Under Federal law, nonprofit institutions are free to engage in any activity they choose but must pay income tax on enterprises that are not related to their tax-exempt purposes.

The association still maintains that it owes no taxes on most of the commercial activities, because they are substantially related to the basic tax-exempt purpose of the organization.

The criminal case against Mr. Channell charges that he collected more than $2 million from donors who were told the money would be used for tax-exempt, educational purposes, such as television commercials.

The report noted that under the Internal Revenue code, a tax-exempt organization must operate exclusively for tax-exempt purposes, cannot confer benefits on private interests and may not provide any support to a political action committee.

It is categorized for tax-exempt purposes as "religious organization", "publishing activities", and "television" (National Taxonomy of Exempt Entities).

The break applies to people who donate appreciated property like paintings to a museum or manuscripts to a library that has agreed to use the property in connection with its tax-exempt purpose - as opposed to selling it promptly.

Upshot for Contributors Several tax lawyers said in interviews that contributors could conceivably be required to refund their tax deduction or pay penalties if their money was not used for tax-exempt purposes.

Since 1950, tax-exempt organizations have generally been required to pay taxes on income from trade or business activities that are not "substantially related" to their tax-exempt purpose.

PTL had "excessive unrelated business income or income which was not really in keeping with the tax-exempt purpose," Mr. Witmer said.

For most organizations, a business activity generates unrelated business income subject to taxation if it fails to sufficiently relate to the tax-exempt purpose of that tax-exempt organization if it meets three requirements: