Category: Miscellaneous Copyright 1998, The Tax Resource Group. All rights reserved. Telephone
800-578-3498. Internet: www.taxresourcegroup.com Taxpayer is a 501(c)(3) organization. Taxpayer publishes a magazine, the circulation of which is as follows. · 1,500 copies to members at $18 per year. · 600 copies to employees of members at $18 per year. · 50 copies to non-members at $27 per year. The three possible methods for allocating dues income to circulation income are set forth at Regulation Section 1.512(a)-1(f)(4)(i), (ii), and (iii). The taxpayer used Regulation Section 1.512(a)-1(f)(4)(i) which is applicable if 20% or more of the total circulation of the periodical consists of sales to nonmembers. This methodology yields a significantly lower allocation to circulation income than the other available methods. Taxpayer's members are commercial banks located in the State of Indiana. Taxpayer has taken the position for purposes of Regulation Section 1.512(a)-1(f)(4)(i) that the 600 copies of the publication sold to employees of members are sales to nonmembers. The IRS has taken exception to that position arguing that since copies were sold to employees at the member price, the employees should be treated as members for purposes of this rule. Apparently, the term "member" is not defined by the Code or Regulations. I can locate no case addressing the employee-of-a-member issue. However, there is a very helpful case addressing a similar issue, and I believe the principles set forth therein could be used to this taxpayer's advantage. The case is National Association of Life Underwriters, Inc. v. Comr., TC Memo 1992-442, 64 TCM 379, revd on other issue 30 F3d 1526, 94-2 USTC ¶50412, 74 AFTR 2d 94-5836. I have mailed a copy of the case for your reference. In this case, a periodical was issued to individuals who technically were nonmembers of the issuing organization. The case examines the rights of these individuals under the governing documents of the various organizations to determine if the rights of these individuals were similar enough to those normally associated with membership to warrant member status in this matter. It seems possible to argue that the employees of a member do not have any of the indicia of membership based on the logic used in this case. I suggest carefully reading the taxpayer's by-laws or constitution to confirm that premise. It seems to me a fairly forceful argument could be made on the taxpayer's behalf using this case. I see no indication that the fact the taxpayer charged the employees the member price is relevant to the determination of member status for this purpose. I suggest avoiding any further discussions with the agent on this matter and going directly to appeals. If the taxpayer presents this argument to the agent, the agent will likely attempt to refute the argument in his report. That could possibly blunt the effect of the taxpayer's logic with the appeals division. |
