Charity Told to Pay Tax on Business Earnings

TAX WATCH

By GRANT WILLIAMS

A charity that runs a consignment store, tea room, and gift shop may keep its tax exemption but must pay income tax on some revenue, the Internal Revenue Service says in a ruling that gives insight into its view of charity-operated enterprises.

The group at issue, which was not identified, was created to help needy women earn their own livings by providing a consignment store where toys and clothing made by the women could be sold. Before a woman´s goods are sold, the charity assesses her work and trains her “how to make items that people will not only buy, but for which they will pay high prices,” the I.R.S. said.

The charity runs a gift shop and tea room next to the consignment store in order, it told the I.R.S., to attract customers to the consignment shop and raise money to support its mission. Both the gift shop and tea room sell goods purchased from for-profit vendors.

The charity said that the operation of the consignment store by itself would fail to bring in many prospective customers because the store would be perceived as a “craft fair” that would not draw “top dollar” prices or generate confidence in the quality of the items for sale. The charity´s largest source of revenue is the tea room, which generates 34 percent of the total; the consignment shop provides 33 percent and the gift shop 28 percent.

In its ruling, the I.R.S. said that the charity will keep its tax exemption even though it operates retail businesses — the gift shop and tea room — as a “substantial part” of its activities. The reason: The charity runs the businesses to further its mission and not as its primary purpose.

But the I.R.S. rejected the charity´s view that the gift shop and tea room are so important to accomplishing its mission that their revenue is exempt from taxes that groups must pay on income from unrelated businesses (Technical Advice Memorandum 200021056).