UNRELATED

BUSINESS
INCOME TAX

APRIL 13, 2021

REVIEW SESSION
• Saturday before the exam
• 4pm?
 REMEMBER WHAT WE PREVIOUSLY
LEARNED ABOUT COMMERCIAL ACTIVITIES

• 501(c)(3) can engage in unlimited commercial activities (even if highly

profitable) if it furthers the exempt purpose of the organization
• And 501(c)(3) does not necessarily lose its tax-exempt status by engaging in
unrelated commercial activities; it can engage in insubstantial amounts
– UBIT deals with the insubstantial commercial activities not in furtherance of
the organization’s exempt purpose – even though no loss of tax-exempt status,
tax is imposed on these activities (unless an exception applies)
– The tax is called UBIT (UBIT imposed on UBTI)
• Purpose of UBIT is so no unfair competition with for profit entities; also
brings in idea of non-profit purpose
UBIT: STARTS WITH IRC
SECTION 511
• § 511 (explains the tax)
– “There is hereby imposed for each taxable year on the unrelated
business taxable income (as defined in section 512) of every
organization described in paragraph (2) a tax computed as
provided in section 11 . . . .”
UBIT: THEN IRC § 512
• § 512 (defines UBTI)
– “Except as otherwise provided in this subsection, the term
‘unrelated business taxable income’ means the gross income
derived by any organization from any unrelated trade or business
(as defined in section 513) regularly carried on by it, less the
deductions allowed by this chapter which are directly connected
with the carrying on of such trade or business . . . .”
UBIT: THEN IRC § 513
• § 513 (defines unrelated trade or business)
– “The term ‘unrelated trade or business’ means, in the case of any
organization subject to the tax imposed by section 511, any trade
or business the conduct of which is not substantially related . . . to
the exercise or performance by such organization of its charitable,
educational, or other purpose or function constituting the basis for
its exemption under section 501 . . . .”
 PLAIN ENGLISH UBTI
ELEMENTS
• If 501(c)(3) has income from the conduct of a trade or business not
substantially related to the exercise or performance of its exempt purpose,
and it is regularly carried on, then there is UBTI upon which UBIT is
imposed
– If UBTI insubstantial, then no risk of losing tax-exempt status
– If UBTI substantial, then risk of losing tax-exempt status
• If an exempt activity is substantially related to the organization’s exempt
purpose, it does not generate UBIT. Regulations indicate that an activity
is related to exempt purposes “only where the conduct of the business
activity has a causal relationship to the achievement of exempt purposes,”
and the causal relationship must be substantial. (Reg. 1.513-1(d)(2).)
HISTORY
• Pg. 314:
– “Under pre-UBIT case law, a charity conducting an
unrelated business, even as its sole activity, qualified
for exemption if it’s net profits were used to support an
exempt purpose or were paid over to a bona fide
charity.”
• Shoe store example (Pg. 314)
• NYU Law School (Pg. 334)
• “Destination of income” test
HOW MUCH IS ALLOWED?
• No bright-line rule
• See pg. 316; see also pg. 329