing in each quarterly issue of its journal (address, telephone, fax, etc.);

* a free copy of the quarterly journal;

* a detailed listing in an annual buyers' guide that describes the types of products manufactured and services offered by associate members;

* a free copy of the membership roster;

* the right to submit "news" articles for the quarterly journal; and

* the right to submit more detailed articles for a special annual issue that generally discusses products and includes pictures and brand names.

The IRS concluded that through the listings in the various publications, associate members are purchasing "direct access" to the professional members of the organization and are attempting to influence the direction in which the professionals will be spending their employers' money. The IRS called this "the essence of advertising." Because the "sale" of "advertising" in this case is, in the view of the IRS, a regularly carried on unrelated trade or business, all income derived from this activity is taxable.

In determining the amount of taxable income received, the IRS considered that the only payment associate members make to the organization is their dues payments. Other than being able to advertise, associate members receive few benefits as a result of their membership.

Furthermore, the IRS found that associate members have more restricted membership rights than regular members and have virtually no control over the operations of the organization. In other words, they are not bona fide members. Therefore, the IRS held that all of the dues paid by associate members reflect the cost of the advertising services they receive and thus constitute taxable unrelated business income for the association.

Second ruling focuses on access to insurance

The second shot in the UBIT battle came in late December 1993 when the IRS issued Technical Advice Memorandum 9416002. This ruling found that membership dues received by a 501(c)(5) agricultural organization from associate members are paid primarily to gain access to the organization's automobile, life, and health insurance plans, and are thus taxable as unrelated business income.

In this case, the organization has two classes of membership. Regular membership is open to anyone engaged in the production of agricultural or horticultural products, or anyone who has been a regular member for five consecutive years immediately prior to retiring from farming and who maintains dues payments. Associate membership in the organization is open to anyone interested in agriculture. Associate members may be officers and committee members but not directors or voting delegates at the organization's annual meeting, where policies and positions are adopted.

In addition to activities that promote agriculture, the organization offers automobile, life, and health insurance programs through a taxable subsidiary. Membership in the organization is a requirement to participate in these insurance plans. Membership is not a requirement, however, for purchasing a variety of other insurance products offered by the organization's taxable affiliates.

Relying primarily on two 1991 federal appellate court decisions, which held that membership dues paid to a union were unrelated business income because membership yielded no privileges other than access to the union's health insurance plan, the IRS ruled in Technical Advice Memorandum 9416002 that the associate members of the agricultural organization are not bona fide members but join the organization primarily to gain access to the organization's auto, life, and health insurance plans. Because providing access to insurance coverage is not substantially related to an exempt agricultural purpose under section 501(c)(5) and because the activity was determined to be a regularly carried on trade or business, the IRS held that income from this activity (dues received from associate members) is taxable as unrelated business income.

There is a key difference, however, between the farm organization's case and the 1991 court decisions. Associate members of the farm organization can participate in most of the organization's exempt functions, whereas associate members of organizations in prior cases received no rights or benefits other than access to health insurance.

Before income from an activity will be taxed as unrelated business income, three conditions must be met:

1. The activity must constitute a trade or business.

2. The trade or business must be regularly carried on.

3. The trade or business must not be substantially related to the organization's exempt purposes.

In determining whether the organization is engaged in a trade or business by providing access to insurance for associate members, the IRS asked the question of whether money collected from associate members constitutes dues or income from the performance of services. Because of the associate members' lack of voting rights and ability to serve on the board of directors, the IRS said that they do not appear to be bona fide members in a manner similar to regular members. Furthermore, the requirement that those who desire to participate in certain insurance programs make payments (in the form of dues) is consistent with a profit motive. Thus, the IRS holds that providing associate members access to insurance is an activity carried on for the production of income from the providing of services, satisfying the "trade or business" requirement specified in the ruling.

As for the second condition, because the organization regularly provides services in connection with the insurance programs, the IRS holds that the activity is "regularly carried on."

The third and final question is whether the trade or business is substantially related to the organization's exempt purposes. The activity is "substantially related" only if the causal relationship of the activity to the achievement of exempt purposes is a substantial one. In this case, the organization's primary exempt-purpose activities are agricultural programs, including legislative advocacy, educational assistance, and publication of a monthly newsletter.

In making its case to the IRS, the organization maintained that dues from associate members enhance these programs and that associate members are benefitted through agriculturally oriented endeavors. Furthermore, the organization tried to distinguish its situation from the organizations in the 1991 court decisions by pointing out that its associate members can participate in most exempt-purpose activities. However, because the organization did not maintain records on and document associate member participation in these activities, the IRS assumed such participation did not exist.

The IRS relied, in part, on the results of a 1990 survey of a sample of the organization's membership. The results indicated that accessibility to insurance programs was a major reason why associate members joined the organization. The technical advice memorandum states that the survey "clearly establishes that associate members are attracted by insurance coverage and not agricultural pursuits." This, despite the fact that associate memberships have been a part of the organization for nearly 50 years--before insurance was even made available.

The IRS therefore concluded that because the organization has "failed to establish that providing access to insurance for associate members is substantially related" to the organization's exempt purposes, "the income [associate member dues] from this activity is subject to the tax on unrelated business income."

The common ground

In both cases, the IRS determined that associate members are not bona fide members but joined the organization primarily to obtain benefits (advertising in the first memorandum; access to insurance in the second) that are not substantially related to the organizations' exempt purposes. Because it also found that providing advertising and access to insurance to associate members are regularly carried on trades or business, the IRS held that all income derived from these activities is subject to UBIT. Furthermore, the IRS held that because dues from all associate members are directly attributable to these activities and because no portion of these dues can be attributed to exempt-purpose activities or benefits, all associate member dues are taxable as unrelated business income.

While on the surface these conclusions may seem like nothing new in the area of UBIT law, in practice, these technical advice memorandums mark a significant departure from past IRS enforcement in this area. Here is why.

Under the UBIT rules, if a trade or business is regularly carried on and is not substantially related to the organization's exempt purposes, then any income derived from that activity will be taxed as unrelated business income. Both advertising and insurance are historically unrelated activities, and income directly attributable to them--even when received from bona fide members has always been treated as taxable unrelated business income (e.g., advertising revenue, insurance premiums, fees received for sponsoring and administering insurance programs, etc.).

The difference here, however, is that dues (historically tax-exempt income) from associate members are also being attributed to these activities--something that, except in egregious circumstances, has never happened before. The IRS is now saying that when associate members receive unrelated services or benefits, if it cannot be established that they are bona fide members, then all dues received from them will be taxed as unrelated business income--in addition to the prior taxation of fees and other payments directly attributable to these services and benefits.

The question of what is a bona fide member is thus central to this analysis. Pending further IRS guidance, the bottom line appears to be that if the IRS considers someone to be a bona fide member, then all dues received from that person will be exempt from tax, regardless of what unrelated services or benefits are received. If someone is determined not to be a bona fide member, however, then all of that person's dues may be taxed, regardless of what related services or benefits are received.

In effect, a "tainting" rule appears to be operating--one that will work to either the benefit or detriment of an organization, depending upon whether the IRS believes the organization's associate members are bona fide members.

The reason for this can be found in the first part of the three-part test for unrelated business income: The activity in question must be a trade or business. In the two recent technical advice memorandums, the threshold question asked in determining whether the organization was engaged in a trade or business was whether the money collected from associate members constituted dues or income from the performance of services.

The answer to that question depended, in both cases, on whether associate members were bona fide members in a manner similar to regular members. If yes, then no trade or business exists. But if no, as was the case in both memorandums, then a trade or business does exist. Thus, whether associate members are considered bona fide members by the IRS appears to be the determinative issue as to whether their dues may be taxed. For example, where insurance is being made available, the second and third conditions of the UBIT test are likely to be satisfied (even with regard to regular members) because the activity will, in most cases, be regularly carried on and not substantially related to the organization's exempt purposes. The key to whether dues may be taxed or not lies in the first condition--whether a trade or business exists.

If the dues are coming from bona fide members, then no trade or business exists and no portion of those dues will be taxed. If, however, the dues are coming from members who are members in name only, then if the other two conditions of the UBIT test are satisfied (as they likely will be), and those dues will be taxed as unrelated business income.

Various definitions of member

A variety of definitions of an association member have been adopted in recent years--by the IRS, the Supreme Court, the Tax Court, the Federal Election Commission (FEC), state legislatures, and others. Which definition takes precedence? Unfortunately, there is no definitive answer as to what constitutes a bona fide member.

In the first of the two most recent technical advice memorandums on this issue, the IRS acknowledged that associations often have several classes of members but that associate ("patron") members in this case would not even be treated as members under nonprofit corporation law standards. While state nonprofit corporation laws vary on this issue, it is noteworthy that the Revised Model Non-Profit Corporation Act defines member as "any person or persons who on more than one occasion, pursuant to a provision of a corporation's articles or bylaws, have the right to vote for the election of a director or directors."

In a 1988 technical advice memorandum, the IRS stated that "'member,' at the least, denotes a formal relationship in which a person, whether specifically described as a member or not, has specified rights and obligations in relation to an organization. In addition, 'membership' assumes some right to participate in the organization's direction as well as an obligation to help support the organization through regular financial contributions."

The technical advice memorandum goes on to say that "most importantly," [bona fide] members "have voting rights and have a voice in the administration and direction" of the organization. It therefore concludes, "Where the payment of dues is the only requirement of membership and where 'members' have no right to participate in the direction of the organization, these individuals will not be deemed [bona fide] 'members.'"

In FEC v. National Right to Work Committee, the U.S. Supreme Court considered whether certain individuals constituted members of a tax-exempt organization for purposes of the Federal Election Campaign Act. Relying on the act's brief legislative history, the Court determined that members of nonprofit corporations should be defined, at least in part, by analogy to stockholders of business corporations and members of labor unions.

As stated by the Court, viewing this question from this perspective means that "some relatively enduring and independently significant financial or organizational attachment is required to be a 'member' "under the statute. In holding that the National Right to Work Committee's purported members did not meet this test, the Court noted, "Members play no part in the operation or administration of the corporation; they elect no corporate officials.... There is no indication that NRWC's asserted members exercise any control over the expenditure of their contributions."

In (belated) response to the National Right to Work Committee decision, the FEC issued final regulations on August 30, 1993. Among other things, they define what constitutes a member of a membership association. Under the new rules, a member must meet one of the following four tests:

* "have some significant financial attachment to the membership association, such as a significant investment or ownership stake (but not merely the payment of dues);

* are required to pay on a regular basis a specific amount of dues that is predetermined by the association and are entitled to vote directly either for at least one member who has full participatory and voting rights on the highest governing body, or for those who select at least one member of those on the highest governing body of the membership association;

* are entitled to vote directly for all of those on the highest governing body of the membership association; or

* on a 'case by case' basis for those who do not fit the precise definition of the general rule."

In Hunt v. Washington Apple Advertising Commission, the U.S. Supreme Court held that certain people should be treated as members of a commission for standing purposes where such people alone elected the members of the commission, served on the commission, and financed its activities through assessments levied on them.

In National Association of Life Underwriters v. Commissioner, the U.S. Tax Court applied the holdings of these cases in determining whether individuals were members of an association within the meaning of the UBIT advertising regulations. The court held that certain individuals were not members because

* the association's articles and bylaws did not constitute them as members;

* the individuals had no "rights or obligations" in the association;

* the individuals did not pay dues to the association; and

* the individuals had no voting (representation) rights in the association.

As can be seen by this brief survey of the law in this area, there is, as of yet, no definitive "bright line" definition of a bona fide member--one that would provide a safe harbor to protect membership dues from being taxed. The IRS has promised to issue audit guidelines this summer, but has noted that the guidelines will contain only a list of factors to be considered.

Steps to consider

Associations wishing to avoid having associate member dues taxed as unrelated business income must ensure as much participation as possible by associate members in the exempt organizational and operational functions of the association. Of course, in many associations, there has been and will continue to be considerable reluctance to grant associate members the same rights and benefits as regular members. In fact, in some circumstances, there may be serious antitrust implications.

Regardless, taxes being the purview of the IRS, associations wishing to avoid tax on associate member dues should consider doing the following:

* Permit and encourage as much participation as possible by associate members in your association's exempt-purpose activities, and, most importantly, document any and all such participation.

* Provide associate members with at least limited voting rights (e.g., ability to vote for one or more board members, and a voice in the expenditure of associate member dues).

* Provide associate members with one or more seats on the board and one or more officer positions.

* Where associate members are supplier members, structure payments from those members (where possible and appropriate) as corporate sponsorship payments rather than dues. (The proposed corporate sponsorship regulations allow for fairly generous "acknowledgement" of the sponsorship without any tax being levied.

* Avoid tying associate member dues to any particular unrelated service provided to such members (e.g., advertising space in association publications in proportion to their dues); and

* Be wary of surveys of associate members that ask about the value of membership in the association.

The IRS stressed recently that documentation is key. While the ability to participate in exempt-purpose activities is essential, it is not enough. Associations must be able to document actual associate member participation in such activities by compiling meeting registration lists, committee rosters, and so forth.

Recent IRS rulings indicate that the fact that associate members receive and read the same exempt-purpose periodicals as regular members or receive legislative representation do not appear, in the IRS view, to qualify as exempt-purpose rights, benefits, or participation. While these may be some of the central reasons for joining an association, the IRS appears to be almost completely discounting their presence when determining whether certain members are bona fide members.

There may be other reasons for giving associate members limited voting rights. Under the new FEC regulations, only association members may be solicited for political action committee (PAC) contributions and be sent partisan political communication. And in most cases, being a member will require both the payment of dues and the ability to directly elect at least one member of the board (or those who elect at least one member of the board). Thus, amending bylaws to provide such limited voting rights to associate members could kill two birds with one stone.

Allocating expenses

IRS officials have said in recent speeches that even if an organization's associate member dues are found to constitute unrelated business income, the taxes owed on that income can be greatly reduced or eliminated through the use of offsetting expenses. This is nothing new, of course, in the UBIT area.

While it is encouraging to hear IRS officials publicly endorse the use of offsetting expenses, the IRS has taken a hard line in audits involving UBIT in recent years on which expenses it considers to be "directly connected" to the unrelated activity. Applicable laws and regulations offer scant guidance as to acceptable cost-allocation methods, other than that they be "reasonable" and "applied consistently," and the IRS has used this lack of formal guidance to its full advantage.

The bottom line is that while an organization facing tax on its associate member dues would be foolish not to allocate any directly connected expenses against that income to reduce its tax bill, such allocations should be reasonable, consistent, and thoroughly documented. Consultation with a knowledgeable tax adviser is recommended.

A look at previous rulings

At least two previous technical advice memorandums hold that associate member dues are not taxable as unrelated business income. These 1983 rulings concluded that associate member dues were not taxable because although the payment of dues gave associate members the right to participate in the insurance programs, the IRS was "unable to identify a nexus to that portion of non-earmarked dues" allocable to the insurance programs.

Interestingly, the IRS pointed to the fact that associate members receive other benefits besides the ability to participate in the insurance plans, including legislative advocacy representation on issues of concern to both regular and associate members, educational lectures and seminars, and various publications including a newsletter providing free classified advertising for members. The associate members in these technical advice memorandums had no voting rights or ability to serve on the board. Yet the IRS found that "these benefits indicate that dues paid by [associate members] ... provide more than the right to participate in [the insurance programs]" and therefore are not subject to tax.

Considering that the benefits and rights (and lack thereof) received by associate members in these 1983 technical advice memorandums are virtually identical to those in the most recent memorandum, it is difficult not to conclude that IRS policy on this issue has been deliberately and completely reversed--a reversal that some observers have indicated is unwarranted and may not hold up to scrutiny by the courts.

Audit awareness

On audit, the IRS will likely be asking itself two threshold questions:

* Are services being provided to members that are unrelated to the organization's exempt purposes?

* Do certain subordinate classes of members appear to be members primarily to take advantage of such services?

If the answer to both of these questions is yes, the IRS will investigate further to determine if the services are regularly carried on trades or businesses not substantially related to the organization's exempt purposes and if these subordinate classes of members are bona fide members.

Taking certain actions will lessen the possibility of having dues subject to tax, but it is not clear what actions will provide guaranteed security. Many associations may be hesitant to amend their bylaws or make other significant changes until they are assured such steps will provide them with a solid defense against the IRS. In particular, associations need to know what minimal rights and benefits associate members need to have and what minimal types and level of associate member participation in exempt-purpose activities are required for their dues to be shielded from tax.

A senior IRS official, speaking at a recent ASAE issue briefing, said that the IRS generally looks for an unrelated economic benefit to the associate members. The official said that if associate members pay higher dues than regular members, yet receive fewer rights and member services, this would be a "fatal factor" that could not be overcome--one that would "certainly" result in the taxing of associate member dues.

Beyond that, he said the factors the IRS would see as red flags include a lack of voting rights; a lack of documented, active participation (not only the ability to participate) in the group's exempt-purpose activities; and membership solicitation materials that pitch associate membership as a way to reach potential new customers or clients or participate in an insurance program or other unrelated program.

Far-reaching implications

In recent public speeches, IRS officials have promised aggressive enforcement of this rejuvenated policy on associate member dues. In particular, they have promised scrutiny of exempt organizations' membership practices and taxation of dues paid by members who only join the organization to "market their products or services" or to receive one or more unrelated benefits. The two recent technical advice memorandums are not the last associations will see from the IRS in this area.

While the issue is, in one sense, a tax issue, it touches upon many of the organizational and operational pillars of membership organizations. By questioning--in effect, dictating--who is and is not a member, who can serve on the governing body, and who can elect the board, the IRS has gone far beyond simply levying taxes.

HIGHLIGHTS

* BEFORE YOU BEGIN writing a communication plan, interview members to understand their perceptions of your organization and of the materials you send them. Then audit your communication vehicles--pull together a list of all that you produce and determine which are most important.

* GET EVERYONE--not only the communication department--to buy in to the plan. One way to do that is to identify in the plan the division or department responsible for each action step.

Putting the Plan Together

Regardless of the type of association you work for and your audiences, keep in mind two basic tenets when developing a communication plan:

* Tie the plan to your association's strategic plan. For example, one of ACHE's strategic initiatives calls for enhancing our efforts in the area of public policy. Consequently, the communication plan contains related action steps, such as "disseminate ACHE's public policy statements to members, allied organizations, and the media as appropriate."

* Develop the plan as a stand-alone document. In other words, staff members should be able to understand the plan without having to refer to other materials.

Congress Gets Involved

At the urging of the farm organization involved in the latest IRS technical advice memorandum and other farm organizations currently facing IRS scrutiny on associate member dues (audits are under way in at least three states), 60 members of Congress recently wrote Treasury Secretary Lloyd Bentsen urging him to reaffirm the long-standing tax-exempt treatment of membership dues from all classes of members.

In addition, Representative Dave Camp (R-MI) has introduced legislation that would prevent the IRS from extending its new policies to agricultural organizations. Specifically, the bill would prevent the IRS from taxing the dues of farm organizations that reasonably relied on the 1983 technical advice memorandums on this issue, and would provide a prospective safe harbor for annual dues of $75 or less paid by members of agricultural organizations.

HIGHLIGHTS

* IN TWO RECENT RULINGS, the IRS has reclassified associate member dues as unrelated business income subject to taxation.

* WHETHER ASSOCIATE MEMBERS are considered bona fide members by the IRS appears to be the determinative issue as to whether their dues may be taxed.

* THE IRS HAS STRESSED that documentation is key. To avoid tax on associate member dues, associations will need to demonstrate and document associate members' participation in exempt-purpose activities.

Statute of Limitations Is No Bar To the IRS

Associations beware: The six-year statute of limitations concerning the assessment of taxes on unrelated business income will likely provide no protection from the Internal Revenue Service.

In a 1993 technical advice memorandum involving the taxation of a labor union's associate member dues, the IRS held that because the Form 990 contains only one entry for membership dues, no mention was made of different categories of membership. Moreover, long-standing IRS precedent holds that only the filing of a Form 990 that discloses "sufficient facts to apprise the service of the potential existence of [unrelated business income] commences the running of the period of limitations on assessment."

Because the facts disclosed on the Form 990 did not apprise the IRS of the potential existence of unrelated business income, the IRS held that the statutory period of limitations did not yet begin running. Thus, the IRS was free to levy unrelated business income tax (UBIT) on associate member dues collected over the span of many years.

The most recent technical advice memorandum ruled that membership dues received by a 501(c)(5) agricultural organization from associate members are paid primarily to gain access to the organization's insurance plans and are thus taxable as unrelated business income. Because approximately 65 percent of its 120,000 members are associate members, the organization is facing a potential tax bill (including interest and penalties) of approximately $10 million. With an annual operating budget of $2 million and lacking significant reserves, the organization now faces an uncertain future.

The bottom line: With no statute of limitations for protection, failure to comply with this rejuvenated IRS enforcement policy could translate into crippling liabilities for unsuspecting associations.

Allocation of Dues Between Taxable and Exempt lncome

At a recent ASAE issue briefing on the issue of taxing associate member dues, a senior IRS official said that the IRS would consider the argument that not all of an organization's associate member dues are going toward the receipt of tangible, taxable benefits. In other words, an organization could allocate dues received from associate members between unrelated business income and tax-free dues income, based on the value of services and benefits received by associate members; only a portion of associate member dues would be treated as taxable income.

The official cautioned that while such an approach would be acceptable, it must be accompanied by thorough documentation of the related (to exempt purposes) rights, benefits, and services both available to and used by associate members. He also said that the IRS would be reluctant to accept this allocation approach where many of the benefits received by associate members are intangible and difficult to quantify (e.g., networking access).

Under such a scenario, there would be no safe harbor within which associate member dues would be free from all taxation. Regardless of the extent of the associate members' participation in the association's exempt-purpose activities, if they also receive, for example, incidental "advertising" benefits as a result of their membership, then the allocable portion of their dues would be subject to tax.

This would force organizations to quantify the value of each membership benefit received by associate members. Using the same reasoning, there is no apparent reason why the same quantification and allocation process should not be applied to regular members as well. As a result, every benefit received by any member not substantially related to the exempt purposes of the organization would have to be quantified, have dues allocated against it, and be taxed.

Under this scheme, the focus shifts from who is and is not a member to what members receive in return for membership. In effect, the definition of a member becomes irrelevant because it provides no safe harbor; who is and is not a member has no implication on what income is taxed. Such treatment of dues income would be a fundamental leap in UBIT law and in the tax treatment of exempt organizations generally.

The alternative to this administrative nightmare of allocating dues income based on the perceived value of membership benefits is for the IRS to create a safe harbor for dues income. As long as associate (or regular) members satisfy the definition of member, then their entire dues would remain tax-free, even if they receive other benefits that are not substantially related to the organization's exempt purposes.

The allocation procedure described here has only been proposed informally by IRS officials. Rulings issued by the IRS to date have taken an all-or-nothing approach--either the associate member dues have been fully taxable or completely exempt. Associations will have to await future rulings to determine whether the IRS will adopt an allocation approach.

Jeffrey S. Tenenbaum is ASAE's government affairs issues analyst.