November 27, 1997 | Read Time: 1 minute
The I.R.S. has ruled that a charity would owe unrelated-business income tax on revenue from advertisements that a company wants to place on walls of the organization’s offices. Non-profit groups must pay the tax on commercial operations not related to their tax-exempt purposes.
The charity, which the I.R.S. did not identify, provides programs and services for its child and adult members — including health and fitness programs, child care, and camps — at its branches. The company, an advertising agency, proposed to place ads or signs on the walls of the charity’s branch offices and pay the charity a flat fee for the space.
The charity asked the I.R.S. to let it escape the unrelated-business income tax by characterizing the payments for ad space as rental income. Under the law, charities don’t have to pay taxes on such payments.
But the revenue service denied the request, concluding that the deal would not be a lease because the company would not have “possession of the premises” in exchange for its payments. Rather, the government said, the company would merely have permission to use the wall space: a taxable license, not a lease (Letter Ruling 9740032).
