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July 13, 2006

The Internet & UBIT

I met Nat Bartholomew, CPA of Langan Associates (recently merged with LarsonAllen) in Nashville during ASAE & The Center's Annual Meeting there last year. I've been getting his firm's not-for-profit finance and accounting email newsletter ever since. They have a pretty nice newsletter, and there was an article in the newsletter that I got today that I felt was particularly relevant to my blog.

The exact circumstances under which unrelated business income tax (UBIT) is applied to Internet activities is still being settled by the IRS and the courts. Here's one area where I bet a lot of associations may be in violation of the rules. Displaying a contributor's or an affinity partner's name or logo on an association web site seems to be fair game. But it seems clear that if you have a web page listing contributors or affinity partners, it's best to not link to their web sites if you want to avoid UBIT. From the newsletter:

Linking to sponsors. Acknowledging a corporate contributor on your site isn't likely to trigger tax, but if you link to the sponsor's products that are sold on the Net, the issue becomes more complex. The sponsor's contribution could be determined to actually be paid advertising, and the resulting revenue taxed.
I don't remember seeing a question regarding this on the CAE exam, but I remember being surprised that there wasn't one.

Remember that it's not necessary to avoid UBIT at all costs. If, by promising a hyperlink to the sponsor's or partner's web site, you can increase your fee to an amount greater than the UBIT that would be imposed by this activity, then you really ought to do it. Unless you're approaching that level where the IRS may revoke your tax-exempt status because too much of your association's revenue is coming from unrelated business income.

UPDATE: This 2002 article from the Venable law firm states that simple links to sponsors' web sites will not ordinarily invoke UBIT, but if the web page that you link to contains a statement of endorsement from the association, it will likely trigger UBIT.

That there are two interpretations of the rules should make any association executive very cautious about how they treat links to sponsors' web pages. This is especially true because the sponsor is free to edit their page however they wish. You might link to a sponsor's page that seems innocent enough, only to have the sponsor go back later and insert product information or statements that seem to imply endorsement from the association. Tread carefully!


1 comment:

David Gammel said...

I can't believe that a generic link to their home page would trigger this. Linking to invidual product could, although I am not a lawyer.

If a simple link to their home page does trigger UBIT, then so should publishing their mailing address and phone number, if you extend it to its logical and ludricrous conclusion. In fact, you are probably better off not mentioning them at all since someone could google their name and then purchase a product.

The real truth is that sponsorships are advertising even if they are not treated as such for tax purposes. Does anyone believe their sponsors don't expect some form of economic return for their sponsorship dollars?