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Exempt Organizations

Exempt Organizations
January 2003

The use of websites by exempt organizations has become an effective and integral part of their efforts to reach constituencies and the general public. Websites are used as fundraising tools and often contain links to sponsors, advertisers and other third party resources.

IRS guidance in connection with website activities has been sparse, although the final regulations on corporate sponsorship payments issued in April, 2002 did provide two useful examples. In PLR 200303062, dated October 22, 2002, the IRS has ruled on several website-related activities of the taxpayer organization. Although the private letter ruling cannot be relied on as authority by taxpayers other than the one to whom it was issued, it provides an indication as to how the IRS might rule if presented with similar facts.

The taxpayer in PLR 200303062 is a membership organization exempt under IRC §(c)(5) organized for the advancement of agriculture. Its purposes are to better the conditions of those engaged in agricultural pursuits, improve the grade of their products and to promote agriculture. The organization conducts meetings and conferences and provides educational information to members. The organization publishes news publications that accept advertising. The advertising income is treated as unrelated business income (UBI).

The organization maintains a website for the purpose of disseminating information to its members and the public. In addition, taxpayer provides information on its website about member companies that offer special or discounted services and benefits to members. Taxpayer lists the member service providers and provides information about the service or benefit. The listings are not promotional in nature and do not encourage members to use the products or services.

Taxpayer does not charge the service provider a fee for its listing. Taxpayer does not accept website advertising from these sponsors, although it does accept advertising from these service providers in its print periodicals.

Some of the service providers also sponsor activities and events. Taxpayer treats such payments as nontaxable corporate sponsorship payments. Other service providers have licensing agreements with taxpayer. Taxpayer treats licensing fees as nontaxable royalties.

Taxpayer requested the following rulings (among others):

  • Taxpayer would like to include web-based advertising for no additional consideration as part of its periodical advertising agreements, in order to attract other advertisers.
  • Taxpayer would like to acknowledge sponsors on its website and provide links to sponsor websites.

Final corporate sponsorship regulations. The final regulations contained the following examples:

  • Taxpayer, a symphony orchestra posts a list of sponsors on its website, including the name and internet address of a corporate sponsor to its concert series. The internet address of the sponsor appears as a hyperlink on taxpayer’s website. Taxpayer does not promote or advertise merchandise of the sponsor. The example concludes that the posting of the name and address on the website constitutes an acknowledgment. The sponsorship payment received by the taxpayer from the sponsor is not taxable.
  • Taxpayer is a health-based charity that sponsors an initiative to inform the public about a particular medical condition. A pharmaceutical company that manufactures a drug that is used in treating the medical condition provides funding for the initiative. Taxpayer’s website contains a hyperlink to the pharmaceutical company’s website. On the pharmaceutical company’s website is a statement that reads: “[Taxpayer] endorses the use of our drug, and suggests that you ask your doctor for a prescription if you have this medical condition.." The taxpayer reviewed the endorsement before it was posted and gave its permission for the endorsement to appear. The endorsement is advertising.

PLR 200303062. In connection with taxpayer’s activities, the IRS ruled as follows:

  • Taxpayer’s listing of information about third-party providers of services to the organization’s members in its publications and brochures and on its website did not result in UBIT.
  • Taxpayer’s providing of a link from its website to the websites of third-party providers of services did not give rise to UBI.
  • The organization’s income from the sale of periodical and banner advertising to third-party providers of services constituted UBI. However, the sale of such advertising did not cause any portion of the licensing revenues from certain service providers to be treated other than as non-taxable royalties.
  • The special rules for computing UBI tax for periodical advertising cannot be used for website advertising unless such advertising is part of a periodical that appears on-line.
  • Where an advertiser pays an amount that is attributable only to periodical advertising (including on-line periodical advertising), the special rules for computing UBI for periodical advertising may apply to the entire payment. However, those rules do not apply where an advertiser pays an amount that is attributable to both periodical advertising and non-periodical advertising that appears on the website generally. In this case, separate computations are required for the periodical advertising and the non-periodical advertising.
  • The providing of a link to a sponsor’s website in connection with an acknowledgment of a sponsorship payment does not give rise to advertising income.

PLR 200303062 highlights the complexity of the issues surrounding exempt organization relationships with sponsors and advertisers. These relationships often involve multiple agreements, such as licensing arrangements and website acknowledgment or advertising. As is often the case in the UBI area, IRS guidance is often incremental, requiring analysis of guidance from several sources. The guidance is often very fact-specific, but may nevertheless be useful in assisting taxpayers who are engaged in similar activities.

Should you have any questions regarding the foregoing, please contact John Kikuchi at (925) 944-7666 or by email.


The information contained in this newsletter is general in nature and does not constitute tax advice or opinion. Applicability to specific situations should be determined through consultation with your tax advisor.

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