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MLM Marketing: MLM Consulting
Avoiding Taxes and Tax-Exempt Status Problems
If you work with NPO, it is absolutely vital that you avoid jeopardizing that organization's tax-exempt status. This can be a sticky legal issue. The extent to which a tax-exempt organization may engage in income-generating activities without jeopardizing its exempt status has never been clarified by the courts or the Internal Revenue Service.
There are two possible consequences to an organization conducting a trade or business. First, the organization may be subject to unrelated business income tax. In addition, the organization may be denied tax-exempt status entirely if the trade or business is carried on to such an extent that it constitutes the primary purpose of the organization.
The IRS taxes unrelated business income to eliminate unfair competition by placing unrelated business activities of otherwise tax-exempt organizations on the same tax footing with other businesses that do have to pay income taxes.
IRS cases and rulings indicate that a good way to avoid taxable income to a nonprofit organization is to approach the organization and gain access to its members through use of the organization's lists or a meeting. (It is important not to compensate the organization for the list of members, as this may result in taxable income.)
You would then offer the members the opportunity to participate in its program in their own right. Any payments to the organization must be voluntary contributions by the members. This could be achieved by offering each member the choice of either receiving any payments from the direct seller or assigning the payments to the organization. A one-time assignment is probably sufficient; however, assignments on a regular basis would provide a more solid case.
The charitable organization should also be careful not to allow the network marketing distribution activity to endanger its tax-exempt status altogether. One method of collaborating with an NPO is through the establishment of a wholly-owned subsidiary corporation to engage in business on the NPO's behalf. This corporation could be signed on as a distributor in the same manner as any individual. The corporation would be taxable on its income. Dividends paid by the subsidiary to the tax-exempt parent, however, would not be unrelated business income to the parent by virtue of 512(b)(1) of the Internal Revenue Code.
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