(Originally published in the April 2012 issue of Bruce R. Hopkins Nonprofit Counsel, available electronically to subscribers on publication.)
The IRS has made public two private letter rulings holding that, for a variety of reasons (principally commerciality), nonprofit religious publishing organizations cannot qualify for tax exemption.
Facts of PLR #1
A nonprofit religious publishing corporation, formed as a successor to a for-profit religious publishing corporation, has been denied recognition of exemption as a religious and charitable organization (an IRC § 501(c)(3) entity) (Priv. Ltr. Rul. 201204021). The grounds for this denial principally are application of the commerciality doctrine and the private inurement and private benefit doctrines.
The nonprofit organization’s website describes it “as a Christian ministry involved in the publishing and production of inspirational literature around the world.” Its executive staff consists of several individuals with considerable years of publishing experience. The organization has royalty agreements with many authors. Ninety-eight percent of its revenue is from gross receipts consisting largely of income from book sales.
One of this organization’s officers, whose books are sold by the organization, has 40 years’ experience in Christian publishing and is “responsible for the hiring and firing, author/publisher relationships, editing, proof-reading, acquisition of manuscripts, weekly radio show, employee relations, budgeting, and general oversight of all departments, developing new programs, and is the ultimate decision maker.”
The organization’s expenditures are consistent with a typical publishing business, including salaries and wages, occupancy, and professional fees. Its assets are composed of accounts receivable and inventory. Its liabilities are primarily accounts payable and notes payable. The liabilities assumed from the for-profit corporation exceeded the value of the assets transferred to the nonprofit corporation. The nonprofit entity continues to pay the lease amount previously paid by the for-profit corporation.
Facts of PLR #2
The second of these rulings involves a nonprofit organization that has a “close connection” with an “established” church that has over 100 churches nationwide; it is part of a “network” involving the church developed to expand the distribution of religious materials. This organization sells religious products, such as books and CDs. It engages in radio, magazine, and Internet advertising. It provides a markup on products and pays sales commissions.
The IRS saw commerciality lurking everywhere in these facts (Priv. Ltr. Rul. 201205013). The agency wrote that this organization “operate[s] in a manner that is not distinguishable from a regular for profit publisher regarding the purchase, advertising, promotion and sales of [its] products.” The IRS added, “While you may indirectly advance religion in distributing your products, your primary concern is the sale of religious publications.” The IRS suggested that the way to avoid commerciality is to give everything away.
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