E-philanthropy: Internet Sours Sweet Charity

Using the Internet to solicit or make charitable donations has its start-up glitches, including tax questions tied to lobbying communications, surrogate Web sites, unrelated business income, and corporate sponsorship.


It is better to give than to receive, unless your company gets trapped in the murky waters of E-philanthropy. The practice of using the Internet to solicit or make charitable donations is innovative, but like any new idea, E-philanthropy has start-up glitches to work through, including tax questions tied to lobbying communications, surrogate Web sites, unrelated business income, and corporate sponsorship.

"The Internet changes things just enough so that when businesses apply traditional tax rules, the analogies break down," warns Putnam Barber, editor of the nonprofit portal Witness the Internal Revenue Service's most recent call for public comment on calculating Internet E-mail costs. By law, nonprofits must track how much they spend on lobbying communications to prevent charities from exceeding federal spending caps. In a traditional, direct-mail newsletter campaign, the calculation of expenses is straightforward. However, says Barber, the incremental cost of sending additional newsletters via E-mail is difficult to determine.

Another snag involves surrogate Web sites that aggregate and clear donations for nonprofits that don't want to maintain complex financial functionality on the Web. The surrogates, which act as middlemen, are sometimes for-profit businesses, says Catherine Livingston, a former Treasury deputy tax legislative counsel who is now with Caplin & Drysdale, in Washington, D.C. "If the middleman site did not establish the proper relationship with the charity," she says, "the tax treatment of a donation may be different than expected." Requesting a receipt for a donation also causes problems. Acknowledgment from a surrogate Web site doesn't satisfy IRS requirements, unless the surrogate is an agent for the charity.

Corporate sponsors must also tread lightly on the Web. Some charities set up sponsorship programs that link their nonprofit Web site to an E-commerce site, such as The idea is to create an Internet link out of the corporate sponsor's logo that connects the commercial and nonprofit sites. The E-commerce company then donates a percentage of the profits from purchases that originate at the logo, which sits on the nonprofit site. It sounds fruitful, but Livingston says the IRS is still unsure whether the stream of revenue created by the link is subject to unrelated business income taxes.

A more serious problem occurs when corporate Web sites also play host to corporate foundation activities. "There are a lot of rules that apply to private foundations under the tax laws, and it's easy to run afoul of those," counsels Livingston. For instance, corporations are allowed to lobby for legislation, but corporate foundations are banned from lobbying. The corporate Web site should not create the impression that the foundation is soliciting votes on Capitol Hill.


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