The Internet and tax-exempt organizations.

EXECUTIVE SUMMARY

* Use of a Website to publish information about an organization simply replaces brochures and reports now available on paper with no negative tax consequences.

* For all categories of exempt organizations, the character of revenues generated through a Website and delivery of services via electronic communication will depend on the relationship between the activity generating the revenue and accomplishment of the organization's exempt purposes.

* There is a list of questions an organization producing revenue from its Website should ask to determine whether its Web activities produce UBI.

As more and more exempt organizations move toward a presence on the Internet, a host of questions arise to determine whether such presence may trigger loss of exempt status or recognition of unrelated business income (UBI). This article explores the types of services exempt organizations normally provide and explains why use of the Internet to offer these services should not necessarily endanger exempt status or trigger UBI.

Most exempt organizations are beginning to use the Internet as a tool for conveying and accomplishing their mission. Opportunities to provide links between an Organization's Website and other Websites abound, making it increasingly important for exempt organizations and their advisers to familiarize themselves with the effect of the use of electronic communication systems on exempt status. The issue is evolving; in 1999, Treasury solicited public comments on the application of existing rules regarding Internet use. Readers must be alert for new developments.

Exempt Status Issues

To obtain recognition and maintain exempt status, a nonprofit organization must be dedicated to and devote its primary energies to conducting activities that accomplish a qualifying exempt purpose. The standards for qualification under the different Sec. 501(c) categories are well defined and documented in regulations, Internal Revenue Manuals for exempt organizations and private foundations, countless published and private IRS rulings and court decisions.(1) The IRS Fiscal 2000 CPE Text for Exempt Organizations states that the "use of the Internet to accomplish a particular task does not change the way the tax law applies to that task."(2) Thus, the existing standards can be studied to make determinations about the character of electronic communication activities. Logically, the Code and regulations should be applied consistency without regard to the medium in which activities are conducted, although the unique nature of the Internet presents some new dimensions (as discussed below).

Electronic communication is a relatively unexplored area of activity for exempt organizations.(3) In 1974, the IRS approved exemption for a regional computer network for a consortium of colleges and universities, because it advanced education.(4) In 1981, a computer network to exchange bibliographic information between libraries was ruled to be a Sec. 501 (c)(3) organization, even though some of its members were not exempts The.(5) IRS 1999 CPE Text for Exempt Organizations states, "Internet Service Providers [ISPs] have usually been denied exemption because they are viewed as carrying on a trade or business for profit, or conferring an [un]mixed private benefit, or both."(6) "Providing communication services of an ordinary commercial nature in a community, even though the undertaking is conducted on a nonprofit basis, is not regarded as conferring a charitable benefit on the community unless the service directly accomplishes one of the established categories of charitable purposes."(7) IRS technicians were told to "peruse the ISP's home page to evaluate its exempt character as a source of public information and to see if `placards,' `banners' and links to commercial sites constitute advertising that create unrelated business income."

Regarding exemption qualification for an organization that operates exclusively on the Internet, an IRS representative contrasted an interactive medical organization (that might qualify as educational) with an online church (that the Service does not believe could qualify as having a regular congregation and meeting the other requirements of the 14-point test for church status).(8) Again, the medium for accomplishing the charitable or other nonprofit mission should not, per se, deprive an organization of eligibility for exempt status. Is there a reason religious worship services cannot be provided to a virtual congregation solely on the Internet? Why not an e-marriage? Must spiritual ceremonies take place in a physical space?

ISPs

Before 1998, ISPs were usually denied exemption, because they were viewed as a business, conferring private benefit, or both.(9) "Providing communication services of an ordinary commercial nature in a community, even though the undertaking is conducted on a nonprofit basis, is not regarded as conferring a charitable benefit on the community unless the service directly accomplishes one of the established categories of charitable purposes."(10) This language from IRS training courses should be carefully studied for an ISP seeking exempt status.

An ISP operated as an adjunct or integral part of a university, public school, library system or a local government qualifies for exemption. Accountability and control, dependence on government grants (rather than user fees) and free access by students, library patrons and the general public are said to be characteristics that evidence a charitable ISP. Such an ISP might also qualify as relieving the burdens of government.

Providing Information

Nonprofit organizations increasingly use Websites to post information about their programs and to communicate with constituents. Use of a Website to publish information about an organization (e.g., tuition rates, grant applications, deadlines, admission standards, locations, caregiver resumes and other descriptive program information) simply replaces brochures and reports now available on paper with no negative tax consequences. Any dissemination of information through the Internet to advance the accomplishment of an organization's exempt purposes should be permitted. A site might also contain a bulletin board for constituent communication, such as a parent forum concerning childcare issues.

Linking an organization's site to sites of other exempt organizations that contain reference materials, services or resources pertaining to its exempt function should also be considered an exempt activity. For example, a childcare provider should be able to link its site to a mental health agency, the school district, an association of child psychiatrists and a child protective service agency. Links that might cause concern regarding exempt status or produce unrelated business income (UBI) are discussed below. Publishing information on legislation and elections on an organization's Website will have varying consequences for different types of exempt organizations. Posting a position on proposed legislation or a political candidate online might violate the existing rules that limit printed and broadcast lobbying and election activities by charities, but could be permissible for other types of exempt organizations. If information on a Website is available for all to see, the rules for communicating with an organization's members will not necessarily apply.

Providing Services

Rendering services to an organization's exempt constituents that advances the mission should similarly be considered an exempt activity. Again, the standards for identifying services that promote the mission are well documented. A business league that sells legal forms to industry members to provide common conveyance documents should certainly be allowed do so electronically.(11) An organization that provides counseling, resource information and transportation assistance to the elderly and handicapped should be able to do so through its Website.(12) A legal aid society could provide advice and documents electronically.(13) Providing bibliographic information to libraries has been found to be an exempt function that can be an exempt service when provided on the Internet.(14)

Fees for Internet Activities

When information, goods or consulting services are sold on an organization's Website, revenues may or may not be taxable. For all categories of exempt organizations, the character of revenues generated through a Website and delivery of services via electronic communication will depend on the relationship between the activity generating the revenue and accomplishment of the organization's exempt purposes.(15) Any charges made by the organizations described in the preceding paragraph would represent exempt-function revenues related to the mission. In considering other situations, the standards for defining "relatedness" under Sec. 513 and the labyrinth of exceptions and modifications applied in calculating taxable income under Sec. 512 can provide answers. The Regs. Sec. 1.513-1 (c)(2)(i) irregular activity exception might apply, depending on the time frame and nature of a sales activity. The profits from the online sale of donated goods would be excluded from tax.(16) Without question, an organization that exploits its own Website in a commercial fashion or provides Internet services to the general public will be treated as conducting an unrelated activity. What constitutes exploitation for different types of exempt organizations, however, is determined by existing rulings and cases governing exempt organizations in general. Questions and suggested answers follow below.

Links

One issue unique to the Internet may be the capability of linking an organization's Website instantly and without charge to another Website. Links can be considered from the vantage point of several different tax consequences. It is important to ask whether the organization's interests are served by the link. If revenues are generated as a result of the link, unrelated business income tax (UBIT) issues must be considered. An unanswered question is whether the organization can be held responsible for the content of the linkee's site.

Links serving an exempt purpose: An organization's motivation for placing a link on its site should be determinative in evaluating whether the link serves its exempt purposes. If the link is to a (profit or nonprofit) site that enables a viewer to learn, get aid, pray, register for classes, or a myriad of other exempt purposes, it should be considered to serve an exempt purpose. The childcare provider previously mentioned would be making related links when it connects its site to that of a mental health agency, a school district, an association of child psychiatrists, a child protective service agency, etc.

Links creating UBI: When the organization receives revenue in connection with providing a link, the motivation must be questioned. Links to the sites of an organization's business sponsors to acknowledge their financial support does not necessarily create UBI. Whether the sponsor's payment represents taxable advertising revenue is governed by the sponsorship rules discussed below.

Goods and services sold on an organization's site must be identified in relation to the organization's exempt purposes. The convenience rule should apply for Sec. 501(c)(3) organizations that sell items to members, students or other constituents. Items unrelated to the mission, sold alongside related ones, must be fragmented (i.e., segregated) from the related items and treated as unrelated business sales items. Commissions or fees rebated to an organization from commercial business sites may produce related income or UBI, depending on the type of items sold and services the organization renders in connection with the activity. An educational organization that sells its own publications through a link to, for example, www.amazon.com, would receive related revenues for its share of a book's selling price. However, a rebate it separately receives because it prompted a visitor to its site to link to Amazon's site, may or may not be treated as royalty income excluded from UBIT, as discussed below.

Links representing nonexempt activity: A link that unilaterally promotes the private interests of the organization's disqualified persons constitutes a nonexempt activity. An example would be a cancer treatment research group that links only to the private clinic site of its creator, an oncologist.(17) Linking an exempt organization's site to a privately owned business(es) for reasons other than to promote exempt purposes or recognize a contributor could endanger exempt status. Whether an organization's status should be revoked for reasons of such link activity would be measured by the standard that requires all exempt organizations to operate primarily for exempt purposes. Such a link from a private foundation's site to the site of a disqualified person could constitute impermissible self-dealing under Sec. 4941 (d)(2)0)).(18)

Links to a particular political party's site would generally be impermissible for a Sec. 501(c)(3) organization, because it is absolutely prohibited from attempting to influence or otherwise intervene in an election. Unbiased links to all parties participating in an election might be considered voter education, rather than intervention in a political campaign, and hence permissible. A Sec. 501(c)(4) organization can conduct a limited amount of campaign activities. There is no specific limit on electioneering by a labor union or business league; thus, links to a particular political candidate or party should be acceptable from a tax standpoint for most non-Sec. 501(c)(3) exempt organizations.(19)

Links causing penalties: Certain nonexempt-function links could subject an organization to penalties. For a private foundation, the self-dealing and taxable expenditure sanctions would impose a penalty for impermissible links. For a public charity, a link promoting a director's private business could be an "excess benefit" transaction subject to intermediate sanctions. There may be some difficulty in measuring the value of such links; the cost of the site is not necessarily the correct measure of the offense. Under Sec. 4955, the cost associated with links that constitute political expenditures would be reportable as taxable income on Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations, and subject to penalty and reported on Form 4720, Return of Certain Excise Taxes on Charities and Other Persons Under Chapters 41 and 42 of the Internal Revenue Code.

A checklist for Website exemption issues can be found in Exhibit 1.

Exhibit 1: Checklist for Website exemption issues(*)

Name of Organization --

Web Address --

Prepared by --

with (client representative)  --                       on date   --

Print homepage and other representative pages from organization's
site to review scope of information presented on the site.       --

Does the site reflect the organization's mission, as described in
Part III of Form 990, Return of Organization Exempt from
Income Tax, or Part  XV of Form 990-PF, Return of Private
Foundation or Section 4947(a)(1) Nonexempt Charitable
Trust Treated as a Private Foundation?                           --

Are goods and services offered for sale on the site?

* Do products or services sold relate to accomplishing exempt
  purposes?                                                      --

* Does site link to a commercial site for sale of its goods or
  services?                                                      --

* Is revenue produced from "hits" on the linked site or some other
  site?                                                          --

Does the organization solicit contributions and/or memberships on
  its site?
  * If so, is slate registration required?                       --
  * Are disclosures for quid pro quo transactions provided?      --
  * Are sponsors recognized with banners on the site? If so,
    does the information on the site qualify as an
    acknowledgment?                                              --

Can the accounting system capture costs related to the site?     --

Can revenues be fragmented by related and unrelated sources?     --

Does the site contain discussion of public affairs?
  * If so, is there a "call to action," urging viewers to
  contract legislators that constitutes grassroots lobbying?     --
  * Does the information presented on public policy issues
  (e.g., gun control, abortion, etc.) present a biased
  viewpoint?                                                     --

Is the site linked to other sites? If so, follow the link to
determine whether links provide information/resources pertaining
to mission:
  * Are there links to the organization's sponsors or
  contributors? If so, does the link represent advertising for
  the sponsor?                                                   --
  * Is there a link to a political party?                        --

Review organization's information reported on www.guidestar.org
(a searchable database of over 620,000 U.S. nonprofit organizations)
  * If not posted, consider voluntary submission of Forms 990.   --

(*) Adopted from Blazek, Tax Planning & Compliance for Tax. Exempt Organizations (John Wiley & Sons, 3d ed., 1999)

Fundraising Issues

The solicitation disclosures that apply to written and broadcast requests for donations, membership dues and other forms of payments in support of (or to qualify for participation in) programs by charities, civic welfare organizations, labor unions and business leagues(20) also apply to Internet requests. Under Sec. 170(f)(8), to be able to claim a deduction for a donation of $250 or more to a Sec. 501(c)(3) organization, a donor must have a written receipt. Such "contemporaneous substantiation" must reflect the amount of the payment, a statement as to whether any goods or services were provided in connection with the gift and, if so, their value. Although for privacy reasons it may not be desirable, a charity could conceivably provide such acknowledgements on its Website. The regulations already list letters, postcards or computer-generated forms as acceptable. An e-receipt (printable by the donor for his tax records) containing the requisite information certainly should also be acceptable proof of payment. Disclosure of the value of benefits provided in a quid pro quo solicitation similarly should be acceptable if displayed on a Website. Although the IRS has yet to issue official guidance on this issue, it expects to "view an e-receipt as sufficient documentation."(21)

Business leagues and other non-charitable organizations soliciting dues and similar payments are subject to very specific disclosure rules, because they are not charitable organizations. Such organizations must also disclose the portion (if any) of the payments that will be spent on lobbying efforts. It is the IRS's opinion that the standards prescribed in Notice 88-120(22) are not "difficult to adapt to computer-based communications."(23) It finds "no reason to treat e-mail solicitation any differently from direct mail solicitations. Web fundraising is also most similar to print media, since unlike telephone, television, and radio, the viewer generally controls what he or she looks at and for how long." All of the following conditions need to exist for a Website solicitation to meet the requirements:

1. The solicitation includes an express statement that payments are not tax deductible as charitable contributions.

2. The statement is at least the same type size as the primary message and is readily visible against the background of the page.

3. The statement appears on the same Web page as, and in close proximity to, the actual request for funds.

4. The statement is either the first sentence in a paragraph or itself constitutes a paragraph.

Online donation sites, such as www.4charity.com, solicit gifts on behalf of charities. Typically, the site operator signs up charities and turns over the donations collected, less a handling fee, to the organizations. The charities perform no services and allow only the use of their name. When no goods are sold nor quid pro quo items returned to donors, they certainly should receive a contribution deduction. The nature of the payments to the charity depends partly on whether the agreement between it and the site operator creates an agency relationship. When the operator simply acts as a collector of gifts, a charitable deduction for the donor (and corresponding donation revenue for the charity) result.

Additional questions arise in connection with cause-related marketing sites, such as www.shop2give.com, on which the merchant agrees to donate a portion of each sale to charity.(24) Another version of this type of fundraising is electronic script.(25) Whether a purchaser or seller can consider a payment a donation depends on their respective motivations. A gift occurs only when a donor makes (or in this case, causes) a gift out of disinterested generosity.(26) When the price the purchaser pays is the same whether or not a donation is made, there is no donation. Similarly, a purchase discount allowed by the seller does not constitute a donation. The character of payments a charity receives from such sites is yet another issue. Generally, such payments will not represent donations, but rather, payments for the use of the charity's name. The revenue should be treated as taxable only if the charity is required to perform services in connection with earning it. If the recipient charity's role is a passive one in which it renders no services to the merchant, the resulting revenue to the charity should be treated as exempt royalty income.(27)

Unrelated Business Aspects

The character of revenues received from sales of goods and services on the Internet is an evolving issue, many aspects of which have yet to be considered by the IRS. Revenues received by an exempt entity in a trade or business regularly carried on and not conducted to accomplish its mission is taxable UBI, unless an exception or modification applies.(28) While there is no question that the law, regulations, cases and rulings that apply to identify and tax UBI can be applied to e-commerce activities, certain unique aspects of the Internet prompt new questions. Following is a list of questions an organization producing revenue from its Website should ask:

* Do the goods and services sold through the site advance the organization's exempt purposes? This determination is made in reference to the mission and the purposes for which the organization was originally found to be exempt. If items or services sold advance the mission, the revenues are treated as related and, thus, exempt from income tax. Revenues generated in the activities described above (under "Providing Services") would be exempt-function revenue. The IRS has issued elaborate guidance regarding items sold in museum gift shops that can be studied to evaluate a merchandise operation.(29) If an item sold serves a utilitarian or ornamental purpose of the purchaser, or is akin to a souvenir, the item is not treated as related to the organization's exempt purposes. A fragmentation rule distinguishes related objects and services sold (that are tax exempt) from unrelated items, the profits from which are taxed.(30)

* Does the organization recognize its sponsors or contributors on its Website? If so, do the Sec. 513(i)(2)(A) rules (i.e., donor acknowledgements vs. advertisements) apply? An exempt organization is entitled to thank its business supporters by displaying a limited type of information about them. New Prop. Regs. Sec. 1.513-4(c)(2)(iii) states that "Use or acknowledgment does not include advertising as described in paragraph (c)(2)(iv) of this section, but may include the following: logos and slogans that do not contain qualitative or comparative descriptions of the payor's products, services, facilities or company; a list of the payor's locations, telephone numbers, or Internet address; value-neutral descriptions, including displays or visual depictions, of the payor's product-line or services; and the payor's brand or trade names and product or service listings."(31)

Revenues from sponsors acknowledged in the appropriate fashion as prescribed in Prop. Regs. Sec. 1.513-4(c)(2)(iii) (i.e., in a way that does not induce the reader to buy a product or service) are specifically excluded from tax. Neither the Code nor regulations limit the size, color or visual presentation of a sponsor thank-you. The thank-you cannot direct the viewer to buy anything; nor can it state that the sponsor's product is superior. The regulations were originally written to adhere to the Federal Communications Commission's standards for public radio and television stations. There seems to be no reason why placement of a sponsor's logo or other permitted information on an organization's Website should not be a permitted acknowledgment. The IRS has suggested that a "flashing banner" might be considered an impermissible attempt to sell the sponsor's product.(32) Although this style might draw attention to the sponsor's name, the fact that the acknowledgment flashes should not necessarily constitute promotion of a product.

* Does the site contain links to business sponsors? If so, what content on the sponsor's site is reached with that click? Does the linked page contain promotional materials for the sponsor? There is no mention of hypertext links in the portion of Prop. Regs. Sec. 1.513-4(c)(2)(iii) quoted above. The AICPA's Exempt Organizations Taxation Technical Resource Panel suggests the subject be addressed in its comments on the proposed regulations. It is thought that links to sponsors should be permitted, as long as a link does not constitute an inducement to buy a product. The panel's drafted language states, "A link that constitutes an advertisement will occur if an exempt organization places a hyperlink on one of its Webpages to a sponsor's e-commerce or other Webpage containing messages of qualitative and comparative language, price information, or other indications of savings or value, an endorsement, or an inducement to purchase, sell, or use such product or services." Because Prop. Regs. Sec. 1.513-4(c)(2)(iii) permits display of a sponsor's Internet address, it seems logical to allow activation of the address with a link. If the sponsorship revenue is determined by the number of hits on the sponsor's linked site, the contingency disqualifies the revenue as a nontaxable sponsorship under Sec. 513(i)(2)(B)(i).

The IRS has suggested "if the Web page shows merely a passive link, then it may not be advertising, but only if related to the activities or purposes of the organization."(33) Not only is this criterion impossible to apply, the suggestion itself over-reaches. How can an organization dictate (or be responsible for) the contents of the sponsor's site that might change at any time? Is it unreasonable to expect that a site to which an exempt organization links will contain only information regarding the organization itself, its programs or an event sponsored by the linkee? Such a rule could be impossible to enforce and administer. Further developments on this important issue are likely.

* What is the character of income received as "referral fees" from online vendors (i.e., www.amazon.com) to their associates? Can such payments be characterized as a royalty? Does the result change If the link allows the site visitor to purchase books published by the organization itself? Commercial sites encourage links to other sites by rewarding organizations when a visitor to its site purchases something on the linked commercial site. The unanswered question is whether such payments represent payment for use of an intangible property right (i.e., a royalty) excluded from UBIT under Sec. 512(b)(2). The IRS has suggested that such arrangements are similar to affinity card programs, from which the organization receives a share of revenues from purchases made on credit cards containing their name and logo. In several cases, the Tax Court unequivocally ruled such revenues were royalties.(34) To protect itself, a creative organization can compose agreements with commercial distributors that specifically designate such transactions as licensing transactions (with no requirement that services be rendered), so that the passive "royalty" modifications can be argued to apply. New developments are certain to occur.

* What if the site sells both related and unrelated items and/or both donated and purchased goods? Relatedness would depend on an ability to identify both the purchaser and the type of goods or services sold. An accounting system capable of tabulating revenues from the sale of the purchased, unrelated items separately from the sale of related and donated goods would be needed to allow use of the "fragmentation rule" to calculate taxable and nontaxable income. The same type of tally would be needed if items were sold both to the general public and to patients, employees or students.(35)

* How would revenue from licensing the use of the organization's name and logo on another site be classified? what about a sale of the list of visitors to the organization's site? The royalty exception should apply to exclude revenues from licensing use of the intangible personal property (such as the organization's name or lists), although the IRS may disagree.

* What is the tax treatment of revenues received for advertisements on an organization's Website? when will a Website be treated as a periodical, making revenue from qualified sponsorships also taxable? If revenues are taxable, will the special cost allocation rules applicable to advertising in printed periodicals apply? These three questions have yet to be addressed by the IRS. Without question, revenues received for placing an advertisement inducing the viewer to buy a product or service on an organization's Website produces taxable UBI. The unanswered question is when a site constitutes a periodical. The Sec. 513(i)(B)(ii) safe harbor does not apply to sponsorships in regularly scheduled and printed materials published in connection with an event or payments made in connection with qualified convention or trade show activity.

A Website will be treated as a periodical, revenues from which will not be treated as qualified sponsorships, when (1) it is updated on a regular, quarterly or more frequent basis, with announcements, news articles and other editorial content of the sort commonly found in printed publications distributed to members and other constituents and (2) distribution or access to the information is limited only to members and/or subscribers. Special allocation rules apply to attribute a portion of an organization's member dues to a periodical containing advertisements that increase the taxable portion of advertising revenues.

* Might the irregular exception apply? When an exempt organization conducts a fundraising activity for a short period of time, rather than on a continual and regular basis, an exception in Regs. Sec. 1.513-1 (c)(2)(i) exempts the income from tax. The continual availability of an organization's Website to anyone with Internet access makes most activity pertaining to the site regularly carried on. A revenue solicitation placed on the site for a limited period of time, however, could conceivably qualify for this exclusion.

* Might the volunteer labor exception apply? When substantially all (i.e., more than 85%) of the labor involved in a revenue-producing activity is donated, under Sec. 513(a)(1) the activity is not considered to produce UBI. If income is derived from a Website produced and maintained by volunteers, some (or all) of the income might be eligible for this exclusion. In such a situation, the value of the volunteers' time in relation to the overall cost of the site should be computed. This exception does not apply to a capital-intensive business in which the income is primarily attributable to an investment in property and equipment.(36)

* How are the costs attributable to Website activity quantified? All the "ordinary and necessary" expenses of establishing and maintaining the site and handling the revenue-producing activity would be tabulated, according to Regs. Sec. 1.512(a)-1. Basically, the hardware and software costs (depreciated over three to five years) for computers, Website design and maintenance fees, access and server fees, cost of personnel involved in maintaining the site, and other direct costs of the activity would be combined. The Regs. Sec. 1.5120)-1 (d) exploitation rule might apply to allocate a portion of the organization's exempt-function costs to the revenue produced.

Lobbying

Organizations exempt under Sec. 501 (c)(3) may devote no more than an insubstantial part of their activities to attempts to influence legislation. This test is a subjective one. A variety of non-monetary factors (e.g., volunteer time and the frequency and visibility of the effort) may be applied to identify substantial lobbying. Alternatively, public charities can chose to govern their permissible lobbying by electing to use a monetary test in Sec. 501 (h). Such charities may spend as much as $1 million a year (20% of the first $500,000, 15% of the next $500,000, 10% of the next $500,000, and 5% of the remainder of its exempt-purpose expenditures) on direct lobbying (i.e., contacts with legislators and officials), but only 25% of that amount on grassroots lobbying. Thus, electing charities must pay careful attention to the grassroots lobbying limit; posting a lobbying message on the organization's Website will likely be treated as a grassroots communication using "mass media."(37) If the message is accessible only by members, the limit may not apply. Information referring to specific legislation on a public domain Website, however, will likely be so treated, and the cost subject to the lower permissible spending limits. However, due to the minimal costs of electronic dissemination, as compared to print and broadcast media, a Sec. 501(c)(3) organization might be able to significantly increase the amount of lobbying it conducts. A private foundation may spend none of its money on lobbying efforts.

Other Issues

There are a number of' issues beyond the scope of this article that need to be mentioned. Nonprofit organizations conducting activities from a Web page should seek assistance in answering other questions, only three of which are listed below:

* Must any state sales tax be collected for sales of goods or products?

* Do the materials published on the organization's site (or sites to which it is linked) involve legal issues, such as intellectual property rights, invasion of privacy, defamation of character, etc.?

* If contributions or memberships are solicited on the Website, must the organization report its fundraising activity in any states? Must special disclosures about the organization's financials be shown on the site?

For more information about this article, contact Mr. Andreozzi at [phone] or [e-mail].

Editor's note: Ms. Blazek is Chair of the Exempt Organizations Electronic Commerce Task Force of the AICPA's Exempt Organizations Taxation Technical Resource Panel. She thanks her fellow Task Force members for their input to and review of this article.

(1) A thorough discussion of the rules can be found in Blazek, Tax Planning and Compliance for Tax-Exempt Organizations (John Wiley & Sons, 3d ed., 1999).

(2) See Chasin, Ruth and Harper, "Tax Exempt Organizations and World Wide Web Fundraising and Advertising on the Internet," Fiscal 2000 CPE Text for Exempt Organizations, Chapter I.

(3) To date, only a few letter rulings even mention the word "Internet." In all instances, the Internet access mentioned in the ruling was to be used as a communication device for the organization's program activity, with no associated revenue generation. IRS Letter Ruling 9913042 (4/5/99) considered a private foundation's computer training program for teachers and students. The program was to provide computers and Internet access; no revenues were to be generated by the activity and a charitable class was served by the program. The issue was whether the expenditures were taxable under Sec. 4945. The ruling concluded that the educational program, with its Internet access component, served a charitable or educational purpose. A host of other issues have not been considered to date. In IRS Letter Ruling 9723046 (6/6/97), Internet activity was condoned as related activity; advertising on the site was noted, but no ruling was requested as to its relatedness or taxability.

(4) Rev. Rul. 74-614, 1974-2 CB 164.

(5) Rev. Rul. 81-29, 1981-1 CB 328.

(6) See Moore and Harper, "Internet Service Providers Exemption Issues," Fiscal 1999 CPE Text for Exempt Organizations, Chapter C.

(7) See Chasin and Harper, "Computer-Related Organizations," Fiscal 1997 CPE Text for Exempt Organizations, Chapter A.

(8) Robert C. Harper, Chief of IRS Technical Branch 3 of the Tax Exempt/Government Entities Division, in comments at a lunch meeting of the Washington, D.C. Bar Taxation Section (12/1/99).

(9) See Moore and Harper, note 6 supra.

(10) See Chasin and Harper, note 7 supra.

(11) San Antonio Bar Ass'n, WD TX (5/14/80); Texas Apt. Ass'n, 869 F2d 884 (5th Cir. 1989).

(12) Rev. Rul. 77-246, 1977-2 CB 190.

(13) Rev. Ruls. 78-428, 1978-2 CB 177, and 76-22, 1976-1 CB 148.

(14) The Council for Bibliographic and Information Technologies, TC Memo 1992-364; Rev. Rul. 70-79, 1970-1 CB 127.

(15) Sec. 513(a) and Regs. Sec. 1.513-I.

(16) Sec. 513(a)(3) states that a trade or business, "which is the selling of merchandise, substantially all of which has been received by the organization as gifts or contributions," is not an unrelated trade or business.

(17) Only Sec. 501(c)(3) and (4) organizations are specifically subject to a prohibition against private inurement.

(18) Sec Hopkins and Blazek, Private Foundations: Tax Law and Compliance (John Wiley & Sons, 1998), Chapter 5.

(19) However, a link from a corporate Website to a candidate's site is a violation of Federal Election Commission rules.

(20) See Sees. 6113 and 162(e)(4), as they pertain to Sec. 501 (c)(4), (5) and (6) organizations; see also Sec. 4911 (e)(2).

(21) See note 8, supra.

(22) Notice 88-120, 1988-2 CB 454.

(23) See note 2, supra.

(24) A list of fundraising Websites has been compiled by The Internet Nonprofit Center, at www.nonprofits.org.

(25) See Seto and Jones, "Fund-Raising Issues, Part II, Script Programs," Fiscal Year 1999 Exempt Organization Technical Instruction Program, Chapter T.

(26) See Sec. 170(c); American Bar Endowment, 477 US 105 (1986), pp. 116-117; Mose Duberstein, 363 US 278 (1960); William S. Allen, 541 F2d 786 (9th Cir. 1976); Rev. Ruls. 86-63, 1986-1 CB 88, and 76-232, 1976-2 CB 62.

(27) Sec. 512(b)(2). The Sierra Club and several other organizations successfully fought a long battle in Tax Court to avoid tax on assignment of their names and mailing lists in connection with bank affinity card programs. A discussion of excludible royalties can be found in Blazek, note 1 supra, Chapter 21.10(d); see note 34, infra.

(28) Secs. 511-513 contain the complex set of rules and exceptions governing the taxation of UBI.

(29) See, e.g., Rev. Ruls. 73-104, 1973-1 CB 263, and 73-105, 1973-1 CB 264; a score of letter rulings cite these historic rulings.

(30) Sec. 513(c); see Blazek, note 1 supra, Chapter 21.

(31) REG-203601-92 (3/1/00); comments are due by May 31, 2000.

(32) The IlKS promised to re-propose or finalize the 1993 proposed regulations on this subject early in 2000.

(33) See Moore and Harper, note 6 supra.

(34) After Sierra Club, Inc., TC Memo 1999-86, was issued on March 23, 1999, the IRS finally conceded defeat in its efforts to tax affinity card payments.

(35) Sec. 513(a)(2); see notes 29 and 30, supra.

(36) See Rev. Rul. 78-144, 1978-1 CB 168 (a long-term net lease of heavy machinery that required the lessee to provide insurance, pay taxes, make repairs and secure and process leases was ruled to be a capital-intensive business).

(37) Regs. Sec. 56.4911-2(b)(5)(iii)(A) provides that mass media includes television, radio, billboards and general circulation newspapers and magazines.

RELATED ARTICLE: Comment Period for Sponsorship Prop. Regs. Ends May 31, 2000

by Jody Blazek, CPA, Blazek & Vetterling, LLP, Houston, TX

Practitioners who serve nonprofit organizations may need to study the sponsorship regulations proposed by Treasury. Many tax-exempt nonprofit organizations receive financial support from businesses. Sponsorship payments acknowledged with words and displays that encourage the viewer or reader to buy the sponsor's product are treated as unrelated business income for otherwise exempt organizations.

In response to public objections to the IRS's attempts to tax college bowl game revenues back in the early 1990s (IRS Letter Ruling (TAM) 9147007), regulations were proposed in 1993 to delineate between words that represent a "thank-you" for a donation from those that constitute taxable advertising. Congress codified the proposed regulations in 1997 by adding Sec. 513(i) to define "qualified" (i.e., nontaxable) sponsorships. Under Sec. 513(i)(2)(A), payments made by o person engaged in a trade or business for which there is "no arrangement or expectation that such person will receive any substantial return benefit other than the use or acknowledgment of the name or logo (or product lines)" of the business are treated as nontaxable donations.

Possibly the most controversial part of the proposed regulations concerns exclusivity agreements. An event or program with a sole sponsor can be a qualified sponsorship. A "qualified sponsorship" (i.e., donation) occurs if a payment buys a company its name on a new stadium. An "exclusive provider" agreement not to sell competitor products, however, is deemed a substantial benefit. A "nonqualified sponsorship" occurs if the exempt organization agrees to sell only the sponsor's products in its facilities or at sporting or other events. The colleges and universities that have already received significant dollars by limiting the sale of products to certain sponsors may need to look to other exclusions from unrelated business income tax to shelter such income.

The proposed standards for identifying and measuring "substantial return benefit" could be improved. Sec. 513(i)(2)(A) provides that sponsor information cannot contain "qualitative or comparative language, price information, or other indications of savings or value, an endorsement, or an inducement to purchase, sell, or use such products or services." The spading event invitation cannot say, for example, "ABC Technology Company is the best Internet provider." The use of logos and symbols that are an established part of the sponsor's identity are permitted, apparently without regard to qualitative language. What constitutes "established" is not defined. Also not described are permitted displays of "value-neutral descriptions" that can include depictions of the sponsor's product-line services and brand or trade names and product or service listings.

To date, the IRS has provided little guidance on the increasing use of the Internet by nonprofit organizations. Fortunately, list of permitted sponsor information has been expanded to include not only the sponsors locations and telephone numbers, but also Internet address. Missing, however, from the proposed regulations is a reference to hyperlinks. The AICPA's Exempt Organizations Taxation Technical Resource Panel's comments on proposals suggest that "a link from an organization's Web site to a sponsor's home page or any other page that does not contain messages of qualitative or comparative language" be added to the list of permitted information. The panel also asks for clarification of whether the "2% or $74 (adjustable for inflation) de minimis rule" is applied per sponsor or for each employee or partner of a sponsor when an organization is evaluating insignificant (and thereby permitted) benefits.

The regulations were proposed on Feb. 29, 2000; the deadline for comments is May 31, 2000. A public hearing is scheduled for June 21, 2000, at 10:00 am, at the Internal Revenue Bldg., 1111 Constitution Ave., NW, Washington, DC.

Jody Blazek, CPA Partner Blazek & Vetterling LLP Houston, TX