Regs. 1.513–1(b) give as an example of trade or business carried on within a larger aggregate of similar activities, the regular sale of pharmaceutical supplies to the general public by a hospital pharmacy where the pharmacy also furnishes supplies to the hospital and patients of the hospital. They also give as an example of trade or business carried on within a larger complex of other activities, soliciting, selling, and publishing commercial advertising where the advertising is published in an exempt organization periodical which contains editorial matter related to the organization’s exempt purpose.

Congress has affirmed this treatment of advertising and similar activities carried on for the production of income as unrelated trade or business subject to tax even though advertising, for example, may appear in a periodical related to the exempt purposes of an organization (IRC 513(c)). H.R. Rep. No. 91–413 (Part 1), 91st Cong., 1st Sess. 45 (1969), 1969–3 C.B. 229. (IRM 7.27.6 discusses rules for computing unrelated business taxable income from sales of commercial advertising in exempt organization publications.) On the other hand, a magazine with little or no advertising which is distributed free or at nominal charge is not meant to be taxed. S. Rep. No. 91–552, 91st Cong., 1st Sess. 75 (1969), 1969–3 C.B. 472.

In United States v. American Bar Endowment, 106 S. Ct. 2426 (1986), the Supreme Court held that an IRC 501(c) (3) organization’s insurance program constituted both the sale of goods and the performance of services and, therefore, was a trade or business for purposes of the tax on unrelated business income. American Bar Endowment (ABE) was the group policyholder and administrator of insurance policies offering life, disability and medical coverage. ABE negotiated premium rates with insurers and selected which insurer would provide coverage. It compiled a list of its members, solicited their insurance business, collected premiums, transmitted premiums to the insurer, maintained files on each policyholder, answered members’ questions concerning insurance policies, and screened claims for benefits. Insured members were required to agree that all dividends refunded by the insurer will be paid to ABE to further its charitable and educational activities. The Court stated that assembling a group of better than average insurance risks, negotiating on their behalf with insurance companies, and administering a group policy are activities engaged in by private commercial entities in order to make a profit. The Court rejected ABE’s arguments that its insurance activities were not a trade or business, citing as a crucial fact that members were required to assign to ABE all dividends as a condition of participating in the insurance program. In addition to concluding that amounts derived from the insurance activities were unrelated business taxable income, the Court also concluded that none of the individuals insured had established that any portion of their premium payments constituted a charitable deduction.

The insurance activities of organizations described in IRC 501(c)(6) have also been held to constitute unrelated trade or business. See Illinois Association of Professional Insurance Agents, Inc. v. Commissioner, 801 F. 2d 987 (7th Cir. 1986); Professional Insurance Agents of Michigan v. Commissioner, 726 F. 2d 1097 (6th Cir. 1984); Carolinas Farm and Power Equipment Dealers Ass’n v. United States, 699 F. 2d 167 (4th Cir. 1983); and Louisiana Credit Union League v. United States, 693 F. 2d 525 (5th Cir. 1982). In these cases business leagues and trade associations performed promotional and administrative services for private insurance companies in connection with insurance programs provided to the organization’s members.

In Independent Insurance Agents of Northern Nevada, Inc. v. United States, 79–2 USTC par. 9601 (D.C. Nev. 1979), the court held that income realized from managing the insurance needs of tax supported public agencies was related to the tax exempt purpose of a business league under IRC 501(c)(6). In this case the organization acted as an insurance broker on behalf of a city, a county, a public school district, a fire department, a fair and recreational board, and a public hospital.

Regs. 1.513–1(b) provides that where an activity does not possess the characteristics of a trade or business within the meaning of IRC 162, such as when an organization sends out low cost articles incidental to the solicitation of charitable contributions, the unrelated business income tax does not apply since the organization is not in competition with taxable organizations. The legislative history indicates that this provision was inserted at the behest of the Disabled American Veterans, which presented testimony regarding its fundraising campaigns in which items of negligible commercial value were used in soliciting contributions. S. Rep. No. 91–522, 91st Cong. 1st Sess. 71 (1969), 1969–3 C.B. 469.

Defining the term "low cost article" has presented difficulties for the Service and the courts. In Hope School v. United States, 612 F. 2d 298 (7th Cir. 1980), the court held that a tax-exempt school’s solicitation of contributions through the mailing of greeting cards to potential contributors did not constitute unrelated trade or business. In the court’s view, the organization was not selling greeting cards but was, instead, distributing them incidental to the solicitation of charitable contributions. The court failed to consider the scope of the operation, the commercial value of the cards, the follow-up letters sent when no response was received, and the solicitation of re-orders. Instead, the court relied upon an analysis of the unfair competition question, holding that no unfair competition was involved. The court emphasized that the proceeds were used for exempt purposes, rather than reinvested in the business. A similar approach was taken by the court in Veterans of Foreign Wars of the United States v. United States, 601 F. Supp. 7 (W.D. Mo. 1984). Citing Hope School, the court stated that the organization did not reinvest proceeds into its greeting card program. In the court’s view, such action resulted in the organization’s gaining no competitive advantage, which indicates that it was not operating a trade or business for purposes of the tax on unrelated business income.

In Disabled American Veterans v. United States, 650 F. 2d 1178 (Ct. Cl. 1981), the court considered whether amounts received from the DAV’s merchandise premiums and mailing list rentals constituted unrelated business taxable income. Under DAV’s Special Solicitation program, requests for contributions were accompanied by books, maps and charts, or wrist calendars. The premiums were offered for contributions in stated amounts of $2.00, $3.00, $5.00 or more. DAV also rented out its donor mailing list. The Claims Court stated that what is necessary to constitute a trade or business for purposes of the tax on unrelated business income is that an activity be operated in a competitive, commercial manner. Applying this test, the court found that the contributions required for both the $2.00 and $3.00 premiums were substantially in excess of their retail value and, therefore, no trade or business was present. However, the contributions required for the $5.00 premiums were not so greatly in excess of their retail value and, therefore, amounts attributable to the $5.00 premiums were derived from a trade or business. The court also held that DAV’s rental of its mailing list was a trade or business.

The Tax Court considered whether an organization’s Christmas card program resulted in unrelated business taxable income in Veterans of Foreign Wars, Department of Michigan v. Commissioner, 89 T.C. No. 2 (1987). VFW entered into a contract with a commercial organization, which agreed to prepare boxes of Christmas cards and send them to individuals appearing on a list provided by VFW. Each package sent to an individual appearing on the list included a cover letter, a box of 20 Christmas cards, a return envelope and a remittance card. The cover letter asked the recipient to pay $2.00 in 1975 and $3.00 in 1976 and 1977, and stated that contributions were tax deductible. The commercial organization also sent out reminder notices to those who did not respond initially. VFW was involved in the Christmas card program for about one week per month from September through February of each year. Approximately 50,000 boxes of cards were shipped during each of the three years. The commercial organization provided similar services to other exempt organizations and, during the three years in question, its share of the Christmas card market was 1.52 percent, 1.84 percent, and 2.12 percent. On these facts the Tax Court concluded that VFW conducted the Christmas card program with the predominant intent of producing income; the Christmas card program was in substance the regularly carried on sale of goods; the program was in competition with Christmas cards marketed by commercial entities; the program was not substantially related to VFW’s exempt purposes; and, those paying more than the $2.00 or $3.00 amounts requested made a gift to VFW. With regard to the trade or business issue, the court stated that it believed VFW conducted the Christmas card program in order to produce income. All of the facts indicated that there was a trade or business under IRC 513(a) and (c). The "low cost article" provision under Regs. 1.513–1(b) was deemed to be inapplicable, since the Christmas cards were within a reasonable range of their retail value and were not low cost articles. In a footnote the court stated that the distribution of the Christmas cards would apparently not qualify under IRC 513(h) and, in any event, this provision applies to distributions made after October 22, 1986. The distributions in this case occurred prior to this date.

In order to clarify this issue, Congress enacted IRC 512(h)(1)(A) as part of the Tax Reform Act of 1986. This provision holds that for exempt organizations eligible to receive deductible contributions under IRC 170(c)(2) or (3), the term "unrelated trade or business" does not include activities relating to the distribution of low cost articles, if the distribution of such articles is incidental to the solicitation of charitable contributions. "Low cost article" is defined as any article with a cost of $5.00 or less to the organization distributing the item. For further information on IRC 513(h), see IRM 7.27.5.8.11.

The Service maintains that unfair competition is neither the sole nor the primary criterion to be considered in determining whether an activity is unrelated trade or business. The following excerpt is taken from the testimony of Lawrence B. Gibbs, Commissioner of Internal Revenue, before the Subcommittee on Oversight, House Ways and Means Committee, on June 22, 1987: In reviewing statutory changes in this area, I would like to express my concerns about proposals suggesting that "unfair" competition should become a statutory test. Currently the statute and regulations do not require the Service to consider competition in determining exempt status or application of the unrelated business income tax. Also, our forms do not require information reporting concerning competition. Very simply, the Service does not have data or the expertise to determine the degree of competition and most particularly whether there is "unfair" competition.

The following court cases reflect different opinions on the importance of competition for purposes of unrelated business taxable income:

In determining whether a trade or business is “regularly carried on” within the meaning of IRC 512, regard must be had to the frequency and continuity with which the activities are conducted and the manner in which they are pursued. This requirement must be applied in light of the purpose of the unrelated business income tax to place exempt organization business activities upon the same tax basis as the nonexempt business endeavors with which they compete. Hence, for example, specific business activities will ordinarily be deemed "regularly carried on" if they manifest a frequency and continuity, and are pursued in a manner generally similar to comparable commercial activities of nonexempt organizations. Regs. 1.513–1(c) (1).

Where income producing activities are of a kind normally conducted by nonexempt commercial organizations on a year-round basis, the conduct of such activities by an exempt organization over a shorter period of time, such as a few weeks, would not constitute the regular carrying on of trade or business.

Where income producing activities are of a kind normally undertaken by nonexempt commercial organizations only on a seasonal basis, the conduct of such activities by an exempt organization during a significant portion of the season ordinarily constitutes the regular conduct of trade or business.

Regs. 1.513–1(c)(2)(i) offers examples of the principles given above.

The following revenue rulings illustrate how the time span of certain activities affect whether those activities are viewed as regularly carried on:

In determining whether or not intermittently conducted activities are regularly carried on, the manner of conduct of the activities must be compared with the manner in which commercial activities are normally pursued by nonexempt organizations. In general, activities which are engaged in only discontinuously or periodically will not be considered regularly carried on if they are conducted without the competitive and promotional efforts typical of commercial endeavors. For example:

In Suffolk County Patrolmen’s Benevolent Association, Inc. v. Commissioner, 77 T.C. 1314 (1981), acq. 1984–1 C.B. 2, an organization entered into contracts with professional promoters for the production of annual fund raising events and the presentation of vaudeville shows. These shows were held for two nights (one weekend) per year for at least six consecutive years. The court stated that the organization’s activities were not conducted with sufficient frequency and continuity, or in such manner, to be regarded as having been "regularly carried on." The annual vaudeville show was seen by the court as merely an intermittent activity to which Congress did not intend the tax on unrelated business income to apply.

Section 1.513–1(c) (2) (ii) of the regulations also states that where an organization sells certain types of goods or services to a particular class of persons in pursuance of its exempt functions or "primarily for the convenience" of such persons within the meaning of IRC 513(a) (2), casual sales to others in the course of such activity will not be treated as regularly carried on. However, where the nonqualifying sales are not merely casual, but are systematically and consistently promoted and carried on by the organization, they meet the requirement of regularity within the meaning of IRC 512.

Rev. Rul. 68–374, 1968–2 C.B. 242, presents two situations to illustrate the meaning of casual sales. In one, an exempt hospital maintains a pharmacy on its main floor primarily for the use of its patients. The pharmacy is also open to the general public and frequent and continuous sales are made to nonpatients. In the other, the hospital pharmacy is closed to the general public but may occasionally fill prescriptions for private patients (who are not hospital patients) of its staff doctors. The Rev. Rul. holds that where, as in the first situation, sales are frequent and continuous, such sales meet the requirement of regularity within the meaning of IRC 512. However, where, as in the second situation, sales are infrequent and primarily for the convenience of the hospital staff, such sales will be considered casual and the income will not be from unrelated trade or business regularly carried on.

Certain intermittent income producing activities occur so infrequently that neither their recurrence nor the manner of their conduct will cause them to be regarded as trade or business regularly carried on. For example, an annual dance or similar fund raising event for charity would not be regularly carried on merely because it is conducted every year on a recurrent basis. Regs. 1.513–1(c)(2)(iii). Rev. Rul. 75–201, 1975–1 C.B. 164, (see IRM 7.27.5.3.3 above) presents another example of such an infrequent activity.

Regs. 1.513–1(d)(4)(i) give the several examples which illustrate the application of the "contribute importantly" principle.

The following revenue rulings provide additional instances of the application of this principle:

In Parklane Residential School, Inc. v. Commissioner, T.C.M. 1983–139, an IRC 501(c) (3) educational organization entered into 22 transactions over a two year period involving the simultaneous purchase and sale of real property. The court held that these transactions constitute a regularly carried on trade or business that was not substantially related to the organization’s exempt purpose or function. Amounts derived from these transactions were subject to tax on unrelated business income.

The leasing of its adjacent office building and the furnishing of certain office services by an exempt hospital to a hospital-based medical group is not unrelated trade or business. Rev. Rul. 69–463, 1969–2 C.B. 131.

The operation by an IRC 501(c) (3) hospital of a gift shop patronized by patients and visitors making purchases for patients and employees, a cafeteria and coffee shop primarily for employees and medical staff and a parking lot for patients and visitors only, does not constitute unrelated trade or business. Rev. Rul. 69–267, Rev. Rul. 69–268, and Rev. Rul. 69–269: 1969–1 C.B. 160. See Rev. Rul. 68–376, 1968–2 C.B. 246, for a discussion of persons considered "patients" of a hospital in certain described situations.

The sale of hearing aids to its patients by an exempt hospital whose primary activity is rehabilitating the handicapped, including those with hearing deficiencies, does not constitute unrelated trade or business. Rev. Rul. 78–435, 1978–2 C.B. 181.

Rev. Rul. 68–375, 1968–2 C.B. 245, holds that the sale of pharmaceutical supplies by an exempt hospital to private patients of physicians with offices in a hospital-owned medical building constitutes unrelated trade or business. The revenue ruling states that such sales are not primarily for the convenience of the hospital’s patients and, since these customers are not patients of the hospital, there is no substantial causal relationship between the pharmacy sales and the furthering of the hospital’s exempt purpose. In Carle Foundation v. United States, 611 F. 2d 1192 (7th Cir. 1979), cert. denied 449 U.S. 824 (1980), a hospital pharmacy sold drugs to both hospital patients and the private patients of doctors who operated an independent clinic on a for-profit basis in offices located in the hospital complex. The court found no evidence that pharmacy sales to the clinic and the clinic’s private patients furthered the hospital’s exempt purpose. Compare Hi-Plains Hospital v. United States, 670 F. 2d 528 (5th Cir. 1982), which holds that pharmacy sales to private patients of staff physicians were substantially related to a hospital’s exempt purpose where such sales were used to recruit doctors to work in a rural community.

In St. Luke’s Hospital of Kansas City v. United States, 494 F. Supp. 85 (W.D. Mo. 1980), the court held that an exempt hospital’s performance of diagnostic laboratory testing upon specimens of patients of the hospital’s staff physicians was not unrelated trade or business under IRC 513. The court found that the hospital needed the specimens to carry on its educational activities. As an independent basis for its holding, the court also stated that the hospital’s staff physicians were "members" of the hospital within the meaning of IRC 513(a) (2), and that testing was performed by the hospital primarily for the convenience of the hospital’s members. Rev. Rul 85–109, 1985–2 C.B. 165, states that the Service will not follow that portion of the St. Luke’s Hospital of Kansas City holding that private patient specimen testing is for the convenience of the hospital’s members. The Service position is that hospital staff physicians are neither "members" nor "employees" of the hospital. The revenue ruling also states that since the laboratory testing services provide a supply of specimens needed in the hospital’s teaching program, they are substantially related to the hospital’s exempt purpose. Rev. Rul. 85–110, 1985–2 C.B. 166, holds that the performance of diagnostic laboratory testing by an exempt hospital upon specimens from private office patients of the hospital‘s staff physicians constitutes unrelated trade or business. The revenue ruling notes that unique circumstances may exist whereby such services may further the hospital’s exempt purpose. Unique circumstances might include emergency laboratory diagnosis of blood samples from nonpatient drug overdose or poisoning victims, or laboratory testing where other laboratories are not available within a reasonable distance from the area served by the hospital or are unable or inadequate to conduct tests needed by hospital nonpatients. The Service will decide whether such unique circumstances exist on a case-by-case basis.

A state university operated two noncommercial radio stations and a commercially sponsored television station. The commercially operated television station was held not to be substantially related to the university’s exempt educational purpose. It was also held that the university could not offset net losses derived from the noncommercial radio stations against income derived from the commercial television station. Iowa State University of Science and Technology v. United States, 500 F. 2d 508 (Ct. Cl. 1974).

An organization was formed for the purpose of advancing education and religion. In furtherance of this purpose it broadcasts religious and educational programs for all but an insubstantial amount of its broadcast time from a television station it owns and operates under a commercial broadcasting license. The organization may qualify under IRC 501(c) (3) even though its remaining broadcast time is devoted to other types of programs that are commercially sponsored; however, these programs constitute unrelated trade or business under IRC 513. Rev. Rul. 68–563 amplified. Rev. Rul. 78–385, 1978–2 C.B. 174.

The sale of broadcasting rights to sporting events sponsored by an IRC 501(c) (6) organization whose purpose is to promote the interests of those engaged in the sport by encouraging participation in the sport and by enhancing public awareness of the sport as a profession, is substantially related to the purposes for which the organization was granted exemption. Rev. Rul. 80–294, 1980–2 C.B. 187.

The sale of radio and television broadcasting rights to an independent producer by an IRC 501(c) (3) organization created as a national governing body for amateur athletics, whose purpose is to promote amateur athletics, is substantially related to the purpose constituting the basis for this organization’s exemption, and is therefore, not unrelated trade or business within IRC 513. Rev. Rul. 80–295, 1980–2 C.B. 194.

Similarly, the sale of broadcast rights to an annual intercollegiate athletic event by an IRC 501(c) (3) organization contributes importantly to the accomplishment of that organization’s exempt purposes. Rev. Rul. 80–296, 1980–2 C.B. 195.

The sale of greeting card reproductions of art works by an art museum described in IRC 501(c) (3) does not constitute unrelated trade or business. Rev. Rul. 73–104, 1973–1 C.B. 263.

The sale of scientific books and city souvenirs by a museum of folk art described in IRC 501(c)(3) constitutes trade or business unrelated to the museum’s exempt function, even though other items sold in the shop are related to its exempt function. Rev. Rul. 73–105, 1974–1 C.B. 264.

The operation of a dining room, cafeteria, and snack bar by an exempt art museum for use by the museum staff, employees, and members of the public visiting the museum does not constitute an unrelated trade or business activity. Rev. Rul. 74–399, 1974–2 C.B. 172.

The operation of a coupon redemption service for the members of an association of retail food merchants, exempt under IRC 501(c) (6), does not contribute importantly to the exempt purposes of the association. Rev. Rul. 68–267, 1968–1 C.B. 284.

An exempt organization’s operation of a retail grocery store as part of its therapeutic program for emotionally disturbed adolescents, almost fully staffed by the adolescents, and on a scale that is no larger than is reasonably necessary for the performance of the organization’s exempt functions, is not unrelated trade or business. Rev. Rul. 76–94, 1976–1 C.B. 171.

The operation of a fringe parking lot and a shuttle bus service that favors no individual merchant or group of merchants, by an IRC 501(c) (6) organization whose primary purpose is to retain and stimulate trade in a city’s downtown area, is not an unrelated trade or business. However, the organization’s operation of a park and shop plan in which patrons of particular members receive stamps entitling them to free parking is not substantially related and is therefore unrelated trade or business within IRC 513. Rev. Rul. 79–31, 1979–1 C.B. 206.

The rental of dormitory rooms and similar residential accommodations, primarily to people under age 25, by an exempt organization whose purpose is to provide for the welfare of young people is substantially related to the purpose constituting the basis for the organization’s exemption and does not constitute an unrelated trade or business within the meaning of IRC 513. Rev. Rul. 76–33, 1976–1 C.B. 169.

The operation of health club facilities in a commercial manner by an IRC 501(c)(3) organization, whose purpose is to provide for the welfare of young people, constitutes unrelated trade or business under IRC 513. Rev. Rul. 79–360, 1979–2 C.B. 236.

The operation of a miniature golf course in a commercial manner by an IRC 501(c) (3) organization, whose purpose is to provide for the welfare of young people, constitutes unrelated trade or business under IRC 513. Rev. Rul. 79–361, 1979–2 C.B. 237.

An agricultural organization, whose primary purpose is to promote the betterment of conditions of breeders of Angus cattle and to improve the breed generally engages in unrelated trade or business when it regularly sells cattle for its members on a commission basis. Rev. Rul. 69–51, 1969–1 C.B. 159.

The rental of studio apartments to artist-tenants and the operation of a dining hall primarily to serve these tenants have no substantial causal relationship to the achievement of the exempt purposes of a fine arts organization created to stimulate and foster public interest in the fine arts by promotion of art exhibits, sponsorship of cultural events and dissemination of information relative to fine arts. Rev. Rul. 69–69, 1969–1 C.B. 159.

An exempt business league that provides job injury histories on prospective employees from public state workman’s compensation records to business concerns on an expedite basis for a specified fee is engaged in an unrelated trade or business. Rev. Rul. 73–386, 1973–2 C.B. 191.

The provision of pet boarding and grooming services for the general public is unrelated to the exempt purposes of an organization operated for the prevention of cruelty to animals. Rev. Rul. 73–587, 1973–2 C.B. 192.

The sale at a profit of standard legal forms to its members by a local bar association described in IRC 501(c) (6) is an unrelated trade or business within the meaning of section 513. Rev. Rul. 78–51, 1978–1 C.B. 165. The Service will continue to rely on this Ruling notwithstanding the conflicting result reached in San Antonio Bar Association v. U.S., (DC) 80–2 U.S.T.C. ¶ 9594.

An exempt association of credit unions that, as part of its activities, publishes and sells to its members a consumer-oriented magazine designed as a promotional device for distribution to their depositors is engaged in an unrelated trade or business. Rev. Rul. 78–52, 1978–1 C.B. 166.

The operation of a beauty shop and a barber shop for senior citizens is substantially related to the exempt purpose of an IRC 501(c) (3) senior citizens center. The sale of heavy duty appliances to senior citizens is not related. Rev. Rul. 81–61 and Rev. Rul. 81–62, 1981–1 C.B. 355.

A language translation service provided by an IRC 501(c) (6) organization that promotes and develops trade relations between business entities located in the U.S. and the government of a foreign country is unrelated trade or business within IRC 513. Rev. Rul. 81–75, 1981–1 C.B. 356.

Assisting member cities in collecting unpaid taxes is substantially related to the exempt purpose of an IRC 501(c) (4) organization. Kentucky Municipal League v. Commissioner, 81 T.C. 156 (1983).

Administering vacation pay and guaranteed annual income accounts is not substantially related to an IRC 501(c) (6) organization’s exempt purpose, which is to negotiate collective bargaining agreements and resolve disputes arising under such agreements. Steamship Trade Association of Baltimore v. Commissioner, 757 F. 2d. 1494 (4th Cir. 1985).

In United States v. American College of Physicians, 106 S. Ct. 1591 (1986), an IRC 501(c) (3) organization published a journal called Annals of Internal Medicine. The journal contained scholarly articles relevant to the practice of internal medicine, advertisements of medical supplies, products and equipment useful in the practice of internal medicine, and notices of positions desired or available in connection with the practice of internal medicine. Advertisements in the journal were "stacked" in two sections—at the front of and behind the editorial content of each issue. Advertisements were prepared by the advertisers and not by the organization. Advertising space was made available in the journal at rates competitive with those charged by commercial organizations for advertising space in their medical journals. The Supreme Court held that advertising contained in the organization’s journal was not substantially related to its exempt educational purpose. Although the Court rejected the Government’s "per se" argument that advertising published in a tax-exempt professional journal can never be substantially related, it did conclude that in this case such advertising did not contribute importantly to the organization’s exempt purpose.

In Fraternal Order of Police, Illinois State Troopers, Lodge No. 41 v. Commissioner, No. 87–1358 (7th Cir. 1987), the court held that income from advertising appearing in the organization’s magazine, The Trooper, was subject to tax on unrelated business income. The court rejected the organization’s arguments, stating that "paid business listings" appearing in The Trooper constituted commercial advertising, and that the royalty modification under IRC 512(b) (2) was not applicable.

In Florida Trucking Association, Inc. v. Commissioner, 87 T.C. 1039 (1986), an IRC 501(c) (6) organization published a newsletter or magazine called Florida Truck News, which contained advertisements pertaining to the trucking industry. The publication contained advertisements for tires, engines and trailers. Advertisements were often repeated. No formal screening process was used, and the content of the advertisements in each issue was not coordinated with the editorial content of the publication. The Tax Court held that the advertisements were not substantially related to the organization’s exempt purpose and, therefore, income from such advertisements was subject to tax on unrelated business income. The court viewed the advertisements as representing straightforward marketing techniques with no systematic effort to relate the products to the publication’s editorial content, and with no screening process.

The exploitation of exempt functions in the context of advertising is illustrated by examples contained in Regs. 1.513–1(d) (4) (iv).

Several revenue rulings also provide examples of advertising activities exploiting exempt functions.

Examples of possible exploitation of exempt functions are contained in Regs. 1.513–1(d)(4)(iv):

An exempt school annually contracts with an individual who conducts a summer tennis camp with the school furnishing the tennis courts, housing, and dining facility and the individual hiring the instructors, recruiting campers, and providing supervision. The tennis camp’s patrons are attracted to the school primarily for its capacity to provide suitable tennis facilities and personnel. Its reputation as an educational institution is of secondary importance, if a factor at all, in attracting the patrons. Thus, the school is not exploiting goodwill or other intangibles generated from the performance of its exempt function. Rev. Rul. 76–402, 1976–2 C.B. 177.

Unrelated trade or business does not include any trade or business in which substantially all the work is performed for the organization without compensation. For example, an orphanage operating a retail store where substantially all the work in carrying on the business is performed for the organization by unpaid volunteers would not be carrying on unrelated trade or business.

In St. Joseph Farms of Indiana v. Commissioner, 85 T.C. 9 (1985), nonacq. 1986–2 C.B. 1, an IRC 501(c) (3) religious order operated a farm, which produced livestock and crops that were marketed commercially. The farm was operated by the organization’s Brothers, who take a vow of poverty and receive no actual salaries. However, the Brothers residing on the farm receive food, clothing, shelter and medical care, regardless of whether they are involved in farm operations. The Tax Court held that although the organization’s farming operations constituted unrelated trade or business, the exception for volunteer labor under IRC 513(a) (1) was applicable. The court reasoned that the support provided the Brothers was not compensation for purposes of IRC 513(a) (1), since such support would be provided regardless of whether the Brothers were operating the farm.

A similar case considered by the Tax Court is Shiloh Youth Revival Centers, Inc. v. Commissioner, 88 T.C. 565 (1987). There, the members of an IRC 501(c) (3) religious organization engaged in forestry, cleaning and maintenance, painting, and so-called "donated labor" activities. The organization provided its members with food, clothing, shelter, medical care and other benefits. The court applied St. Joseph Farms of Indiana in concluding that the organization’s activities constituted unrelated trade or business. However the court distinguished St. Joseph Farms of Indiana with respect to the applicability of the volunteer labor exception under IRC 513(a) (1). In Shiloh the court deemed this exception inapplicable because the organization’s members would not have received food, clothing, shelter, medical care and other benefits if they did not work. In contrast, the Brothers in St. Joseph Farms of Indiana would be cared for even if they were no longer involved in the farming operations.

In Waco Lodge No. 166, Benevolent and Protective Order of Elks v. Commissioner, 696 F. 2d 512 (5th Cir. 1983), an organization conducted bingo games where 23.1 percent of the work was performed for cash compensation and the balance of the work was performed by volunteers who received free drinks for their services. The court held that although free drinks did not constitute compensation, the 23.1 percent of the work performed for cash compensation was substantial enough to prevent the bingo game operation from meeting the exception for volunteer labor under IRC 513(a) (1).

IRC 513(a) (2) and Regs. 1.513–1(e) (2) provide that any trade or business carried on by an IRC 501(c) (3) organization or by a governmental college or university primarily for the convenience of its members, students, patients, officers or employees is not unrelated trade or business. For example, a laundry operated by a college for the purpose of laundering dormitory linens and students’ clothing would not be considered unrelated trade or business.

The following are several revenue rulings illustrating the "convenience exception" .

IRC 513(a) (3) and Regs. 1.513–1(e) (3) exclude from the definition of unrelated trade or business any trade or business which consists of selling merchandise, substantially all of which has been received by the organization as gifts or contributions. For example, the operation of a thrift shop by an IRC 501(c) organization, which sells donated clothes and books to the general public, would not be considered unrelated trade or business. (See Rev. Rul. 71–581, 1971–2 C.B. 236, and IRM 7.25.25.3.2.1 for rules concerning thrift shops separately incorporated to raise funds for specified exempt organizations.)