<p class="MsoNormal"><span style="font-family:"Times New Roman","serif""> </span></p>
<p class="MsoNormal"><span style="font-size:12.0pt;font-family:"Times New Roman","serif""> </span><span style="font-family:'Times New Roman',serif;font-size:11pt">Since profits from the ministry’s
YouTube channel ads would almost surely be deemed taxable as unrelated income
under the current Treasury regulations, the next step is calculating the UBTI,
or Unrelated Business Taxable Income. Keep in mind that under the Internal
Revenue Code, regular, for-profit businesses are entitled to certain deductions
from their taxes. Expenses attributable solely to the unrelated business are
fully deductible, and that includes losses, depreciation and other items “directly
connected” with the unrelated business.</span><a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%234.docx#_ftn1" name="_ftnref1" title="" style="font-family:'Times New Roman',serif;font-size:11pt"><span class="MsoFootnoteReference"><span class="MsoFootnoteReference"><span style="font-size:11pt">[1]</span></span></span></a><span style="font-family:'Times New Roman',serif;font-size:11pt">
An additional advantage is that UB taxable income is taxable at the new
corporate income tax rate, just passed in January 2011, which raises the amount
of income for the lowest rate of 15% to the first $50,000 of total income. Then
the rate is still 25% for income from $50,000 to $75,000, 34% from $75,000 to
$10 million, and the top rate remains at 35% for income over $10 million.</span><a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%234.docx#_ftn2" name="_ftnref2" title="" style="font-family:'Times New Roman',serif;font-size:11pt"><span class="MsoFootnoteReference"><span class="MsoFootnoteReference"><span style="font-size:11pt">[2]</span></span></span></a></p>
<p class="MsoFootnoteText"><span style="font-size:11.0pt;font-family:"Times New Roman","serif""> The exploitation of an exempt function
are generally not deductible in computing the UBTI, since the items are
incidental to the conduct of an exempt purpose and thus do not have a
sufficient relationship to the unrelated trade or business.<a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%234.docx#_ftn3" name="_ftnref3" title=""><span class="MsoFootnoteReference"><span class="MsoFootnoteReference"><span style="font-size:11pt">[3]</span></span></span></a>
However, a charitable deduction is allowed for nonprofit organizations subject
to the UBIT in an amount up to ten percent of the unrelated business income
computed without the inclusion of the contributions.<a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%234.docx#_ftn4" name="_ftnref4" title=""><span class="MsoFootnoteReference"><span class="MsoFootnoteReference"><span style="font-size:11pt">[4]</span></span></span></a>
Expenses attributable to the dual use of facilities or personnel by exempt
activities and the unrelated trade or business of the organization require an
allocation between exempt and business functions on a “reasonable basis”.<a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%234.docx#_ftn5" name="_ftnref5" title=""><span class="MsoFootnoteReference"><span class="MsoFootnoteReference"><span style="font-size:11pt">[5]</span></span></span></a>
The allocation of expenses of the exempt activity to the taxable business when
the unrelated business “exploits” an exempt function is allowed by the
regulations in certain limited situations. For example, if the unrelated trade
or business is of a kind carried on for profit by a taxable organization, and
the exempt activity exploited by the business is comparable to the activities
normally carried on by taxable organizations in such a business, the expenses
attributable to the exempt activity are deductible to the extent that: 1) they
exceed the income (if any) attributable to the exempt activity, and 2) the
allocation of the excess expenses to the unrelated activities does not result
in a loss from the unrelated trade or business.<a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%234.docx#_ftn6" name="_ftnref6" title=""><span class="MsoFootnoteReference"><span class="MsoFootnoteReference"><span style="font-size:11pt">[6]</span></span></span></a>
</span></p>
<p class="MsoFootnoteText"><span style="font-size:11.0pt;font-family:"Times New Roman","serif""> This is a very generous rule, but may
it allow for the allocation of the expenses for production of the films and
videos on the ministry’s YouTube channel be deducted against the taxable
advertising income from the ads on the channel? Within limits, yes, since the
exempt activity, film making, is of “a type normally conducted by taxable
organizations in pursuance of such [a] business”.<a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%234.docx#_ftn7" name="_ftnref7" title=""><span class="MsoFootnoteReference"><span class="MsoFootnoteReference"><span style="font-size:11pt">[7]</span></span></span></a>
As previously mentioned, the regulations have elaborate rules for allocating
expenses in the advertising area<a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%234.docx#_ftn8" name="_ftnref8" title=""><span class="MsoFootnoteReference"><span class="MsoFootnoteReference"><span style="font-size:11pt">[8]</span></span></span></a>,
so some further study, and advice from a tax accountant, would have to be
undertaken before attempting this allocation. Exempt function expenses first
must be allocated to the income derived from or attributable to that function –
for example, expenses from filming a movie about the ministry must first be
allocated to income from donations to make the film, if any. Then any excess
may be allocated to the unrelated business income from the YouTube ads. </span></p>
<p class="MsoFootnoteText"><span style="font-size:11.0pt;font-family:"Times New Roman","serif""> Net operating losses (NOL) are
allowable as a deduction in computing the UBTI and may be carried back and
forward as in a normal business activity.<a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%234.docx#_ftn9" name="_ftnref9" title=""><span class="MsoFootnoteReference"><span class="MsoFootnoteReference"><span style="font-size:11pt">[9]</span></span></span></a>
However, only income and deduction items not excluded from the UBTI are taken
into account for NOL purposes, and any preceding years in which the
organization was not an exempt organization are ignored in computing NOLs,
including carrybacks and carryforwards.<a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%234.docx#_ftn10" name="_ftnref10" title=""><span class="MsoFootnoteReference"><span class="MsoFootnoteReference"><span style="font-size:11pt">[10]</span></span></span></a>
But allocation of the excess expenses will not be permitted to the extent that
it would result in a net operating loss from the unrelated business. Also, the
excess may not be allocated to another unrelated business of the nonprofit that
does not exploit the same function of film making in this case, such as the
selling of shirts and other merchandise by the ministry.<a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%234.docx#_ftn11" name="_ftnref11" title=""><span class="MsoFootnoteReference"><span class="MsoFootnoteReference"><span style="font-size:11pt">[11]</span></span></span></a>
However, the regulations permit several businesses exploiting the same exempt
function to be consolidated, so that videos not part of the main documentary
film and the film may be put together to calculate the UBTI.<a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%234.docx#_ftn12" name="_ftnref12" title=""><span class="MsoFootnoteReference"><span class="MsoFootnoteReference"><span style="font-size:11pt">[12]</span></span></span></a> </span></p>
<p class="MsoFootnoteText"><span style="font-size:11.0pt;font-family:"Times New Roman","serif""> As you can imagine, the allocation of
expenses between related and unrelated activities of a dual use facility,
especially if employees are used for both the exempt and business activities,
is a difficult calculation.<a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%234.docx#_ftn13" name="_ftnref13" title=""><span class="MsoFootnoteReference"><span class="MsoFootnoteReference"><span style="font-size:11pt">[13]</span></span></span></a>
In <i>Rensselaer Polytechnic Institute v.
Commissioner,</i></span> <span style="font-size:11.0pt;font-family:"Times New Roman","serif"">a
college field house was used for both student activities such as college ice
hockey, and commercial uses including ice shows and public ice skating. The
court affirmed the tax court’s judgment that the apportionment of the field
house’s idle time should be by the hours devoted to exempt and non exempt uses.
The regulations suggest, as in the <i>Rensselaer</i>
case, that time devoted to the various activities is a “reasonable basis” for
allocation.<a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%234.docx#_ftn14" name="_ftnref14" title=""><span class="MsoFootnoteReference"><span class="MsoFootnoteReference"><span style="font-size:11pt">[14]</span></span></span></a>
The depreciation on a facility used for both the exempt activities and the
unrelated taxable business can be allocated by reference to the space used for
the various activities, unless there is a more reasonable basis for the
allocation.<a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%234.docx#_ftn15" name="_ftnref15" title=""><span class="MsoFootnoteReference"><span class="MsoFootnoteReference"><span style="font-size:11pt">[15]</span></span></span></a> </span></p>
<p class="MsoFootnoteText"><span style="font-size:11.0pt;font-family:"Times New Roman","serif""> Therefore, if the documentary and
YouTube videos were produced in the ministry’s facilities where other ministry
activities take place, the amount of time used in the facility by the
filmmakers for those films would have to be apportioned to the unrelated
business of the advertising vehicle. At the same time, if ministry employees or
personnel are used to help produce the videos as well as the documentary film,
an exempt use, there would have to be apportionment of their time. The
“reasonable basis” to be used for the apportionment of taxes to the unrelated
business film/video production for YouTube would be a complex formula, perhaps
even worthy of requesting a Revenue Ruling from the I.R.S. </span></p>
<p class="MsoFootnoteText"><span style="font-size:11.0pt;font-family:"Times New Roman","serif""> All this leads to the question of
whether it is worth it to have the ministry involved with the making of the
YouTube ad-sponsored videos. Would there be enough revenue from the ads to fund
the actual documentary, and would the tax deductions available to the
for-profit business help in paying for the videos there, thus freeing up funds
to make the documentary without the ministry? Since the subject matter of the
documentary is directly related to the ministry’s purpose, I would still like
to find a way to use some of the revenue from the YouTube ads to fund the
video. Perhaps the use of a joint venture or partnership with the ministry and
an unrelated entity would be a workable alternative.</span></p>
<p class="MsoNormal"> </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 class="apple-style-span"><span style="font-size:10pt;font-family:'Times New Roman',serif"> </span></span></p>
<p class="MsoNormal"><span class="apple-style-span"><span style="font-size:10pt;font-family:'Times New Roman',serif"> </span></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%234.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""> I.R.C. § 512(a) (1) and Treas.
Reg. § 1.512(a)-1(b).</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%234.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""> I.R.C. § 11(b)</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%234.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. § 1.512(a)-1(d).</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%234.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]</span></span></span></span></a><span style="font-family:"Times New Roman","serif""> I.R.C. § 512(b)(1o)</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%234.docx#_ftnref5" name="_ftn5" title=""><span class="MsoFootnoteReference"><span style="font-family:"Times New Roman","serif""><span class="MsoFootnoteReference"><span style="font-size:10pt">[5]</span></span></span></span></a><span style="font-family:"Times New Roman","serif""> Treas. Reg. § 1.512(a)-1(c).</span></p>
</div>
<div id="ftn6">
<p class="MsoFootnoteText"><a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%234.docx#_ftnref6" name="_ftn6" title=""><span class="MsoFootnoteReference"><span style="font-family:"Times New Roman","serif""><span class="MsoFootnoteReference"><span style="font-size:10pt">[6]</span></span></span></span></a><span style="font-family:"Times New Roman","serif""> Treas. Reg. § 1.512(a)-1(d)(2).</span></p>
</div>
<div id="ftn7">
<p class="MsoFootnoteText"><a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%234.docx#_ftnref7" name="_ftn7" title=""><span class="MsoFootnoteReference"><span style="font-family:"Times New Roman","serif""><span class="MsoFootnoteReference"><span style="font-size:10pt">[7]</span></span></span></span></a><span style="font-family:"Times New Roman","serif""> Treas. Reg. § 1.512(a)-1(d)(2).</span></p>
</div>
<div id="ftn8">
<p class="MsoFootnoteText"><a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%234.docx#_ftnref8" name="_ftn8" title=""><span class="MsoFootnoteReference"><span style="font-family:"Times New Roman","serif""><span class="MsoFootnoteReference"><span style="font-size:10pt">[8]</span></span></span></span></a><span style="font-family:"Times New Roman","serif""> Treas. Reg. §
1.512(a)-1(f)(2)-(7).</span></p>
</div>
<div id="ftn9">
<p class="MsoFootnoteText"><a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%234.docx#_ftnref9" name="_ftn9" title=""><span class="MsoFootnoteReference"><span style="font-family:"Times New Roman","serif""><span class="MsoFootnoteReference"><span style="font-size:10pt">[9]</span></span></span></span></a><span style="font-family:"Times New Roman","serif""> I.R.C. § 512(b) (6).</span></p>
</div>
<div id="ftn10">
<p class="MsoFootnoteText"><a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%234.docx#_ftnref10" name="_ftn10" title=""><span class="MsoFootnoteReference"><span style="font-family:"Times New Roman","serif""><span class="MsoFootnoteReference"><span style="font-size:10pt">[10]</span></span></span></span></a><span style="font-family:"Times New Roman","serif""> Treas. Reg. § 1.512(b)-1(e).</span></p>
<p class="MsoFootnoteText"><span style="font-family:"Times New Roman","serif""> </span></p>
</div>
<div id="ftn11">
<p class="MsoFootnoteText"><a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%234.docx#_ftnref11" name="_ftn11" title=""><span class="MsoFootnoteReference"><span style="font-family:"Times New Roman","serif""><span class="MsoFootnoteReference"><span style="font-size:10pt">[11]</span></span></span></span></a><span style="font-family:"Times New Roman","serif""> Treas. Reg. § 1.512(a)-1(d) (2).</span></p>
</div>
<div id="ftn12">
<p class="MsoFootnoteText"><a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%234.docx#_ftnref12" name="_ftn12" title=""><span class="MsoFootnoteReference"><span style="font-family:"Times New Roman","serif""><span class="MsoFootnoteReference"><span style="font-size:10pt">[12]</span></span></span></span></a><span style="font-family:"Times New Roman","serif""> Treas. Reg. § 1.512(a)-1(f)(7).</span></p>
</div>
<div id="ftn13">
<p class="MsoFootnoteText"><a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%234.docx#_ftnref13" name="_ftn13" title=""><span class="MsoFootnoteReference"><span style="font-family:"Times New Roman","serif""><span class="MsoFootnoteReference"><span style="font-size:10pt">[13]</span></span></span></span></a><span style="font-family:"Times New Roman","serif""> 732 F.2d 1058 (U.S.Ct. App. 2d
Cir., 1984).</span></p>
</div>
<div id="ftn14">
<p class="MsoFootnoteText"><a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%234.docx#_ftnref14" name="_ftn14" title=""><span class="MsoFootnoteReference"><span style="font-family:"Times New Roman","serif""><span class="MsoFootnoteReference"><span style="font-size:10pt">[14]</span></span></span></span></a><span style="font-family:"Times New Roman","serif""> Treas. Reg. § 1.512(a)-1(c).</span></p>
</div>
<div id="ftn15">
<p class="MsoFootnoteText"><a href="file:///C:/Users/Maryellen/Documents/Filmmaking%20as%20part%20of%20a%20Nonprofit%20Organization%20-%20Installment%20%234.docx#_ftnref15" name="_ftn15" title=""><span class="MsoFootnoteReference"><span style="font-family:"Times New Roman","serif""><span class="MsoFootnoteReference"><span style="font-size:10pt">[15]</span></span></span></span></a><span style="font-family:"Times New Roman","serif""> Id.</span></p>
</div>
</div>