Private Foundations: Tax Law and Compliance, 4th Edition

Chapter ElevenUnrelated Business Income

1. § 11.1 General Rules
   1. (a) Overview
   2. (b) Trade or Business Income
   3. (c) Substantially Related Activity
   4. (d) Regularly Carried On
   5. (e) Real Estate Activities
2. § 11.2 Exceptions
   1. (a) Royalties
   2. (b) Rents
   3. (c) Research
   4. (d) Nonbusiness Activities
   5. (e) Revenue Produced on the Internet
3. § 11.3 Rules Specifically Applicable to Private Foundations
   1. (a) Business Enterprises
   2. (b) Permitted Businesses
   3. (c) Partnerships and S Corporations
   4. (d) Community Foundations' Grant-Making Services
4. § 11.4 Unrelated Debt-Financed Income
   1. (a) Acquisition Indebtedness
   2. (b) Related-Use Exceptions
   3. (c) Includible Income
5. § 11.5 Calculating and Reporting the Tax

The unrelated business income rules constitute a significant component of the general federal tax law for tax-exempt organizations.¹ These rules, however, are of limited concern to private foundations because of the prohibition on excess business holdings,² which essentially bars foundations from actively engaging in an unrelated business. Nonetheless, certain aspects of the unrelated business income rules are applicable to private foundations.

A private foundation may receive unrelated business income, for example, from a permitted minority interest in a partnership. During the period of time a private foundation is allowed to dispose of an excess business interest, it might receive business income. Those private operating foundations that charge fees or sell the products of their programs must understand whether this ...