As the IRS and Treasury prepare to issue “guidance under §512 regarding methods of allocating expenses relating to dual use facilities” (per the current “Priority Guidance Plan”), what might some of those expense allocation methods look like?


Denali Christian College (DCC) – in Alaska – is a public charity in accordance with Internal Revenue Code sections 501(c)(3) and 170(b)(1)(A)(ii).  In the past year, a donor gave DCC a golf course.  So now, DCC runs a golf operation that is used by students, faculty, alumni, and the general public.  Fees charged are as follows:

General public             $30

Alumni                        $25

Faculty                        $10

Students                      $10

The accounting team at DCC knows that they have unrelated business income for the greens fees paid by the general public and alumni (but not students and faculty).  They have allocated expenses to the unrelated business income on a “gross-to-gross” (gross revenue for unrelated golfers over total gross revenue).  So, for example, if each of the four “types” of golfers above each accounted for 250 rounds per year, the expense allocation would look as follows:

($30 x 250 = 7,500) + ($25 x 250 = 6,250) =

13,750 / 18,750 = 73.33%

The IRS – in the Colleges and Universities Compliance Project (Final Report 2013) – found this NOT to be a reasonable allocation method – inherently because it misrepresented the expenses because unrelated golfers paid more per round.  Thus, the numerator in the cost allocation equation was skewed upward.

The IRS EO Examinations team prescribed a “unit-based” allocation method modeled after NUMBER OF ROUNDS as follows:

Number of unrelated (alumni and general public) rounds of golf (numerator) /

Total number of rounds of golf (denominator)

= % of expenses allocable to unrelated business income from golf fees

This would result in a much lower expense allocation percentage at:

500 rounds / 1,000 total rounds = 50.00%


From Treasury Regulation 1.512(a)-(1)(c):

Dual use of facilities or personnel. Where facilities are used both to carry on exempt activities and to conduct unrelated trade or business activities, expenses, depreciation and similar items attributable to such facilities (as, for example, items of overhead), shall be allocated between the two uses on a reasonable basis. Similarly, where personnel are used both to carry on exempt activities and to conduct unrelated trade or business activities, expenses and similar items attributable to such personnel (as, for example, items of salary) shall be allocated between the two uses on a reasonable basis. The portion of any such item so allocated to the unrelated trade or business activity is proximately and primarily related to that business activity, and shall be allowable as a deduction in computing unrelated business taxable income in the manner and to the extent permitted by section 162, section 167, or other relevant provisions of the Code.

**In the Colleges & Universities Compliance Project questionnaire, Question 28 asked respondents to break down the total expenses, including direct and indirect, reported for all activities on their Form 990-T for the tax year ending in 2006 or the most recent year in which they filed a Form 990-T (represented by Figure 29 in the report).  The results for direct expenses vs. indirect expenses for both public and private colleges and universities were similar (about 80% direct and 20% indirect).

Bottom Line

This is not just about golf courses – although we did have a client college who had a golf course donated to them this year – most institutions have “dual-use facilities”.  We keep saying it – unrelated business activities are “bright and blinking” on the IRS’ radar screen.  It will be good to get guidance on expense allocations involving dual-use facilities.  It makes sense to touch base with a qualified tax advisor on these items.  He or she will be able to help you navigate UBIT issues – including expense allocations – and how they may affect your school.

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.