Web Issues and the IRS: a Hot Topic

By GRANT WILLIAMS

The Internal Revenue Service has been harshly criticized by many charities and citizens for considering whether — and how — to clarify the way tax laws apply to nonprofit organizations’ use of the Internet. Others simply offered suggestions about how the tax agency should proceed in its oversight of charities’ Web activities.

The response comes after the revenue service formally stated in the fall that it was reviewing whether it needed to put out guidance that would clarify how the tax code should be applied to nonprofit Internet activities.

To date, the government has not issued instructions or explanations that are specifically aimed at Internet transactions of tax-exempt groups, and many organizations, large and small, have been concerned about what the revenue service might do or expect from them.

The I.R.S. specifically asked for comment on the way it should view charities that have Web sites or communicate with the public through electronic mailing lists, discussion lists, chat rooms, or other methods.

The revenue service was deluged with thousands of letters — most critical, but some encouraging. While a number of individuals, charities, and coalitions of charities, such as Independent Sector, sent in carefully written, lengthy, and lawyerly responses to the revenue service’s request, the I.R.S. also heard from hundreds and hundreds of citizens who sent short notes that vehemently opposed any regulation of charities’ Internet work. Many letters and e-mails used wording that had been suggested by the Gun Owners of America, an advocacy organization in Springfield, Va., that strongly opposes federal regulation.

Other correspondents, apparently inspired by religious organizations that urged followers to protest, accused the tax agency of trying to keep Christians from practicing their faith.

Hubbub Draws Scrutiny

Some writers clearly understood the underlying tax issues behind the revenue service’s announcement and gave the I.R.S. suggestions on how the government should or should not proceed. But others obviously did not understand the law or the I.R.S.’s intentions, and many of these viciously lashed out at the tax agency on a variety of grounds that had little to do with the issues at hand. Others mistakenly concluded that the revenue service had already decided to put into effect a wide variety of new policies.

The hubbub drew the attention of Rep. Ernest J. Istook Jr., an Oklahoma Republican, who, according to The Washington Post, sent aides to meet with I.R.S. officials to explain that he was hearing complaints from family-values groups and did not want the tax agency to issue any ruling that might hamper the ability of such organizations to communicate on the Internet. Mr. Istook is a member of the House Appropriations Committee, which drafts major spending measures.

All in all, the massive response was not a typical reaction to an I.R.S. request for comments on a tax topic: A few dozen comments is the norm.

Concern About Advocacy

Some of the fuss stemmed from the revenue service’s statement that, “when a charitable organization engages in advocacy on the Internet, questions arise as to whether it is conducting political or lobbying activity, and if so, to what extent.”

Under federal law, charities are not allowed to participate in political campaigns, so groups want to be sure they understand what the rules are in order to stay out of trouble. The law also limits the amount of lobbying that charities may do, so organizations worry whenever it appears that the government might broaden its definition of what constitutes lobbying.

One issue of controversy stems from the fact that some charities have electronic ties with other kinds of groups that engage in political or lobbying activities on the Internet. “The ease with which different Web sites may be linked electronically (through a ‘hyperlink’) raises a concern about whether the message of a linked Web site is attributable to the charitable organization,” the I.R.S. said.

The Internal Revenue Service posed two key questions: “Does a hyperlink on a charitable organization’s Web site to another organization that engages in political campaign intervention result in per se prohibited political intervention? Does providing a hyperlink to the Web site of another organization that engages in lobbying activity constitute lobbying by a charitable organization?”

In its letter to the I.R.S., Independent Sector, a national coalition of charities and grant makers, said that it disagreed with the revenue service’s overall concern that a charity might necessarily be saddled by a message contained on a linked site.

“There is nothing in the statute or regulations to suggest that attribution should arise because technology makes it far easier and more efficient for a charity to give people access to wholly unrelated parties and their communications,” Independent Sector said. “An individual can use the telephone to reach another party far more efficiently than regular mail or a personal visit, but the I.R.S. has never ruled that a charity risks attribution of statements made by a wholly unrelated party if it provides the public with that other party’s telephone number.”

Campaign Politics

On the issue of campaign intervention, Independent Sector said, “If a charity provides a set of links to candidate Web sites or party Web sites, and the charity states that the goal of offering the links is voter education, and the links are presented in an impartial fashion that shows no bias in favor or against any candidate, the links should be viewed as furthering a charitable purpose and not as campaign intervention. The context that the charity creates is what matters.”

Said Tim Crowley, director of Internet media for the Christian Broadcasting Network: “One of the most incredible characteristics of the Internet is its platform to deliver a free flow of information to virtually anyone. While some regulation of that kind of information may be necessary, the idea of establishing a system that would police ‘the link activity’ of certain sites and organizations is hard to swallow.”

The Alliance for Justice, a coaltion of advocacy groups, said that a link from one group to another organization that is engaged in lobbying should not be considered “per se lobbying activity” by the organization that creates the link. “Among other reasons, any such rule would impose a tremendous burden on linking organizations, given that they do not control the content of linked sites.”

Moreover, said the Alliance for Justice, “making organizations responsible for any communications accessible through a link would create a strong disincentive for providing such links, thus undermining a key feature of the Web and reducing its extraordinary utility.”

But the Alliance for Justice said that in some cases “the context of both the Web site linked from — and the Web site linked to — can, when linked, create a lobbying communication.”

The Alliance illustrated its point through an example of a fictional charity Web site that discusses forest policy issues and includes a page offering links to other organizations’ positions on forest policies. One of the linked pages may encourage the reader to contact Congress in support of a ban on logging on federal lands.

The portion of the charity Web site discussing logging on federal land should be treated as lobbying if the organization explicitly urges its readers to follow the link to take action, “or otherwise indicates an intent to adopt the other organization’s message as its own,” the Alliance for Justice said.

However, if the links are simply presented as sources of additional information, “the fact that some users may choose to follow a link that leads to encouragement to lobby should not be sufficient” to turn the charity’s discussion of issues into so-called grass-roots lobbying, the Alliance concluded.

Many who wrote letters to the revenue service were upset that the I.R.S. was asking advice on how it might scrutinize charities that — using Web pages or electronic mailing and discussion lists — communicate with their members, supporters, or the public, or ask them to post their opinions or to take action on public-policy issues. Those correspondents charged that the government wants to limit the number of Americans that nonprofit organizations can communicate with.

Another topic of concern to charities was the revenue service’s statement that it might need to make clear how unrelated-business income tax could be levied on payments that stem from use of the Internet. Charities must pay the tax on money-making activities that are unrelated to their missions.

The I.R.S. noted that some charities receive payments from companies to display advertising messages on the organizations’ Web sites. Some groups have “banners” on their sites containing information about — and a link to — other organizations in exchange for similar banners on the other organizations’ Web sites.

What’s more, many tax-exempt groups provide hyperlinks on their sites to companies that sponsor their activities. Some organizations receive payments based on a percentage of sales for referring customers to another Web site, while other groups receive payments based upon the number of people who use the hyperlink to go to the other Web page.

Some correspondents asked the I.R.S. not to apply the income tax to Internet transactions. Others suggested that the revenue service issue guidance setting forth “bright-line rules” on how it wants to apply existing law to Internet transactions in order to clear up the uncertainty charities now face.

The revenue service received a number of letters from organizations and citizens who asked that the tax agency avoid regulation of the Internet.

“The I.R.S. should not be in the business of monitoring the Internet, suppressing public discourse, and censoring public information,” wrote Flo Beaumon, program manager at Aloha Inn, which offers transitional housing for homeless people in Seattle.

Asked Thomas E. Rogeberg, chief operating officer of Coral Ridge Ministries in Fort Lauderdale, Fla.: “Is the I.R.S. so unencumbered by its own mission that it believes it now has so much ‘free time’ it may probe the depths of thousands of nonprofits whose resources are so limited that the Internet may be its lone method of communication?”

Mr. Rogeberg continued, “Why not do your civic and proper role of collecting the massive tax amounts that major pornography and other ‘sin industry’ conglomerates never even think to route to your coffers? That is where your priority should be, not in trying to harness indefensible nonprofits who could never control the verbiage coming to their sites.”

The Internal Revenue Service has not said when it will make a decision about what its next step might be.

Although the deadline for sending comments to the I.R.S. has passed, the tax agency’s concerns about Internet activities of nonprofit groups, set forth in Announcement 2000-84, Internal Revenue Bulletin 2000-42, may be found on the service’s Web site, http://www.irs.ustreas.gov/bus_info/bullet.html.