Thursday, December 26, 2013
With a big red floppy hat tip to the TaxProf Blog, this Forbes article brings tax geekiness to admirable new heights, as a tax lawyer tries to distract her children on Christmas Eve with a discussion of St. Nick's Form 1040-NR. Do read the whole thing, but for our purposes here on the Nonprofit Prof Blog, here's the fun part:
The kids are pretty sure – and I agree – that Santa doesn’t intend to operate as a for profit business. But he likely doesn’t meet the criteria to be tax exempt under section 501(c)(3) of the Internal Revenue Code. By default, that would make his venture for profit for purposes of IRS (whether he wants to make money or not) and therefore, taxable.
Even if Santa’s toy distribution scheme were to be classed as a non-profit, there may be other unrelated trade or business income… As noted earlier, my house isn’t sure where Santa gets his money. Clearly, he isn’t paid for his services though my kids question the value of cookies and milk left out for him (that is, as my seven year old noted, a LOT of cookies). Since we’ve seen a lot of Santa merchandise in stores, we’ve worked out that we think he gets some licensing revenue for his own image and also for Rudolph – kind of like Pixar does for Lightning McQueen and Buzz Lightyear. That income would be taxable to the extent that it’s not offset with expenses. So, assuming all of this, what’s deductible?
So here's my question, would Santa's operations qualify for Section 501(c)(3) status? I mean, clearly he could structure his licensing revenue as a royalty exempt from UBIT and even drop it into a for profit sub if need be. I don't really see an inurement or a private benefit issue - surely, all good kids in the world constitute a charitable class. He's not been lobbying as far as I know, so barring a big political endorsement, I'm not seeing the issue. So does Santa just need good nonprofit counsel?
Merry Christmas (a day late) to all who celebrate, and a joyous New Year to all.