[NEohioPAL] Filmmaking as part of a Nonprofit Organization - Installment III. Advertising Revenue

[Mary Ellen Tomazic]

        May the funding of a nonprofit venture be accomplished through
advertisements unrelated to the tax exempt purpose but fully dedicated to
it? Enter *U.S. v. American College of
Physicians[1]<file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%233.docx#_ftn1>
*, in which the U.S. Supreme Court put its stamp on the question of
advertising by nonprofit organizations. The College published a
professional journal in which it sold advertising space, with the ads
strictly limited to those which contained information about the use of
medical products. The College screened its ads and accepted only those for
pharmaceuticals, medical supplies and equipment useful in the practice of
medicine, and medically related job notices. The ad revenue generated by
the journal was considerable, grossing over $1.3 million in 1975, with net
profits of $153,388. The College reported that net amount as taxable
income, paid taxes on it, and then made a claim for a refund of that tax,
which failed. The claim made that the profits were substantially related to
the College’s tax exempt purposes was rejected by the United States Claims
Court, which stated that the advertising was a “trade or business” separate
from the publishing of the journal itself with its educational articles and
editorial comment. The Court of Appeals for the Federal Circuit reversed
the Claims Court, holding that the College had established a substantial
relation of the advertisements to its tax exempt purpose due to their
contribution to the education of the Journal’s readers. The Supreme Court,
focusing on the conduct of the tax exempt organization itself in its
advertising business, found that the College did not use the advertising to
educate in a systematic way, but that the ads reflected the marketing
strategy of the advertisers. The Supreme Court discussed the Treasury
Regulations that established the “contribute importantly” requirement for
income of a nonprofit[2]<file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%233.docx#_ftn2>,
and the examples given in that regulation, which coincidentally use
magazine advertising. The Court did not want to set out a per se rule that
all journal advertising is a trade of business unrelated to the purpose of
the nonprofit, but found that the advertising in the College’s journal, The
Annals of Internal Medicine, does not contribute importantly to the
journal’s educational purposes, and reversed the Circuit Court, finding the
College’s advertising profits to be taxable. The Court opined that perhaps
through careful coordination of the advertisements with the editorial
content of the issue, the College could satisfy those stringent standards
of the Congress and Treasury.

        The Treasury has a number of detailed regulations dealing with
advertising by tax exempt organizations, and the Court noted that the
regulations emphasize the “manner” of designing and selecting the
ads.[3]<file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%233.docx#_ftn3>Many
of the ads in the Annals were scrutinized by the Court, which pointed
out that some were repeated from month to month, undermining the College’s
suggestion that the ads alerted readers to new developments in certain
drugs.[4]<file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%233.docx#_ftn4>

        If a medical journal with medically related ads cannot pass muster
under the Treasury Regulations, it is difficult to imagine how ads on a
YouTube channel, which are selected by YouTube and not the content provider
of the channel,[5]<file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%233.docx#_ftn5>could
be substantially related enough to be tax exempt. Therefore, I
conclude that ads on a YouTube channel would be deemed to be unrelated, and
any profits from those ads would be taxable to the nonprofit sponsoring and
contributing to the YouTube channel, even if the content “contributed
importantly” to its tax exempt purpose.


© 2012 Mary Ellen Tomazic



Mary Ellen Tomazic is an attorney in Cleveland specializing in entertainment
issue such as copyright, trademarks, contracts and licenses for musical
groups and filmmakers.


------------------------------

[1]<file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%233.docx#_ftnref1>475
U.S. 834, 106 S.Ct. 1591 (1986).

[2]<file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%233.docx#_ftnref2>Treas.
Reg. § 1.513-1(d)(2).

[3]<file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%233.docx#_ftnref3>Treas.
Reg. § 1.513-1(d)(4)(iv) and Example 7.

[4]<file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%233.docx#_ftnref4>475
U.S. 834, 849, 106 S.Ct. 1591 (1986).

[5]<file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%233.docx#_ftnref5>
As
a YouTube revenue sharer, the ministry would have no say in what ads are
put on their videos. YouTube would select the ads and they would get profit
sharing from the ad revenue.
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