As we saw last week, there are many ins and outs with regard to the UBIT rules. Be careful that you are aware of the tricks and traps.


In a similar situation to last week, Troas Bible College (TBS), a public charity under I.R.C. section 501(c)(3) and an educational entity under I.R.C. 170(b)(1)(A)(ii), sent their development director to a Christian media conference. There, she connected with several motion picture companies about TBS being paid a fee to eBlast advertisements for certain movies. TBS put strict procedures in place that the Christian movies “eblasted” must “align closely with their exempt purpose”. In the current tax year, TBS was paid $20,000 for six eBlasts. Each of the ads was vetted by a committee of the TBS Board of Directors to ensure acceptable content. TBS’ CFO, calls and asks us if these payments – or any part of them – would be unrelated business income.

As we saw in last week’s “Situation”, this would likely be considered an activity that is “regularly carried on”. Thus, the fair market value of the “service” connected with this “mailing list rental” would be unrelated business income.

However, might TBS have an argument that this activity is related to its exempt purpose and exempt from UBIT? I personally do not believe so. The concept of a causal relationship that must be “substantial” and “contributes importantly” to the exempt purpose of the organization, would not seem to be met in this circumstance. However, the concepts below should be kept in mind when advising our clients…

From the 2014 ACT Report:
An “unrelated” trade or business is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance of the purpose or function constituting the basis for the organization’s exemption. An activity that is a trade or business is “related” to the tax-exempt purpose of the organization if the activity is “causally related” to the achievement of the organization’s exempt purpose. The causal relationship must be “substantial” and “contribute importantly” to the exempt purpose. If the activity is carried on more extensively than necessary, income from the excess activity is treated as unrelated. Thus, where income is realized from activities which are related but are conducted on a scale that is not reasonably necessary to accomplish the tax-exempt purpose, the excess income will be UBTI.

Because the determination of whether a trade or business is substantially related to an organization’s exempt purposes depends upon the facts and circumstances of each case, the numerous IRS pronouncements and judicial decisions offer limited comfort in connection with a particular organization carrying on a particular activity. But, there are a number of factors that the IRS and the courts have relied on in concluding that an activity is not substantially related. These factors include:

• Fees charged to the general public are comparable to commercial facilities;
• Only those that purchase the goods or services are benefited and the benefits are in direct proportion to the fees charged;
• The organization furnishes and operates the facilities through its own employees who perform substantial services in providing the activity; and
• Maximization of profit is a predominant element in the exempt organization’s conduct of the activity.

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.

**Note that an organization’s use of the revenue for its exempt purposes does not make the activity that produced the income (e.g., fundraising event) substantially related to the organization’s exempt purpose.

Bottom Line

As we continually say, the issues and nuances in the UBIT arena are difficult to navigate. You should always check with a qualified tax advisor with respect to these types of issues.

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.