September 23, 1999 | Read Time: 4 minutes
The Internal Revenue Service is providing its agents with new advice on how to handle a range of issues that may arise during charity audits and other reviews. Among the hot topics: charities that run health clubs and organizations that raise money through the Internet.
The advice appears in the latest version of the revenue service’s training textbook. The publication is intended solely to train I.R.S. workers, but charity leaders and their lawyers find the guide to be useful because they can see how the agency views complicated aspects of tax law.
Other topics discussed in the new edition include: car-donation programs; donor-advised funds, in which people turn over cash and appreciated assets to a charity, claim a charitable deduction, and recommend how, when, and to which charities to distribute the money; and supporting organizations, which typically are created to raise money for a specific charity but which sometimes have general purposes and support a variety of causes.
In the chapter of its handbook on health clubs, the I.R.S. noted that Congress had asked the tax agency to take action. Lawmakers directed the tax agency last year to make sure that charities that run health clubs or provide “fitness services” do not unfairly compete with businesses.
Congress made clear that it did not have a problem with the I.R.S.’s policy toward groups like the Y.M.C.A. that offer “a variety of programs based on community needs, including health and fitness for people of all ages, incomes, and abilities.”
A 1984 ruling by the I.R.S. said that fitness programs run by non-profit groups are charitable activities as long as the organizations serve a broad array of people. Such groups are not liable for the unrelated-business income tax that charities must pay on money-making activities that are unrelated to their missions.
But Congress said it wanted the I.R.S. to “review the standards it applies to fitness activities operated by educational and health-care organizations.”
In its handbook, the revenue service said that agents may use a “fragmentation rule” to help decide if a health club that is run by a charity as part of its overall operation strays from the charity’s mission and thus owes tax. “In appropriate circumstances,” the I.R.S. said, “the activities of a fitness center may be fragmented so as to subject those activities, which are indistinguishable from their commercial counterparts, to unrelated-business income tax.”
The tax agency’s position drew praise from a group of for-profit health clubs. “To my knowledge, this is the first time the I.R.S. has publicly recognized the problem of commercialization by tax-exempt fitness clubs and tried to do something about it,” said Helen Durkin, director of public policy for the International Health, Racquet & Sportsclub Association.
In another chapter of its handbook, the I.R.S. explains how federal tax laws can apply to non-profit organizations that use e-mail and Web sites to raise money and sell merchandise and advertising. “The use of the Internet to accomplish a particular task does not change the way the tax laws apply to that task,” the handbook said. “Advertising is still advertising. Fund raising is still fund raising. However, the nature of the Internet does change the way in which these tasks are accomplished.”
For example, the I.R.S. noted that federal law generally requires non-profit organizations that are not eligible to receive tax-deductible contributions to disclose that fact when asking for contributions. On a Web site, the I.R.S. said, such a group would have to make sure that a potential donor could read the disclosure before clicking the “submit or other button to transmit information to a soliciting organization.”
The I.R.S. said it plans to formally ask non-profit organizations for comment on how current laws should be applied to groups’ Internet work.
“There’s been something of a void, so it’s important that the I.R.S. is beginning to lay down principles and analyses to give guidance on Internet activities and to ask the public for feedback,” said Dan Moore, charities registrar in the New Mexico Attorney General’s Office, who was speaking in his role as a board member of the National Association of State Charity Officials.
Copies of the I.R.S. publication, Exempt Organizations Continuing Professional Educational Technical Instruction Program, may be obtained for $37.35 — checks payable to the United States Treasury — from the Internal Revenue Service, F.O.I./Privacy Section, P.O. Box 795, Ben Franklin Station, Washington 20044. Ask for the edition designated “Training #4277-051″ for the 2000 fiscal year. The book will soon be available at no cost on the tax agency’s Web site at http://www.irs.gov/prod/bus_info/eocpe.html.
