Is Ad Income on Your Publication Taxable?

October 24, 2012

Tax-exempt organizations that produce publications for their members should remember to look carefully at the tax law if they receive income from advertising in those publications. They may be liable to pay taxes on advertising income if their members have the “right to receive” the publications.

A Tax Court decision last year found that if a tax-exempt organization’s members “have a right to receive a publication” then income from paid advertising is taxable, even if the advertising does not exceed the cost of producing the publication.

A tax-exempt organization, the National Education Association of the United States, published two magazines that were distributed to dues-paying members and a small number of nonmember paid subscribers

The organization’s literature stated that a portion of the dues was paid for production of the magazines. The association sold advertising space to defray the expenses of producing and mailing the magazines.

The National Education Association experienced unrelated business taxable income from the advertising but offset the income with a loss from its circulation activities.

Treasury regulations require that a portion of the membership dues be treated as circulation income when the “right to receive” an organization’s periodicals is associated with membership in the organization and members do not pay for the subscriptions. If members do not have the right to receive the publications, then the net advertising income may not be taxable.

The Tax Court found that, because the organization’s members had a legal right to receive the magazines and didn’t pay for the subscriptions, a portion of the membership dues was circulation income as a result of this income allocation. Therefore, there was no loss from the circulation activity, and the organization owed unrelated business income tax on the advertising income. (National Education Association of the United States v. Commissioner, 137 TC No. 8, Sept. 28, 2011)