Use of Commercial Revenue Models

There is significant confusion over the ability of a non-profit to rely upon advertising and other traditional commercial models for revenues. This is likely because the IRS recognizes that some 501(c)(3) organizations will generate revenue from methods unrelated to their exempt purpose, and requires an otherwise tax-exempt organization to pay tax on such "unrelated business taxable income." [FN1] Some applicants have therefore inferred that a tax-exempt organization is free to earn revenue from advertising, etc., so long as it pays taxes on that income.

This view is not entirely correct. In fact, the taxability of advertising and other commercial revenues is distinct from the more fundamental question of whether the use of such revenue models demonstrates a commercial motive that will disqualify a non-profit from 501(c)(3) status. The U.S. Tax Court has stated that "[w]hile the sale of advertising space will not automatically disqualify a journal from tax-exempt status ..., the absence of advertisements in the bulletin underscores petitioner's lack of commercial intent." [FN2]

The IRS has been particularly consistent in rejecting applications from publishers of newspapers and newsletters whose revenue models track those of their for-profit counterparts. In Revenue Ruling 77-4, the IRS decided that an "ethnic-oriented" newspaper was not operated for "educational" purposes because of its financial and revenue structure (despite its lack of profits):

The organization is a nonprofit corporation the only activity of which is the publication and distribution of a weekly newspaper that presents local, national, and world news. The pages of the newspaper are equally divided between community interest items of significance to the members of a certain ethnic group, national and international news articles of special interest to the members of the group, and regular commercial advertising. It also republishes syndicated editorials. The newspaper operates with a paid staff. ... The corporation's income is derived from the sale of advertising and the sale of subscriptions to the general public. Its primary expenses are the payment of wages and printing costs. Although the organization has been in existence several years, it has yet to realize a profit from its operations. ... This organization's only activities are preparing and publishing a newspaper, soliciting advertising, and selling subscriptions to that newspaper in a manner indistinguishable from ordinary commercial publishing practices. Accordingly, it is not operated exclusively for charitable and educational purposes and thus does not qualify for exemption from Federal income tax under section 501(c)(3) of the Code. [FN3]

The IRS has similarly and repeatedly denied exemptions based upon the nature of the revenues earned by a publishing organization in later cases:

• The operation of a newspaper was found to be indistinguishable from commercial practices and ineligible for an exemption where "income appears to be derived from 1) sales of the newspaper; 2) advertisements; and 3) subscription fees." [FN4]

• A non-profit formed "for the publication of a newsletter and other publications to disseminate civic, social, business and other news and information and to otherwise serve the welfare and best interests of the ... community" was denied an exemption; although the newsletter would be distributed for free, a set percentage of each page was allocated for advertising and the organization received no contributions or grants. [FN5]

• Denying an exemption to a free community newspaper to unite "men and women in social work," the IRS stated, "Although you will not sell subscriptions to your newspaper, you anticipate that you will be substantially supported by selling advertisements. Thus the operation of your newspaper is indistinguishable from many ordinary publishing practices." [FN6]

• A non-profit organized to publish never-before-published works from well known children's authors in serial format through newspapers was denied a 501(c)(3) exemption: "The financial information, regardless of your characterization, does not indicate that your fees are very distinguishable from those any book owner or publisher would charge for publication in a similar matter. In fact you have modified your fee structure to be able to become more competitive." [FN7]

In contrast, organizations that avoid advertising, subscription fees, and other such models are much more likely to be found to be operating in a non-commercial manner. For example, in Technical Advice Memorandum 98-35-003, the IRS found that a non-profit organized to provide consumer awareness and protection through radio programming did not lose its 501(c)(3) exemption as a result of a change of the focus of its programming, where such changes were insubstantial and the content was not being exploited for profit:

[Taxpayer]'s format has been modified from the original consumer education program to include other matters. However, all programming of this nature is insubstantial. In addition, there are no syndicated shows, no advertising sales and no charges for other stations to purchase the show. Therefore, [Taxpayer]'s radio programming and other consumer education activities are not being operated in a commercial manner so as to preclude exemption under section 501(c)(3) of the Code. [FN8]

Charging customers subscription fees and using other traditional for-profit revenue models is more likely to be acceptable to the IRS where a non-profit can show that its efforts at non-profit fundraising have been unsuccessful. Thus, in Pulpit Resource v. Commissioner, the Tax Court held that the publisher of "Pulpit Resource" was entitled to an exemption notwithstanding operating on a subscription fee basis:

Apparently, the only way petitioner could accomplish its objective ... was by selling Pulpit Resource at a price sufficient to pay for its cost and provide [its founder] with a reasonable salary. It apparently received few, if any, contributions and a contest for best sermons met with little financial success. There is no evidence that petitioner was in competition with any commercial enterprise conducting the same business activity. The market for petitioner's product was so limited in scope that it would not attract a truly commercial enterprise. While the petitioner projected a profit from its sales for 1977, the amount was small and it was dedicated to be used for religious purposes. [FN9]

Accordingly, a journalism organization is more likely to pass scrutiny for "commercial operation" if it can avoid using advertising, subscription fees, and similar revenue-generating activity, and instead rely on traditional non-profit fundraising. Moreover, even a failed attempt to rely on fundraising might help to establish that use of ordinary commercial revenue models is necessary, particularly if advertising, etc., are used to make up the shortfall from fundraising rather than substitute for fundraising entirely.


1 See,,id=156395,00.html (last updated October 29, 2010).
2 Peoples Translation Serv., 72 T.C. at 50.
3 Rev. Rul. 77-4, 1977-1 C.B. 141.
4 I.R.S. Non Docketed Serv. Adv. Review 1815R (Jan. 9, 1986) (available on Westlaw at 1986 WL 1166828).
5 I.R.S. Non Docketed Serv. Adv. Review 1856R (Feb. 18, 1988) (available on Westlaw at 1988 WL 1519091).
6 I.R.S. Non Docketed Serv. Adv. Review 1755R (Sept. 24, 1990) (available on Westlaw at 1990 WL 10519942).
7 I.R.S. Non Docketed Serv. Adv. Review 20000754R (Sept. 26, 2000) (available on Westlaw at 2000 WL 34548360).
8 I.R.S. Tech. Adv. Mem. 98-35-003 (July 24, 1998).
9 Pulpit Resource v. Comm'r, 70 T.C. 594, 610 (1978).


Subject Area: