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QUESTION: Thank you for reviewing my question. We are a nonprofit private school in Virginia. With each sports season, we sell t-shirts to students who are athletic team participants. For example, cross country, basketball, soccer, etc. team members are given the opportunity to order a shirt with the school's logo and the name of the participant's sport. Order forms are distributed at the start of the season and then one group order is placed for those that have ordered.

We also sell PE shirts to students with the school logo. It is mandatory for students to have these for PE classes. Most are sold at the beginning of the year, but we maintain a small inventory since some students need replacement shirts at other times.

The collection of funds and shirt distribution is handled by a paid staff member. Our cost for purchasing the shirts from an outside vendor is approximately $5 each and we charge $10 each.

In your opinion, would these sales constitute unrelated business income, or would these sales be exempt for us as an educational organization since youth sports is part of our educational program? (As a side note, we have not been collecting sales taxes, if you are able to comment on that.) Thank you for your time!

ANSWER: If the school logo is prominently displayed then the sale of t-shirts would not be unrelated business activity. I have in my profile that this free forum is only for general questions about IRS federal exemption issues of 501(c)(3) organizations. Your question about sales tax is a state matter and states differ somewhat on their treatment, but I will direct you to http://www.tax.virginia.gov/nonprofit

Harvey Mechanic
Attorney at Law
Harvey108@hotmail.com

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.

---------- FOLLOW-UP ----------

QUESTION: Thank you so much for your fast response! I am trying to understand if the logo is somehow considered to "further our exempt purpose" and if so, how? Is there an IRS reference you can point me to, please? I couldn't find anything specific in the IRS Unrelated Business Income publication that seemed to fit...
THANK YOU!

Answer
I have in my profile that this free forum is only for general questions about IRS federal exemption issues of 501(c)(3) organizations. Off the top of my head I would not be able to give you any IRS reference as to why t-shirt sales to athletic team members is not considered unrelated business. You wrote, "cross country, basketball, soccer, etc. team members are given the opportunity to order a shirt with the school's logo and the name of the participant's sport."  

IRS Publication 598 "Tax on Unrelated Business Income of Exempt Organizations" at
http://www.irs.gov/pub/irs-pdf/p598.pdf explains that,  if products or services are not directly related to the charitable, educational, religious or other purpose or function constituting the basis for its exemption (other than for production of income), then the activities are generally taxable.

Their exact wording is found in the middle column of page 3 "Unrelated business income is the income from a trade or business that is regularly carried on by an exempt organization and that is not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity."

Your t-shirt sales activity ostensibly is not simply to obtain funding for the school, but is also to foster camaraderie and pride in the particular sports team. That activity helps prevent juvenile problems and helps to foster youth sporting activities, which is an exempt activity even if not in the school context. Those types of activities are not generally categorized by the IRS as educational but usually come under the large category "charitable activities".  See Rev. Rul. 80-215 which is available
at http://www.irs.gov/pub/irs-tege/rr80-215.pdf  and in that Revenue Ruling's "Law and Analysis" area we see the description of the general law:
---Start of Excerpt--
Section 501 (c) (3) of the Code provides for the exemption from federal income tax of organizations organized and operated exclusively for charitable purposes.

Section 1.501 (c) (3)-1(d) (2) of the Income Tax Regulations provides that the term "charitable" is used in section 501(c) (3) of the Code in its generally accepted legal sense and includes the advancement of education and the promotion of social welfare by organizations designed to combat juvenile delinquency.

Trusts created for the purpose of promoting sports for children have been upheld as charitable on the basis of either combatting juvenile delinquency or advancing education.
---End of Excerpt--

Harvey Mechanic
Attorney at Law
Harvey108@hotmail.com

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.

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Harvey Mechanic

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I am an attorney and I volunteer time to answer general questions about U.S. Federal income tax issues of nonprofit 501(c)(3) public charities only. Those questions could be about establishing and maintaining legal requirements for such non-profit organizations in the United States, including Internal Revenue service filings and requirements. I will not be working on this free forum to answer questions about Nonprofit's possible unrelated or for-profit businesses or how to fill out forms. This forum is only for general questions about federal tax law, not as the law applies to your specific situation. If you do not make your question public then I will not be spending much of my donated time on answers that would not benefit the public. If you have other questions, please contact me at Harvey108@hotmail.com I will reply from my email. In any case, do not reveal confidential information to me until after I have contracted with you to provide personal legal services. My responses on this forum are intended to be general statements of law, should not be relied upon as legal advice, and do not create an attorney/client relationship. For me to consider your individual situation and how the law applies, I would need to gather extensive information about the situation. To search my previous answers you can do a Google search by "site:allexperts.com/q/nonprofit" without the quotes and then add your search terms before hitting enter.

Experience

I have been practicing law and especially the law of nonprofit organizations since 1990 when I was admitted to the New York Bar and I have maintained my status with the Bar since that time.

Education/Credentials

B.S. Columbia University in New York City, 1970

J.D. (Law Degree) Brooklyn Law School, 1990 -- Cum Laude.


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