At Issue:
Many schools have “guest house” or visitor housing operations. These activities can result in unrelated business income – or not. Last week, we looked at a school that ran a “hotel operation”. This week let’s examine something that is not as formal.
Situation:
Marathon Bible College (MBC) is a private college exempt under Internal Revenue Code section 501(c)(3) and 170(b)(1)(A)(ii). Several years ago, MBC was given a condominium complex with 8 two-bedroom condos. It is know as the MBC “guest house”. They use these accommodations to house visiting professors, visiting athletes, parents of students, and other guests of the college. Breakfast and maid services are included with a “stay”. When there are vacancies on the calendar, MBC makes rooms available to the general public via internet or phone-in reservations.
Ward, MBC’s Controller, calls us to enquire about whether the income from their “guest house” activity is subject to UBIT. We answer that the income received from MBC’s “guest house” is not rental income from the lease of real property because services are also provided to the occupants. Generally, the income MBC receives from providing rooms to visiting professors, parents of students, visiting athletes, guests of the university who contribute importantly to the university’s educational and other exempt purposes is not unrelated business income. However, the income that MBC receives from members of the general public does not contribute importantly to MBC’s exempt purposes and is therefore unrelated business income. We also note that MBC should carefully track the types of guests, overall revenues and expenses, and utilize a reasonable allocation method when accounting for the “guest house” activity.
Rules:
From the 2014 ACT Report:
Hotel Rentals and Dormitory Use
Section 1.512(b)-1(c)(5) of the Income Tax Regulations states that payments for the use or occupancy of rooms or other space where services are also provided to the occupant, such as for the use or occupancy of rooms or other quarters in hotels, boarding houses, or apartment houses furnishing hotel services, or in tourist camps or tourist homes, motor courts or motels do not constitute rent from real property.
Situation 8:
A, a public university, operates a hotel on its campus to house visiting professors, parents of students, visiting athletes, and other guests of the university. The hotel is also open to the public. A is not located in an isolated region and there are other hotels available in the area for use by the public. Because the income received from A’s operation of the hotel represents the payment for the use or occupancy of rooms where services are also provided to the occupants, the income is not rental income from the lease of real property. The income A receives from providing rooms to visiting professors, parents of students, visiting athletes, guests of the university who contribute importantly to the university’s educational and other exempt purposes is considered substantially related to A’s exempt functions and is not unrelated business income to A. The income A receives from members of the public does not contribute importantly to A’s exempt purposes and is therefore unrelated business income.
*Note also that Private Letter Ruling 201106019 provides further clarification on this type of activity.
Bottom Line
Does your institution receive any “payments for the use or occupancy of rooms or other space where services are also provided to the occupant”? This may involve dorm rooms, a “guest house”, extra apartment space, etc. Is it regularly carried on? Is the space or “arrangement” offered to the general public? Please ensure that you are in compliance with IRS rules and local laws with regard to activities of this nature.
Specific questions? Email Dave Moja
The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.