April 4, 2002 | Read Time: 1 minute
The IRS has ruled that a charity that provides Internet access may keep its tax exemption, but only after the organization made key structural changes.
In its ruling, which could be important to other Internet-services groups, the IRS said that the charity in question was recognized as tax-exempt in 1992, after it was set up to “provide and operate an educational and charitable community telecommunication network” and to “establish and operate an online, community-based, public-access information and communication service.”
But in 1998, the IRS decided that the organization’s primary activity of providing Internet services for a fee was not charitable work, and that the group was really being run as a business. The group’s explanation that it provided services to “disadvantaged businesses, individuals, and communities” did not establish that it was “operated exclusively for the relief of the poor, distressed, or underprivileged,” the revenue service said.
In fact, the IRS said that the charity received 75 percent of its income from providing Internet services to those who do not have low incomes or are otherwise in need.
To keep its tax exemption, the organization created a taxable subsidiary and transferred to it all of its services that are not aimed at low-income people, according to the IRS. The charity itself then planned to provide Internet services to those in need and to other charities for fees that were “substantially below cost,” the IRS said, using grants from profits reaped by its new taxable subsidiary to defray the expense of providing the subsidized services.
As is its custom, the IRS did not identify the charity involved in the ruling (Technical Advice Memorandum 200203069).
