At Issue:

Your college may not run a “hotel” on campus, but many schools have “guest house” operations. These activities can result in unrelated business income – or not. For the next two weeks, we’ll take a look at both ends of this spectrum.


Saltwater Christian College (SCC)), a private university under I.R.C. section 501(c)(3) and 170(b)(1)(A)(ii), operatives a hotel on its campus to house visiting professors, parents, visiting athletes and other guests. The hotel is also open to the public. SCC offers, as one of its educational programs, a degree in hotel management. They call to ask us if they might have unrelated business income from this activity.

As we unpack the facts with them, we find that students of SCC study the operations of the hotel, coordinate its activities, and participate in the day-to-day management and activities of the hotel as part of their education. The hotel offers the students the ability to receive training that would not otherwise be available to them in a university setting. The hotel is not operated on a scale than is significantly larger than needed to provide this real world experience to its students. In this instance, the operation of the hotel appears contribute importantly to the educational purposes of SCC and is therefore substantially related to the accomplishment of SCC’s tax-exempt, educational purposes. As a result, all income SCC receives from the operation of the hotel is income that is related to its exempt functions.


From Treasury Regulation 1.513-1(d)(2):

Type of relationship required. Trade or business is “related” to exempt purposes, in the relevant sense, only where the conduct of the business activities has causal relationship to the achievement of exempt purposes (other than through the production of income); and it is “substantially related,” for purposes of section 513, only if the causal relationship is a substantial one. Thus, for the conduct of trade or business from which a particular amount of gross income is derived to be substantially related to purposes for which exemption is granted, the production or distribution of the goods or the performance of the services from which the gross income is derived must contributed importantly to the accomplishment of those purposes. Where the production or distribution of the goods or the performance of the services does not contribute importantly to the accomplishment of the exempt purposes of an organization, the income from the sale of the goods or the performance of the services does not derive from the conduct of related trade or business. Whether activities productive of gross income contribute importantly to the accomplishment of any purpose for which an organization is granted exemption depends in each case upon the facts and circumstances involved.


Bottom Line

You may not run a “hotel” on your campus (although it might be a great “Revenue Enhancement Opportunity”!), but do you receive any “payments for the use or occupancy of rooms or other space where services are also provided to the occupant”? Next week, we will look at a similar activity that may hit closer to home – and may generate unrelated business income.

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.