<p class="MsoNormal"><span style="font-family:'Times New Roman',serif">                          </span></p>

<p class="MsoNormal"><span style="font-size:11.0pt;font-family:"Times New Roman","serif"">        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<a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%233.docx#_ftn1" name="_ftnref1" title=""><span class="MsoFootnoteReference"><span class="MsoFootnoteReference"><span style="font-size:11pt">[1]</a>,

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<a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%233.docx#_ftn2" name="_ftnref2" title=""><span class="MsoFootnoteReference"><span class="MsoFootnoteReference"><span style="font-size:11pt">[2]</span></span></span></a>,

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. </span></p>

<p class="MsoNormal"><span style="font-size:11.0pt;font-family:"Times New Roman","serif"">        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.<a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%233.docx#_ftn3" name="_ftnref3" title=""><span class="MsoFootnoteReference"><span class="MsoFootnoteReference"><span style="font-size:11pt">[3]</span></span></span></a>

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.<a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%233.docx#_ftn4" name="_ftnref4" title=""><span class="MsoFootnoteReference"><span class="MsoFootnoteReference"><span style="font-size:11pt">[4]</span></span></span></a>

</span></p>

<p class="MsoNormal"><span style="font-size:11.0pt;font-family:"Times New Roman","serif"">        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,<a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%233.docx#_ftn5" name="_ftnref5" title=""><span class="MsoFootnoteReference"><span class="MsoFootnoteReference"><span style="font-size:11pt">[5]</span></span></span></a>

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. </span></p><p class="MsoNormal"><span style="font-size:11.0pt;font-family:"Times New Roman","serif""><br></span></p>

<p class="MsoNormal"><span style="font-size:12.0pt">© 2012 </span><span style="font-size:12.0pt">Mary

Ellen Tomazic</span></p>

<p class="MsoNormal"><span style="font-size:12.0pt"> </span></p>

<p class="MsoNormal"><span class="apple-style-span"><span style="font-size:10pt;font-family:'Times New Roman',serif">Mary Ellen Tomazic is an

attorney in Cleveland specializing in entertainment</span></span><span style="font-size:10pt;font-family:'Times New Roman',serif"><br>

<span class="apple-style-span">issue such as copyright, trademarks, contracts and

licenses for musical</span><br>

<span class="apple-style-span">groups and filmmakers.</span><br>

<br>

</span></p>

<div><br clear="all">

<hr align="left" size="1" width="33%">

<div id="ftn1">

<p class="MsoFootnoteText"><a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%233.docx#_ftnref1" name="_ftn1" title=""><span class="MsoFootnoteReference"><span style="font-family:"Times New Roman","serif""><span class="MsoFootnoteReference"><span style="font-size:10pt">[1]</span></span></span></span></a><span style="font-family:"Times New Roman","serif""> 475 U.S. 834, 106 S.Ct. 1591

(1986).</span></p>

</div>

<div id="ftn2">

<p class="MsoFootnoteText"><a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%233.docx#_ftnref2" name="_ftn2" title=""><span class="MsoFootnoteReference"><span style="font-family:"Times New Roman","serif""><span class="MsoFootnoteReference"><span style="font-size:10pt">[2]</span></span></span></span></a><span style="font-family:"Times New Roman","serif""> Treas. Reg. § 1.513-1(d)(2).</span></p>

</div>

<div id="ftn3">

<p class="MsoFootnoteText"><a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%233.docx#_ftnref3" name="_ftn3" title=""><span class="MsoFootnoteReference"><span style="font-family:"Times New Roman","serif""><span class="MsoFootnoteReference"><span style="font-size:10pt">[3]</span></span></span></span></a><span style="font-family:"Times New Roman","serif""> Treas. Reg. § 1.513-1(d)(4)(iv)

and Example 7.</span></p>

</div>

<div id="ftn4">

<p class="MsoFootnoteText"><a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%233.docx#_ftnref4" name="_ftn4" title=""><span class="MsoFootnoteReference"><span style="font-family:"Times New Roman","serif""><span class="MsoFootnoteReference"><span style="font-size:10pt">[4]</a><span style="font-family:"Times New Roman","serif""> 475 U.S. 834, 849, 106 S.Ct.

1591 (1986).</span></p>

</div>

<div id="ftn5">

<p class="MsoFootnoteText"><a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%233.docx#_ftnref5" name="_ftn5" title=""><span class="MsoFootnoteReference"><span class="MsoFootnoteReference"><span style="font-size:10.0pt;font-family:"Calibri","sans-serif"">[5]</span></span></span></a> <span style="font-family:'Times New Roman',serif;background-image:initial;background-color:white;background-repeat:initial initial">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.</span><span style="font-family:"Times New Roman","serif""></span></p>

</div>

</div>