Any business activity in which substantially all the work is performed for the organization by volunteers – without compensation – is not an unrelated trade or business.



Troas Bible College (TBC) is a private college exempt under Internal Revenue Code section 501(c)(3) and section 170(b)(1)(A)(ii).  TBC is located in a downtown area.  TBC holds weekly public dinners each Tuesday night as a way to raise funds.  The dinner costs $12 per person.  All of the cooking, serving, cleanup, etc. is performed by volunteers without compensation.

TBC’s Controller calls us to ask if this activity is generating unrelated business income.

We paraphrase a recent IRS EO “issue snapshot” and say that holding public dinners and charging admission on a regular basis may, given the facts and circumstances of a particular case, be considered an unrelated trade or business. However, if unpaid volunteers performed the work at the dinners, the activity is not an unrelated trade or business.



From IRS “Issue Snapshot” Volunteer Labor Exclusion from Unrelated Trade or Business

(Dated 5/12/17):


  • The term ”substantially all” is not defined in section 513 or regulations for purposes of this exception. When analyzing all the facts and circumstances it is helpful to identify and compare the number of hours worked by people who work without pay and the number of hours worked by people who are compensated to determine if substantially all the work is carried on by unpaid volunteers. However, the existing court cases do not apply a set percentage test and the “substantially all” test is to be applied in a general manner. See Waco Lodge and St. Joseph Farms.
  • Compensation” is interpreted broadly. It may include payments to bartenders, waitresses, snack bar staff, maintenance workers, security, and other workers, as well as the tips that any workers receive. See Executive Network Club. A worker who obtains goods or services at a reduced price in return for his services may also be considered to be compensated. See Waco Lodge. At the same time, there must be a “but-for” connection between the payment and the services, such that the payment would not otherwise be received but for the provision of services. See St. Joseph Farms.
  • De minimus amounts received by workers are not compensation. Free food and beverages may be considered payment of compensation; however, the facts and circumstances of each case must be examined to determine if the amounts in question are de minimus.  For example, in Waco Lodge [1983] the court concluded the drinks and food given to workers were not compensation within the meaning of IRC Section513(a)(1), because the average worker received the equivalent of only $0.63 an hour.
  • All workers involved in the operation of the activities must be taken into account. This includes workers involved in advertising the activity, the set-up and the cleanup of the facilities, the actual operation of the activity, concessions, accounting and legal services, and security.  See Waco Lodge (bartenders) and S. Cmty. Ass’n (security guards).
  • Work provided by third-party contractors is not volunteer labor. If the organization conducting trade or business activities makes a payment to a third party in return for supplying labor, the amount paid is considered compensation in applying the volunteer labor exception. It is irrelevant that the workers are not compensated directly by the organization. See S. Cmty. Ass’n.
  • Volunteer labor must be a significant factor in the production of income. In Rev. Rul. 78-144 the IRS reasoned that volunteer labor exception applies only where the performance of service is a material income-producing factor in carrying on the business and therefore didn’t apply to leasing activity.



  • The “Volunteer labor exclusion” can provide an opportunity for your institution.
  • Rules and case law in this arena generally define “substantially all” as 85%.
  • As a rule of thumb, drinks and food given to workers would not be considered “compensation.”
  • All workers involved in the activity – including third-party contractors – must be considered and included in the calculation of “substantially all.”

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.