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Fundraising events are the lifeblood of many exempt organizations. These events range from golf tournaments to charity balls to silent auctions. Exempt organizations solicit companies and individuals to sponsor such events to underwrite the cost of the events. Organizations need to be aware of the IRS rules to keep their sponsorship income from being categorized as advertising income and potentially subject to the Unrelated Business Income Tax (UBIT).
Unrelated Business Income is generally defined as income from a trade or business that is regularly carried on and which is not substantially related to the organization’s exempt purpose. Many special rules exist to exempt certain types of income from UBIT. Some of the major exemptions are for passive types of income (interest, dividends, royalties) and for activities where substantially all the work in generating the revenue is done by volunteers.
The IRS has much concern in the area of sponsorships and advertising. They believe that many sponsors are paying the sponsorship in exchange for receiving certain benefits from the exempt organization. Rules and regulations exist under IRC §513 that describe definitions and safe harbors for sponsorship payments and any benefits received. In 1997, Congress added §513(i) to the Internal Revenue Code which provided a safe harbor from UBIT for “qualified sponsorship payments.” The IRS then added regulation §1.513-4 in 2002 to further clarify the sponsorship safe harbor.
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Mandatory Electronic Filing Coming Soon
The IRS released regulations in January 2005 that will require certain Tax exempt organizations to file their annual returns electronically beginning with tax year 2005 returns (Tax years ending on or after December 31, 2005). For the 2005 tax year, organizations with total assets of $100 million or more who also file 250 or more returns with the IRS (income tax, excise tax, employment tax, and information returns) will be required to file the Form 990 electronically. For purposes of determining if 250 or more returns are filed, each Form W-2 and quarterly Form 941 and Form 1099 is considered a separate return.
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| Vehicle Donation Changes
In 2004, the IRS issued two new publications – a Charity’s Guide to Car Donations (Publication 4302) and a Donor’s Guide to Car Donations (Publication 4303). Both publications describe types of car donation programs, their impact on the Tax Exempt status of the organization and when such contributions are deductible. The American Jobs Creation Act of 2004 made several significant changes to the rules for car donations made after December 31, 2004. In January 2005, the IRS issued Publications 4302-A and 4303-A which outline the new rules.x
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IRS Briefs
- IRS EO division is shifting its focus from customer service to enforcement. Still concerned with customer service.
- IRS Executive Compensation Review – IRS has begun its compensation review project targeting tax-exempt organizations. Letters have been sent to 1,784 tax-exempt organizations. Organizations that receive such letters should proceed with care and diligence in formulating their responses.
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Court Briefs
- Charity Lawsuits – federal lawsuits have now been dismissed in New York, Arizona, and Illinois. The U.S. District Court Judge in New York dismissed the claims “with prejudice” meaning that the lawsuits cannot be pursued in state court.
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Legislative Briefs
- Senate Finance Committee held hearings related to exempt organizations on April 5, 2005 to discuss strengthening the role of charities in the U.S. and closing the tax gap.
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