On February 3, 2006, I attended a CompassPoint program on unrelated business income tax (UBIT) presented by Cherie Evans and Barbara Rosen of Evans & Rosen. Cherie and Barbara are colleagues of mine in the practice area of exempt organizations or nonprofit law. Both spent part of their legal careers at the highly regarded Silk, Adler & Colvin. Some of the key points covered in the program follow:
What is Unrelated Business Income?
- A trade or business that is
- Regularly carried on and is
- Not substantially related to the organization’s exempt purpose.
What is a trade or business?
Any activity carried on for the production of income from the sale of goods or performance of services.
What is regularly carried on?
Business activities are "regularly carried on" if they show a frequency and continuity and are pursued in a manner similar to comparable commercial activities of nonexempt organizations.
What does "not substantially related" mean?
An activity is "not substantially related" if it does not contribute importantly to the accomplishment of the organization’s exempt purposes (see your governing documents and exemption application). Expending revenues generated from an activity in furtherance of exempt-related purposes does not make the activity itself substantially related.
Some Specific Exclusions: Income from –
- Activities conducted substantially by volunteers.
- Sale of donated merchandise.
- Activities carried on for the convenience of its members, students, patients, officers or employees.
More Exclusions: Income from –
- Certain trade shows and state fairs
- Certain bingo games
- Corporate sponsorship payments – Amounts are for qualified sponsorship payments, rather than advertising, which is not excluded, if the sponsor receives nothing but use or acknowledgment of the sponsor’s name, logo or product line. If the message includes qualitative or comparative language, price information or other indications of savings or value, an endorsement or an inducement to purchase, sell or use such products or services, the payments will be deemed advertising. Moreover, the acknowledgment will be deemed advertising if it appears in regularly scheduled printed material that is not related to, or primarily distributed in connection with, an event.
- Rental of mailing lists to charitable or veterans’ organizations
- Low-cost articles
Specific Modifications for Passive Income:
- Interest, dividends, annuities, royalties, rents from real property, capital gain
- The general rule is that income derived from passive activities that are regularly carried on, for profit, do not produce UBI (e.g., rental income from real property rentals)
- Exceptions to the general rule: (i) interest, rents, royalties and other fees received from a more than 50% controlled corporation; (ii) income derived from property acquired with debt-financing (subject to certain exceptions).
Risk to Exempt Status:
The exempt organization must not be operated for the primary purpose of carrying on an unrelated trade or business. The measure of whether an exempt organization will lose its exemption is not based on the amount of UBI, but rather on the level of time and effort that the exempt organization spends on non-exempt related activities carried on to generate UBI.
$1,000 is the gross UBI threshold for filing Form 990-T.
UBIT is a complicated area of the tax law. You may find more in-depth discussion and analysis of the UBIT laws at the following sites:
IRS Publication 598, Tax on Unrelated Business Income of Exempt Organizations (rev. Mar. 2005)
UBIT: Current Developments, 1999 EO CPE Text
The Unrelated Business Income Tax and Payments from Controlled Entities, 109 Tax Notes 1443
The Unrelated Business Income Tax: All Bark and No Bite? – Evelyn Brody, Joseph J. Cordes