* A manufacturer turns to researchers at a local university for help in designing a mass produced version of a promising new product.
* A salesman for a group of small, specialized publishers persuades a museum gift shop to add to the titles it already sells some guides to nearby tourist spots.
* A church, finding it harder and harder to get volunteer help as more of its congregation is filled with two-career families, decides to hire someone to coordinate its weekly bingo game.
In all of these cases, one unintended and unexpected result of the business decision may be to generate new tax revenue for Uncle Sam. The Treasury is being increasingly aggressive about going after taxes on business income generated by organizations that are generally exempt from paying taxes. And the groups, strapped for cash as government grants dry up and private giving is squeezed by the economic downturn, are testing the limits of the law.
"Charities are looking for new revenue sources and are engaging in activities they haven't engaged in before," acknowledges Washington tax lawyer Bruce R. Hopkins, an authority on the issue.
There is, of course, nothing unlawful about a tax-exempt organization plunging into the commercial world. But those plunges may well produce profits that the Internal Revenue Service can tax the same way it taxes the profits of a business. When a group gets a tax-exempt status from the IRS, it is for a particular purpose, and if an activity ranges outside that purpose, the tax collectors are ready to crack down.
That leads to some pretty fine line-drawing. Take the typical gift shop at a zoo. The zoo got its tax-exempt status as an education organization intended to "stimulate and enhance public awareness, interest, and appreciation of animals." Last year the IRS went through the inventory of the gift shop at the zoo, and decided that stuffed toys and coin banks in the shape of animals and works of art of animals are close enough to the basic purpose so that no tax is due on profits from the sales.
The same is true of film sales, since they help "the visitor in recording his/her individual experiences at the zoo," the IRS explained. But the same ruling called unrelated to the zoo's purpose--and therefore taxable--jewelry with animal motifs and inexpensive buttons, pennants, patches, and decals that also contain animal pictures and the name of the zoo.
That distinction may not be entirely clear, Assistant IRS Commissioner S. Allen Winborne admits. His staff is now working on some general guidelines.
They will say, for instance, that sales of items carrying the logo of a museum, zoo, library, education TV station, or other tax-exempt organization will generally be taxable. But the really sticky question comes up when "an article that has certain utilitarian uses is sold by a museum as a faithful adaptation or reproduction of an item in its collection," Winborne told an American Bar Association meeting on the subject last month. Are people buying copies of a pioneer apple corer at a folk art museum in order to understand pioneer life or to core apples? Only the latter case would generate a tax. To decide, the IRS will say in upcoming guidelines that it will look at such clues as the museum's pricing policy, the muscle it puts into its marketing program, and the amount of competition from commercial outlets. The more like a business charity sales look, the more the IRs will treat them like a business.
The IRS crackdown is showing up in all sorts of other areas. It is currently in a court fight with the American Bar Endownment, trying to establish the right to tax the profits organizations make when they hold group insurance policies for members. In another pending court case, it is battling Yale University over how to divide up the costs of maintaining--and therefore the profits from renting--facilities that are sometimes used for college sports events and are sometimes rented out to professional teams. And the taxmen are getting tougher in tracking down income from sales or rentals to commercial mail-order operations of the mailing lists of names and addresses of members or contributors. The Reagan administration is fighting a proposal by Sen. Lloyd Bentsen (D-Tex.) to make tax-free all income from letting others use such mailing lists.
The Tax Code has all sorts of special rules for charities. For instance, virtually any business income is free from tax if the operation is done by unpaid volunteers. But hire professional fund-raisers--or pay a commission to salespersons who round up ads for a program--and a tax-exempt activity may suddenly become taxable.
Similarly, any research performed by a college or university or by a hospital--even if for a profit-making corporation--is tax exempt. But the IRS increasingly is taking a narrow view of just what "research" means. Helping a corporation get an idea translated in a laboratory prototype is just fine, but contracts to do more than that--to develop the prototype into a commercial product--are likely to be called taxable by the Treasury.
All this matters to companies because they are likely to have to pay more for research if a university has to pay tax on the income, and they are going to have trouble making sales to museum shops if the merchandise is going to cause the institutions tax troubles. But there's another side to the increasing IRS toughness on the issue: it may scare off some nonprofit competition for commercial enterprises, or at least help equalize costs between tax-exempt and tax-paying competitors.