Background. As IRS notes in Internal Revenue Manual (IRM) §22.214.171.124, “Internet Funding,” the Internet provides many new opportunities for tax-exempt organizations to raise revenues to finance their operations. Many organizations now have pages on their websites set to take a donation, through Paypal or other online electronic funds transfer methods. IRS advised that such pages should contain the required disclosures as to deductibility. Receipts generated by electronic donations should likewise contain disclosures.
Numerous for-profit (and non-profit) websites have been set up to provide ideas for fundraising activities. Many, but not all, of these sites charge fees for directions as to how to conduct the activities, or are tied into selling merchandise as fundraisers (such as magazine and candy sales)
In IRM §126.96.36.199.1, “Examination Guidelines: Internet Funding,” IRS directs examiners to review Form 990 Schedule G, if filed, to verify whether that the organization made solicitations by e-mail. E-mail solicitations are to be treated in the same manner as a direct mail solicitation.
Examiners are told to visit the organization’s website to identify any fundraising activities the organization conducts on the Internet. They should determine if the organization acknowledges its sponsors/donors on its website by displaying names, logos, or products, or creating links to the sponsor’s website. This may be a sale of advertising—which may be taxable as unrelated business income. Examiners should also determine the taxability of any merchandise sales on the Internet using the same principles that apply to sales in the organization’s gift shop or other location. Based on the facts and circumstances, the income could be unrelated business income regardless of where the organization sells the items.
Under Code Sec. 6113, certain tax-exempt organizations that are ineligible to receive tax deductible charitable contributions are required to disclose the nondeductibility of contributions during fundraising solicitations in “an express statement (in a conspicuous and easily recognizable format).” Notice 88-120, 1988-2 CB 454, provides guidance, including “safe harbors” on meeting this requirement. Examiners should verify that any organization subject to this requirement includes one of the statements listed in Notice 88-120 in any web-based fundraising solicitation. To ensure the viewer has an opportunity to see the statement before making a contribution, the statement must be:
… in the same type size as the primary message;
… readily visible against the background of the page;
… on the same page as, and in close proximity to, the actual request for funds;
… either the first sentence in a paragraph or the statement itself constitutes a paragraph;
… presented without the viewer having to follow a link to see the statement; and
… in plain view before the viewer clicks on the “submit,” “transmit,” “accept” or other button that transmits their donation information to the soliciting organization.
For purposes of penalty provisions for web page solicitations, Code Sec. 6710(d)(3) provides that written or printed solicitations (other than mail) are treated as occurring when distributed. Generally, IRS will consider a web page to be distributed when it is uploaded to a server and becomes available to the public.
Information Letter. In an Information Letter, IRS advised Congressman Peter Welch (D-VT) that no prohibition exists against a Code Sec. 501(c)(3) organization using an Internet fundraising platform to raise funds. Web site or e-mail solicitations should comply with the same rules that apply to other solicitations.
IRS noted that an organization that intends to apply for recognition of its Code Sec. 501(c)(3) status and wants to raise funds, whether via the Internet or otherwise, must ensure that it structures its fundraising programs in a manner consistent with that tax-exempt status.
An organization applying for recognition of Code Sec. 501(c)(3) status must describe its actual and planned fundraising activities in its application (Form 1023, “Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code”), and must report any expenses incurred with regard to fundraising both on Form 1023 and its annual information returns (i.e., Form 990, Form 990-EZ or Form 990-PF).
An organization that is raising funds and hasn’t yet received recognition as exempt from tax under Code Sec. 501(c)(3) should make clear (whether on a website or otherwise)—in a statement in the solicitation material both conspicuous and easily recognizable—that it hasn’t received Code Sec. 501(c)(3) recognition and that as a result contributions may not be deductible.
A Code Sec. 501(c)(3) organization can’t be organized or operated for the benefit of private interests, such as the creator or the creator’s family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. And no part of a Code Sec. 501(c)(3) organization’s net earnings may inure to the benefit of any private shareholder or individual. Thus, the organization should consider whether payments or benefits to fundraisers or other private parties may be excessive or may constitute impermissible direct or indirect private benefit or private inurement.
IRS cautioned that the organization must consider any fees that a fundraiser or any other private party may charge and determine whether payment of such fees, and any other aspect of the arrangement between the organization and the private party, is reasonable and is consistent with Code Sec. 501(c)(3) status.
An organization that provides something of value to donors in exchange for donations must consider carefully the possibility that doing so may violate the rules against private benefit or private inurement, and must comply with any substantiation and disclosure requirements for quid pro quo contributions.
In addition, IRS advised that the organization should consider any state laws and regulations that may apply to Internet fundraising by non-profit or tax-exempt organizations.
Please feel free to contact our office if you would like to discuss this matter in further detail as it relates to your specific situation.
Dean R. Holland, CPA