Tax Planning and Compliance for Tax-Exempt Organizations, 6th Edition

CHAPTER 21Unrelated Business Income

• § 21.4 Definition of Trade or Business
• § 21.8 Unrelated Activities
  • (b) Services
• § 21.10 Income Modifications
  • (d) Royalties
• § 21.11 Calculating and Minimizing Taxable Income

§ 21.4 Definition of Trade or Business

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Activities and Attributes of UBI. A project that focuses on preserving historic buildings is eligible to be classified as charitable and qualified for § 501(c)(3) exemption only if it fails both the Profit Motive and the Commerciality Tests. To do so it must respond with “No” answers to most of the questions in Exhibit 21.1. Additionally, its organizational characteristics should not look like those on the matrix illustrated in Exhibit 21.2. Possessing those factors indicates conduct of unrelated business(es). While some UBI is acceptable, too much prevents tax exemption as considered in § 21.3, “Consequences of Receiving UBI.” A recent private letter ruling contains facts about the complex of activities and work that can cause a historic restoration project to fail to obtain tax exemption:¹

• “Provide a large portion of financial results, like profits and tax-credits to private investors providing the capital to restore the properties in which the elderly will live.
• “Tax-exempt entity serves as general partner receiving consulting and management fees for its work.

“The purpose in your Articles of Incorporation states ‘to promote friendship, cooperation and mutual assistance among your members.’ ...