7.27.5  Unrelated Trade or Business

7.27.5.1  (02-23-1999)
General

  1. After finding that an organization is of the type subject to the provisions of IRC 511 through 515, the next step is to determine whether it is engaged in activity constituting unrelated trade or business regularly carried on within the meaning of IRC 513.

  2. The following three conditions must be met before an activity may be so classified:

    1. The activity must be a trade or business;

    2. The trade or business must be regularly carried on; and

    3. The trade or business must not be substantially related to exempt purposes.

  3. Two IRS publications concerning the unrelated tax provisions have been issued. Publication 598 gives a detailed description of IRC 511 through 514. Publication 1018 is a brief, plain-language explanation of how the unrelated provisions apply to churches and church organizations.

7.27.5.2  (02-23-1999)
Trade or Business

  1. For purposes of IRC 513, the term "trade or business" has the same meaning it has in IRC 162, and generally includes any activity carried on for the production of income from the sale of goods or performance of services. Thus, the term trade or business is not limited to integrated aggregates of assets, activities, and goodwill which comprise businesses for the purposes of certain other provisions of the Code. Activities of producing or distributing goods or performing services from which a particular amount of gross income is derived do not lose identity as trade or business merely because they are carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which may, or may not, be related to the exempt purposes of the organization. Regs. 1.513–1(b).

7.27.5.2.1  (02-23-1999)
Trade or Business Carried On Within a Larger Aggregate of Other Activities

  1. 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.

  2. 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.

7.27.5.2.2  (02-23-1999)
Insurance Activities

  1. 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.

  2. 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.

  3. 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.

7.27.5.2.3  (02-23-1999)
Low Cost Articles

  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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.

7.27.5.2.4  (02-23-1999)
Competition

  1. 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.

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

    1. In Hope School v. United States, 612 F. 2d 298 (7th Cir. 1980), the court strongly endorsed the concept of unfair competition as an essential element in the analysis of unrelated business taxable income. An important aspect of this case was the lack of evidence presented at trial to suggest that the school’s solicitation program represented the possibility of an unfair competitive advantage over taxpaying greeting card businesses. The court concluded by stating: "We find no problem with unfair competition in this case."

    2. Similarly, in Veterans of Foreign Wars of the United States v. United States, 601 F. Supp. 7 (W.D. Mo. 1984), the court found that the organization gained no competitive advantage and did not operate a trade or business for purposes of the tax on unrelated business income.

    3. Another case in which the absence of competition was emphasized is Greene County Medical Society Foundation v. United States, 72–2 USTC par. 9604 (W.D. Mo. 1972). There, the court stated that the organization’s production and sale of phonograph records by the "Singing Doctors" was not competitive with the ordinary business of commercial record production and sales and, therefore, was not a trade or business.

    4. More recently, the Tax Court in Veterans of Foreign Wars, Department of Michigan v. Commissioner, 89 T.C. No. 2 (1987), found that the organization’s Christmas card program was in direct competition with Christmas cards marketed by commercial entities.

    5. In Disabled American Veterans v. United States, 650 F. 2d 1178 (Ct. Cl. 1981), the court stated that the legislative history clearly indicates that to constitute a trade or business for UBTI purposes, the activity must be conducted in a competitive fashion. The court clarified its position by stating that actual competition need not be established, since IRC 511–513 does not confine UBTI to those situations where it is established that some specific aspect of unfair competition has occurred.

    6. In Smith-Dodd Businessman’s Association, Inc. v. Commissioner, 65 T.C. 620 (1975), the Tax Court stated that "unfair competition plays a relatively insignificant role in the application of the amended unrelated business tax."

    7. The strongest support for the Service position that competition is neither the sole nor primary criterion to be considered in determining whether an activity is unrelated trade or business can be found in Clarence LaBelle Post No. 217 v. United States, 580 F. 2d 270 (8th Cir. 1978), cert. dismissed 99 S. Ct. 712. There, the organization argued that it was not competing with any taxable business, while the government argued that the tax on unrelated business income is not limited to competitive business. The court held that competition alone does not determine whether an unrelated trade or business should be taxed.

7.27.5.3  (02-23-1999)
Regularly Carried On

  1. IRC 512 applies to any unrelated trade or business regularly carried on by an organization.

7.27.5.3.1  (02-23-1999)
General

  1. 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).

7.27.5.3.2  (02-23-1999)
Normal Time Span of Activities

  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.

  2. 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.

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

    1. The operation of a sandwich stand by a hospital auxiliary for only 2 weeks at a state fair would not be the regular conduct of trade or business. The sandwich stand would not compete with the operation of similar facilities by a taxpaying organization which would ordinarily operate on a year-round basis.

    2. The operation of a commercial parking lot on Saturday of each week year-round would be the regular conduct of trade or business.

    3. The operation of a track for horse racing for several weeks of a year would be considered the regular conduct of trade or business because it is usual to carry on such trade or business only during a particular season. 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.

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

    1. The sale of advertising during a four month period by the paid employees of an exempt organization, which raises funds for an exempt symphony orchestra and publishes a weekly concert program distributed free at the symphony performances over an eight month period, is a business regularly carried on in determining unrelated income under section 512 of the Code. Rev. Rul. 75–200, 1975–1 C.B.163.

    2. However, the sale of advertising by volunteers of an exempt organization, which raises funds for an exempt symphony orchestra and publishes an annual concert book distributed at the orchestra’s annual charity ball, is not a business regularly carried on in determining unrelated income under section 512 of the Code. Rev. Rul. 75–201, 1975–1 C.B. 164.

    3. A two week horse racing meet featuring pari-mutuel betting conducted by an IRC 501(c)(3) county fair association is a regularly carried on trade or business, since it is usual to carry on such trade or business only during a particular season. Rev. Rul. 68–505, 1968–2 C.B. 248. (See IRM 7.27.5.8.5, which discusses the IRC 513(d) exception to unrelated trade or business for public entertainment activities of qualified organizations.)

7.27.5.3.3  (02-23-1999)
Intermittent Activities

  1. 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:

    1. The publication of advertising in programs for sports events or music or drama performances will not ordinarily be deemed to be the regular carrying on of business. Regs. 1.513–1(c) (2) (ii).

    2. However, Income derived by an exempt organization from the sale of advertising in its annual yearbook is unrelated business taxable income where an independent commercial firm under a contract covering a full calendar year conducts an extensive advertising solicitation campaign in the organization’s name and is paid a percentage of the gross advertising receipts for selling the advertising, collecting from advertisers, and printing the yearbook. Rev. Rul. 73–424, 1973–2 C.B. 190.

  2. 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.

  3. 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.

  4. 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.

7.27.5.3.4  (02-23-1999)
Special Rule

  1. 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.

7.27.5.4  (02-23-1999)
Substantially Related

  1. To be regarded as unrelated trade or business activity the conduct of the activity would not be substantially related to the organization’s performance of its exempt purpose.

  2. To determine whether a business activity is or is not substantially related requires an examination of the relationship between the business activities which generate the particular income in question—that is, the activities of producing or distributing the goods or performing the services involved—and the accomplishment of the organization’s exempt purpose. To be related, in the statutory sense, the relationship must be causal. In addition, the causal relationship must be a substantial one. Thus, the activities which generate the income must contribute importantly to the accomplishment of the organization’s exempt purposes to be substantially related. Regs. 1.513–1(d).

  3. Where income is realized from activities which are conducted on a larger scale than is necessary for the performance of an exempt function, the income attributable to the excess constitutes gross income from the conduct of unrelated trade or business. Regs. 1.513–1(d) (3).

  4. Whether activities productive of gross income contribute importantly to the accomplishment of any purpose for which an organization is granted exemption, depends in each case upon the facts and circumstances involved. Following are illustrations of this principle.

7.27.5.4.1  (02-23-1999)
Schools

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

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

    1. The regular sales of membership mailing lists by an exempt educational organization to colleges and business firms is an activity that does not contribute importantly to the accomplishment of the organization’s exempt purposes. Rev. Rul. 72–431, 1972–2 C.B. 281. (See IRM 7.27.5.8.11, which discusses the exception to unrelated trade or business for exchanges and rentals of member lists.)

    2. A travel tour program operated by a university alumni association for members and their families, under which the association, working with various travel agencies, schedules several tours annually to destinations around the world, mails out promotional material, accepts reservations, and is paid a fee by the travel agencies on a per person basis, is an unrelated trade or business within the meaning of section 513 of the Code. Rev. Rul. 78–43, 1978–1 C.B. 164.

    3. An exempt school operates a ski facility for use in its physical education program and also for use, to a substantial degree, for recreational purposes by students attending the school and members of the public who are required to pay slope and ski lift fees comparable to nearby commercial facilities. The recreational use of the facility by students is substantially related to the school’s exempt purposes and the income derived from the students’ use of the facility is not from unrelated trade or business. However, income from use by the public is from unrelated trade or business. Rev. Rul. 78–98, 1978–1 C.B. 167. See also Rev. Rul. 80–297, 1980–2 C.B. 196.

    4. An organization’s operation of vending machines and laundromat facilities on a university’s campus is substantially related to the organization’s exempt purposes of assisting a university and carrying out its activities. Rev. Rul. 81–19, 1981–1 C.B. 353.

  3. 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.

7.27.5.4.2  (02-23-1999)
Hospitals

  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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.

7.27.5.4.3  (02-23-1999)
Broadcasting

  1. 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).

  2. 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.

  3. 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.

  4. 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.

  5. 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.

7.27.5.4.4  (02-23-1999)
Museums

  1. 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.

  2. 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.

  3. 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.

7.27.5.4.5  (02-23-1999)
Retail Merchants

  1. 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.

  2. 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.

  3. 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.

7.27.5.4.6  (02-23-1999)
Youth Organizations

  1. 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.

  2. 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.

  3. 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.

7.27.5.4.7  (02-23-1999)
Other Examples

  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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.

  6. 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.

  7. 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.

  8. 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.

  9. 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).

  10. 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).

7.27.5.5  (02-23-1999)
Disposition of Products of Exempt Functions

  1. Ordinarily, gross income from the sale of products which result from the performance of exempt functions does not constitute gross income from the conduct of unrelated trade or business if the product is sold in substantially the same state it is in on completion of the exempt functions. However, if a product resulting from an exempt function is utilized or exploited in further business endeavor beyond that reasonably appropriate or necessary for disposition in the state it is in upon completion of the exempt function, the gross income derived therefrom would be from conduct of unrelated trade of business. Regs. 1.513–1(d)(4)(ii).

  2. An illustration of this is provided by the following revenue rulings:

    1. Rev. Rul. 66–323, 1966–2 C.B. 216, held that the practice of a tax exempt blood bank of selling blood and blood components to commercial laboratories was a business unrelated to the purpose of the blood bank’s exemption, the collection and distribution of blood for the benefit of the public and related research.

    2. Rev. Rul. 66–323 was modified by Rev. Rul. 78–145, 1978–1 C.B. 169. Therein the Service held that the sale of plasma to commercial laboratories by an exempt blood bank, engaged in collecting and maintaining blood products for use by hospitals, was not an unrelated trade or business where the blood bank sells either by-product plasma from which red blood cells have been removed for use by hospitals or plasma salvaged from whole blood nearing the end of its shelf life. However, sale of plasma derived from donors through plasmapheresis or purchased from other blood banks is an unrelated trade or business.

7.27.5.6  (02-23-1999)
Dual Use of Assets or Facilities

  1. If an asset or facility necessary to the conduct of exempt functions is also used in a commercial endeavor, the fact that the asset or facility is used for exempt functions does not, by itself, make the income from the commercial endeavor gross income from related trade or business. Regs. 1.513–1(d) (4) (iii).

  2. Operation of a mailing service for other organizations is unrelated trade or business even though the mailing service is also used for exempt activities. Rev. Rul. 68–550, 1968–2 C.B. 249.

  3. An exempt school annually contracts with an individual who conducts a 10-week summer tennis camp with the school furnishing the tennis courts, housing, and dining facilities and the individual hiring the instructors, recruiting campers, and providing supervision. The amounts received are from unrelated trade or business and are generated through the dual use of facilities and personnel; therefore, an allocable portion of expenses attributable to such facilities and personnel may be deducted in computing unrelated business taxable income under IRC 512. Rev. Rul. 76–402, 1976–2 C.B. 177. See also Rev. Rul. 80–297, 1980–2 C.B. 186.

  4. An exempt school operates a ski facility for use in its physical education program and also for use, to a substantial degree, for recreational purposes by students attending the school and members of the public who are required to pay slope and ski lift fees comparable to those of nearby commercial facilities. The recreational use of the facility by students is substantially related to the school’s exempt purposes and the income derived from the students’ use of the facility is not from unrelated trade or business under IRC 513. However, income from use of the facility by the public is from unrelated trade or business. Rev. Rul. 78–98, 1978–1 C.B. 167.

  5. An organization formed for the purpose of advancing education and religion through operating a television station on which it broadcasts educational and religious programs qualifies for exemption under IRC 501(c) (3). However, the insubstantial amount of commercial programming which it broadcasts constitutes unrelated trade or business under IRC 513. Rev. Rul. 78–385, 1978–2 C.B. 174.

7.27.5.7  (02-23-1999)
Exploitation of Exempt Functions

  1. In some cases, exempt activities will create good will or other intangibles which are used in commercial endeavors. Unless these commercial endeavors themselves contribute importantly to the accomplishment of an exempt purpose, the income which they produce is from the conduct of unrelated trade or business. Regs. 1.513–1(d)(4)(iv) contain examples that illustrate this principle.

7.27.5.7.1  (02-23-1999)
Advertising

  1. 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.

  2. 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.

  3. 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.

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

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

    1. Income derived by an exempt organization from the sale of advertising in its annual yearbook is unrelated business taxable income where an independent commercial firm under a contract covering a full calendar year conducts an intensive advertising campaign in the organization’s name and is paid a percentage of the gross advertising receipts for selling the advertising, collecting from advertisers, and printing the yearbook. Rev. Rul. 73–424, 1973–2 C.B. 190.

    2. Income derived by an association of law enforcement officials described in IRC 501(c) (6), from the sale of space in its journal either for conventional advertising or merely to identify the purchasing organization without a further message constitutes unrelated business income. However, income derived from the listing of 60 names to a page would not constitute unrelated trade or business because the purchaser of a listing neither expects nor receives more than an inconsequential benefit. Rev. Rul. 74–38, 1974–1 C.B. 144, as clarified by Rev. Rul. 76–93, 1976–1 C.B. 170.

    3. The sale of advertising during a four month period by the paid employees of an exempt organization, which raises funds for an exempt symphony orchestra and publishes a weekly concert program distributed free at the symphony performances over an eight-month period, is a business subject to the unrelated business income tax. Rev. Rul. 75–200, 1975–1 C.B. 163.

    4. An IRC 501(c) (6) organization’s sale of its membership directory to its members, who are the directory’s sole purchasers, is substantially related to the organization’s exempt purpose. The sale of the directory furthers the common interests of the organization’s members and does not confer any private, commercial benefit on the member.

    5. The publishing of ordinary commercial advertisements in the journal of an IRC 501 (c) (6) bar association constitutes unrelated trade or business under IRC 513. However, the publishing of legal notices does not constitute unrelated trade or business. Rev. Rul. 82–139, 1982–2 C.B. 108.

7.27.5.7.2  (02-23-1999)
Other Cases

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

    "Example (1). U, an exempt scientific organization, enjoys an excellent reputation in the field of biological research. It exploits this reputation regularly by selling endorsements of various items of laboratory equipment to manufacturers. The endorsing of laboratory equipment does not contribute importantly to the accomplishment of any purpose for which exemption is granted U. Accordingly, the income derived from the sale of endorsements is gross income from unrelated trade or business."


    "Example (2). V, an exempt university, has a regular faculty and a regularly enrolled student body. During the school year, V sponsors the appearance of professional theater companies and symphony orchestras which present drama and musical performances for the students and faculty members. Members of the general public are also admitted. V advertises these performances and supervises advance ticket sales at various places, including such university facilities as the cafeteria and the university bookstore. V derives gross income from the conduct of the performances. However, while the presentation of the performances makes use of an intangible generated by V’s exempt educational functions—the presence of the student body and faculty—the presentation of such drama and music events contributes importantly to the overall educational and cultural function of the university. Therefore, the income which V receives does not constitute gross income from the conduct of unrelated trade or business."

  2. 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.

7.27.5.8  (02-23-1999)
Exclusions from Unrelated Business

  1. IRC 513(a) (1) and Regs. 1.513–1(e) (1) exclude the following from the definition of unrelated trade or business:

    • Volunteer labor

    • Convenience of members

    • Donated merchandise

    • Special rules for local associations of employees.

7.27.5.8.1  (02-23-1999)
Volunteer Labor

  1. 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.

  2. 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.

  3. 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.

  4. 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).

7.27.5.8.2  (02-23-1999)
Convenience of Members

  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.

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

    1. The leasing of studio apartments and the operation of a dining hall by an IRC 501(c) (3) organization are not primarily for the convenience of its members and constitute unrelated trade or business. Rev. Rul. 69–69, 1969–1 C.B. 159.

    2. A gift shop operated by the hospital for the convenience of its patients, visitors and employees, is not unrelated trade or business. Rev. Rul. 69–267, 1969–1 C.B. 160.

    3. The operation of a cafeteria and coffee shop by a hospital, for the convenience of its employees and medical staff, is not unrelated trade or business. Rev. Rul. 69–268, 1969–1 C.B. 160.

    4. The operation of a parking lot for patients and visitors by an exempt hospital for the convenience of such patients and visitors is not unrelated trade or business. Rev. Rul. 69–269, 1969–1 C.B. 160.

    5. The operation of a dining room, cafeteria, and snack bar by an exempt art museum for the convenience of its 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.

    6. In St. Luke’s Hospital of Kansas City v. United States, 494 F. Supp. 85 (W.D. Mo. 1980), the court held, in part, that the hospital’s performance of diagnostic laboratory testing upon specimens of patients of the hospital’s staff physicians is not unrelated trade or business because the testing was performed primarily for the convenience of the hospital’s staff physicians, who were “members” for purposes of IRC 513(a) (2). 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.

7.27.5.8.3  (02-23-1999)
Donated Merchandise

  1. 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.)

7.27.5.8.4  (02-23-1999)
Special Rule for IRC 501(c) (4) Local Associations of Employees

  1. Any trade or business carried on by a local association of employees described in IRC 501(c) (4) organized before May 27, 1969, which consists of the selling of items of work-related clothes and equipment and items normally sold through vending machines, through food-dispensing facilities, or by snack bars, for the convenience of its members at their usual place of employment. IRC 513(a) (2) and Regs. 1.513–1(e) (2).

7.27.5.8.5  (02-23-1999)
Exclusions Under IRC 513(d) — Background

  1. IRC 513(d) was added to the Code by the Tax Reform Act of 1976. This provision excludes income from certain convention and trade show activities and public entertainment activities of qualified organizations. The Committee Reports on P.L. 94–455 regarding this section indicate that dissatisfaction with prior revenue rulings was the reason for this legislation.

  2. IRS procedure before the passage of the 1976 Tax Reform Act was to treat income from a trade show or suppliers’ exhibit related to the exempt purposes of the exempt organization that sponsored it, as related income, as long as the show was conducted in a manner reasonably calculated to promote and stimulate interest in the industry generally, and where selling or order taking was neither permitted nor condoned.

  3. The Service position with respect to trade shows prior to the enactment of IRC 513(d) is set forth in Rev. Rul. 67–219, 1967–2 C.B. 210, and Rev. Ruls. 75–516 through 75–520, 1975–2 C.B. 220–226. Rev. Ruls. 67–219 and 75–516 are obsoleted for taxable years beginning after October 4, 1976. Rev. Ruls. 75–517 through 75–520 are revoked for taxable years beginning after October 4, 1976. See Rev. Rul . 85–123, 1985–2 C.B. 168.

  4. In Rev. Rul. 68–505, 1968–2 C.B. 248, the Service ruled that an exempt county fair association conducting a horse racing meet with pari-mutuel betting was engaged in an unrelated trade or business notwithstanding the fact that it was not in competition with commercial enterprises.

  5. The Congressional Committee indicated in its report that such activities are related to the exempt purposes of the organizations conducting the trade shows and public entertainment activities. It is customary for such organizations to provide entertainment, including horse racing, to attract the public to the educational exhibits on display. In addition, selling products at trade shows does not detract from the purpose of promoting and stimulating an interest in, and demand for, an industry’s products. Lastly, such activities are not usually in competition with similar commercial activities.

7.27.5.8.6  (02-23-1999)
Convention and Trade Show Activity

  1. IRC 513(d) and Regs. 1.513–3(b) provide that certain traditional convention and trade show activities carried on by a qualifying organization in connection with a qualified convention or trade show will not be treated as unrelated trade or business and income from such activities will not be subject to the tax imposed by IRC 511.

  2. IRC 513(d) (3) (C) defines a qualifying organization as one described in IRC 501(c) (3), (4), (5) or (6) that regularly conducts, as one of its substantial exempt purposes, a qualified convention or trade show. The Tax Reform Act of 1986 extended the definition of qualifying organization to organizations described in IRC 501(c) (3) and 501(c) (4). The effective date of this provision is October 22, 1986.

  3. A qualified convention or trade show is a show that meets the following requirements:

    1. It is conducted by a qualifying organization;

    2. At least one purpose of the sponsoring organization in conducting the show is the education of its members, or the promotion and stimulation of interest in, and demand for, the products and services of the qualifying organization’s members’ industry or to educate persons in attendance regarding new developments or products or services related to the exempt activities of the organization; and

    3. The show is designed to achieve that purpose through the character of a significant portion of the exhibits or the character of conferences and seminars held at the convention.

  4. For the purposes of this section, convention and trade show activity means any activity of a kind traditionally carried on at shows. The regulations indicate that this includes, but is not limited to:

    1. Activities designed to attract to the show members of the sponsoring organization, members of an industry in general, and members of the public, to view industry products or services and to stimulate interest in, and demand for, such products and services;

    2. Activities designed to educate persons in the industry about new products and services or new rules and regulations affecting the industry; and

    3. Incidental activities, such as furnishing refreshments, of a kind traditionally carried on at such shows.

  5. To overcome Congress’ specific objection to the taxing of income from trade shows where selling was permitted, Regs. 1.513–3(d) provides that the rental of display space to exhibitors, including exhibitors who are suppliers, at a qualified trade show or at a qualified convention will not be considered unrelated trade or business even though the exhibitors who rent the space are permitted to sell or solicit orders.

  6. Regs. 1.513–3(d) and (e) make it clear that a supplier exhibit may be part of a qualified trade show and, as such, will not be treated as unrelated trade or business. A supplier exhibit is one in which the exhibitor displays goods or services that are supplied to, rather than by, the members of the qualifying organization in the conduct of such members’ own trades or businesses. Income from a supplier show not connected with a qualified trade show will be treated as unrelated trade or business. See the regulations for examples.

  7. A convention or trade show activity which is conducted by a qualifying organization, but which otherwise is not so qualified under IRC 513(d), will be considered unrelated trade or business.

7.27.5.8.7  (02-23-1999)
Public Entertainment Activities

  1. IRC 513(d) also provides that income from qualified public entertainment activities engaged in by qualified organizations will not be treated as unrelated trade or business.

  2. A public entertainment activity is one traditionally conducted at fairs or expositions promoting agricultural and educational purposes. Such activities include, but are not limited to, any activity, one of the purposes of which is to attract the public to fairs or expositions or to promote the breeding of animals or the development of products or equipment.

  3. Public entertainment activities are excluded from unrelated trade or business only when they are conducted by a qualifying organization in—

    1. conjunction with an international, national, state, regional, or local fair or exposition,

    2. accordance with the provisions of state law which permit the activity to be operated or conducted solely by such an organization, or by an agency, instrumentality, or political subdivision of such state, or

    3. accordance with the provisions of state law which permit such an organization to be granted a license to conduct not more than 20 days of such activity on payment to the state of a lower percentage of the revenue from such licensed activity than the state requires from organizations not described in IRC 501(c) (3), (4), or (5).

  4. A qualifying organization is defined in IRC 513(d) (2) (C) as an organization described in IRC 501(c) (3), (4) or (5) which regularly conducts, as one of its substantial exempt purposes, an agricultural or educational fair or exposition.

  5. Activities such as horse racing with pari-mutuel betting would not be considered unrelated trade or business under this section provided the above requirements are met.

  6. IRC 513(d) is effective for taxable years beginning after October 4, 1976.

7.27.5.8.8  (02-23-1999)
Certain Hospital Services

  1. IRC 513(e), added by the Tax Reform Act of 1976, provides that a tax exempt hospital’s income from providing the services listed in IRC 501(e) (1) (A) to other tax exempt hospitals will not be subject to unrelated business income tax. The provision applies if: such services are furnished solely to hospitals which have facilities to serve not more than 100 inpatients; such services, if performed on its own behalf by the recipient hospital, would constitute activities in exercising or performing the purpose or function constituting the basis for its exemption; and such services are provided at a fee or cost which does not exceed the actual cost of providing such services such cost including straight line depreciation and a reasonable amount for return on capital goods used to provide such services.

7.27.5.8.9  (02-23-1999)
Certain Bingo and Other Games of Chance

  1. IRC 513(f), added by Public Law 95–502, effective for taxable years beginning after December 31, 1969, provides that certain bingo games are excluded from the definition of unrelated trade or business. Prior to the enactment of this law, exempt organizations were subject to the unrelated business income tax on the proceeds of bingo games regularly carried on, unless the bingo games were conducted by unpaid volunteers.

  2. Regs. 1.513–5(d) defines a bingo game as a game of chance played with cards that are generally printed with five rows of five squares each. Participants place markers over randomly called numbers on the cards in an attempt to form a preselected pattern such as a horizontal, vertical, or diagonal line, or all four corners. The first participant to form the preselected pattern wins the game. As used in this section, bingo game means any game of bingo of the type described above in which wagers are placed, winners are determined, and prizes or other property is distributed in the presence of all persons placing wagers in that game.

  3. The regulations provide that in order for a bingo game to come within this section it must be legal under state and local law and it must not be in direct commercial competition with similar games conducted by for-profit organizations. It should be noted that if bingo is illegal under state law or local law it is immaterial whether state or local officials enforce the law. See Regs. 1.513–5(c) (3), Example (2).

  4. In determining whether bingo games are conducted in competition with commercial entities, Regs. 1.513–5(c) (2) provides that bingo games are "ordinarily carried out on a commercial basis" within a jurisdiction if they are regularly carried on by for-profit organizations in any part of that jurisdiction. Ordinarily the entire state would constitute the appropriate jurisdiction for making this determination. However, if state laws permit local jurisdictions to determine whether bingo games may be conducted by for-profit organizations, or if state law limits or confines the conduct of bingo games by for-profit organizations to specific local jurisdictions, then the local jurisdiction will constitute the appropriate jurisdiction for determining whether bingo games are ordinarily carried out on a commercial basis.

    Example:

    Veterans’ organizations Y and X, both tax-exempt organizations, are organized under the laws of State N. State N has a statutory provision that permits bingo games to be conducted by tax-exempt organizations. In addition, State N permits bingo games to be conducted by for-profit organizations in city S, a resort community located in county R. Several for-profit organizations conduct nightly bingo games in city S. Y conducts weekly bingo games in city S. X conducts weekly bingo games in county R. Since State law confines the conduct of bingo games by for-profit organizations to city S, and since bingo games are regularly carried on there by those organizations, Y’s bingo games conducted in city S constitute unrelated trade or business. However, X’s bingo games conducted in county R outside of city S do not constitute unrelated trade or business.

  5. Section 311 of the Deficit Reduction Act of 1984 (as amended by section 1834 of the Tax Reform Act of 1986) provides that for purposes of IRC 513, the term unrelated trade or business does not include games of chance conducted by nonprofit organizations if the conduct of such games does not violate any state or local law and, as of October 5, 1983, there was a state law (originally enacted on April 22, 1977) in effect which permitted only nonprofit organizations to conduct such games. This provision applied to games of chance conducted after June 30, 1981, in taxable years ending after that date. The amendment contained in the Tax Reform Act of 1986 limited the exception to games of chance conducted in the State of North Dakota. The Technical and Miscellaneous Revenue Act of 1988 (P.L. 100–647, section 6201) allowed retroactive application of this exception previously applicable to organizations covered by the Deficit Reduction Act of 1984. Under this non-Code provision, exempt organizations are not subject to the unrelated business income tax for income received from certain games of chance conducted after June 30, 1981, and on or before October 22, 1986, whether or not the games were conducted in North Dakota. Only North Dakota enjoys the exception for non-bingo gambling conducted after October 22, 1986.

7.27.5.8.10  (02-23-1999)
Certain Pole Rentals

  1. IRC 513(g), added to the Code by P.L. 96–605, states that in the case of mutual or cooperative telephone or electric companies exempt under IRC 501(c) (12), the term "unrelated trade or business" does not include engaging in qualified pole rentals.

  2. The term "qualified pole rental" is defined in IRC 501 (c) (12) (D) as any rental of a pole (or other structure used to support wires) if such pole—

    1. is used by the company to support one or more wires which are used in providing services to its members, and

    2. is also used by the lessee to support its wires for the transmission of electricity or of telephone or other communications.

  3. In this connection "rental" includes any sale of the right to use the pole or other structure.

  4. This provision is effective for all taxable years beginning after December 31, 1969.

7.27.5.8.11  (02-23-1999)
Certain Distributions of Low Cost Articles Without Obligation to Purchase and Exchanges and Rentals of Member Lists

  1. The Tax Reform Act of 1986 created two additional exceptions to the term "unrelated trade or business." IRC 513(h) provides exceptions to unrelated trade or business for the distribution of

    • low cost articles and exchanges

    • rentals of member lists.

  2. These exceptions are available to exempt organizations that are eligible to receive deductible contributions under IRC 170(c) (2) or (3). Organizations that can utilize these exceptions include charitable, religious and educational organizations, and war veterans’ organizations.

  3. The distribution of low cost articles is discussed in text 36.2.4 and Reg. 1.513–1(b), which provides that where an activity does not possess the characteristics of a trade or business, 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 regulations do not contain a definition of "low cost articles." Courts that have addressed this issue have arrived at various conclusions. See Hope School v. United States, 612 F.2d 298 (7th Cir. 1980); Disabled American Veterans v. United States, 650 F.2d 1178 (Ct. Cl. 1981); Veterans of Foreign Wars of the United States v. United States, 601 F. Supp. 7 (W.D. Mo. 1984); and, Veterans of Foreign Wars Department of Michigan v. Commissioner, 89 T.C. 7 (1987). In order to clarify this issue, Congress enacted IRC 513(h) (1) (A), which provides that for exempt organizations that are eligible to receive deductible contributions under IRC 170(c) (2) and (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.

    1. "Low cost article" is defined as any article with a cost of $5 or less to the organization distributing the item. IRC 513(h) (2) (A).

    2. Items are aggregated in a calendar year where more than one item is distributed to a single distributee. The aggregate of the items is treated as one article for purposes of the $5 amount. IRC 513(h) (2) (B).

    3. For taxable years beginning in a calendar year after 1987, the $5 amount is indexed based on a cost-of-living adjustment. IRC 513(h) (2) (C).

    4. A distribution of low cost articles is treated as a distribution incidental to the solicitation of charitable contributions only if (1) the distribution is not made at the request of the distributee; (2) the distribution is made without the express consent of the distributee; and (3) the distributed articles are accompanied by a request for a charitable contribution by the distributee to the distributing organization and by a statement that the distributee may retain the low cost article regardless of whether the distributee makes a charitable contribution to the distributing organization. IRC 513(h) (3).

  4. Income from the exchanges and rentals of member lists was held to be unrelated business taxable income in Disabled American Veterans v. United States, 650 F.2d 1178 (Ct. Cl. 1981). In response to this court decision Congress enacted IRC 513(h) (1) (B), which provides that for exempt organizations that are eligible to receive deductible contributions under IRC 170(c) (2) or (3) the term “unrelated trade or business” does not include exchanging or renting members’ or donors’ names and addresses with or to another such organization. In accordance with this provision, an exempt organization eligible to receive deductible contributions under IRC 170(c) (2) or (3) that exchanges its member lists with "another such organization," or that rents its member lists to "another such organization" does not engage in unrelated trade or business.

7.27.5.8.12  (02-23-1999)
Qualified Sponsorship Payments

  1. IRC 513 (i), added to the Code by P.L. 105–34, provides that the term "unrelated trade or business" does not include the activity of soliciting and receiving "qualified sponsorship payments."

  2. A qualified sponsorship payment is a payment made by any person engaged in trade or business (sponsor) to a tax-exempt organization in return for the organization’s use or acknowledgment of the sponsor’s name or logo.

  3. Use or acknowledgment does not include advertising the sponsor’s products or services, including endorsement or other inducements to buy, sell or use such products or services.

  4. This provision is effective for all taxable years beginning after December 31, 1997.

7.27.5.9  (02-23-1999)
Special Rule for Certain Trusts

  1. The term "unrelated trade or business" has a special meaning for a trust computing its unrelated business taxable income under IRC 512 for purposes of IRC 681 (relating to the limitation on the charitable deduction by a trust), an exempt trust described in IRC 401(a), or an IRC 501(c)(17) trust. Any trade or business regularly carried on by one of these trusts, or by a partnership of which it is a member, is unrelated trade or business. IRC 513(b). In addition, the exclusions of IRC 513(a) are not applicable to these trusts. See Cooper Tire and Rubber Co. v. Commissioner, 36 T.C. 96 (1961), aff’d., 306 F. 2d 20 (1962).

7.27.5.10  (02-23-1999)
Digest of Published Rulings

  1. Construction and sale of houses.—The construction and sale of 80 houses by a charitable foundation described in section 101(6) of the 1939 Code (The predecessor of IRC 501(c) (3)), over a period of 18 months for the sole purpose of raising funds for the support of a church constitutes unrelated trade or business, notwithstanding the foundation does not contemplate engaging further in such activity. Where, however, such activity constitutes the primary activity, the foundation is not entitled to exemption. Rev. Rul. 55–449, 1955–2 C.B. 599.

  2. College radio station; cinder block plant.—The operation of a radio station and cinder block plant conducted in a manner similar to commercial undertakings by a tax-exempt university constitutes unrelated trade or business as defined in IRC 513 and the income derived therefrom is taxable under IRC 511. However, a laundry operated by the university primarily for the convenience of its students, officers or employees, comes within the exception of IRC 513(a) (2) and the income derived therefrom is not taxable under the provisions of IRC 511. Rev. Rul. 55–676, 1955–2 C.B. 266.

  3. Insurance commissions; trust agreement.—The handling of an insurance program for a municipal board of education and the receipt of brokerage commissions which are required to be deposited in a special fund for public purposes, does not affect the status of an insurance board described in IRC 501(c) (6). Such activity was not considered unrelated trade or business because it was performed by unpaid labor. Rev. Rul. 56–152, 1956–1 C.B. 56.

  4. Medical research foundation.—The operation of a medical illustration department, which furnishes various photographic, illustrative, and similar services to medical and educational institutions, and electroencephalography clinic for several hospitals by a foundation which is organized and operated to conduct and support medical and scientific research and is described in IRC 501(c) (3), constitutes unrelated trade or business within the meaning of IRC 513, the income from which is subject to the tax imposed by IRC 511. Rev. Rul. 57–313, 1957–2 C.B. 316.

  5. Sale of supplies to farm bureau members.—A county-wide organization engaged in the advancement and improvement of agriculture may be considered to be tax exempt. Any income which it receives from the sale of supplies and equipment to members, however, is taxable as unrelated business income. Rev. Rul. 57–466, 1957–2 C.B. 311.

  6. Operation of orchards and farms.—The operation of orchards and farms by the employees of a charitable trust is a profit-making enterprise not related to the charitable purposes of the trust and, therefore, constitutes unrelated trade or business. The income derived therefrom is taxable as unrelated business taxable income. However, farm income derived by the trust from a tenant under a lease, under the terms of which the trust is neither a joint venture nor a partner, is not unrelated business taxable income. Rev. Rul. 58–482, 1958–2 C.B. 273.

  7. Tournaments.—An association formed to promote and conserve the best interests and true spirit of a game, which has been held to be exempt from Federal income tax, is not subject to the unrelated business income tax on income derived from the operation of championship tournaments, the grant of radio and television broadcasting rights, and the sale of publications relating to the rules of the game. Rev. Rul. 58–502, 1958–2 C.B. 271.

  8. Business leases.—A lease, the parties to which are both described in IRC 501(c) (3) and which otherwise constitutes a business lease within the meaning of IRC 514, will not be considered as substantially related to the charitable, educational, etc., purposes of the lessor solely because the lessee is likewise an exempt organization. Rev. Rul. 58–547, 1958–2 C.B. 275.

  9. Bar and restaurant.—The operation of extensive club facilities, consisting of a restaurant, a bar, and a cocktail lounge for members and guests by an organization described in IRC 501(c) (5) constitutes the carrying on of unrelated trade or business within the meaning of IRC 513 and the organization is subject to the tax on the unrelated business income resulting from the operation of such facilities. Rev. Rul. 60–86, 1960–1 C.B. 198.

  10. Insurance and property management. —An organization, otherwise exempt from Federal income tax under IRC 501(a) as an agricultural organization described in IRC 501(c) (5), is subject to tax under IRC 511 on the unrelated business income resulting from services rendered to certain insurance companies and from the performance of property management services. Rev. Rul. 60–228, 1960–1 C.B. 200.

  11. Accounting and tax services.—A labor organization described in IRC 501(c) (5) is subject to the tax imposed by IRC 511 on unrelated business income with respect to income derived from the performance of accounting and tax services for certain of its members. Rev. Rul. 62–191, 1962–2 C.B. 146.

  12. Sale of call options.—An organization described in IRC 501(c) (3) which regularly sells "call" options on certain securities held in its investment portfolio, is engaged in unrelated trade or business as defined in IRC 513 and income realized by the organization from unexercised "call" options is ordinary income subject to the unrelated business income tax. Rev. Rul. 66–47, 1966–1 C.B. 149.

  13. Business league; health and welfare plans.—The management of health and welfare plans for a fee by a business league described in IRC 501(c) (6) is unrelated trade or business within the meaning of IRC 513. Rev. Rul. 66–151, 1966–1 C.B. 152.

  14. Sale of blood and blood products by a blood bank.—Rev. Rul. 66–323, 1966–2 C.B. 216, modified by Rev. Rul. 78–145, 1978–1 C.B. 169.

  15. Trade shows.—Amounts realized by a business league from certain trade shows are not subject to the tax on unrelated business income imposed by IRC 511, where the objective of such trade shows is the promotion and stimulation of interest and demand for the products and services of the industry in general, and not merely the promotion of the individual products of the exhibitors. Any profits must be devoted to furthering the sponsoring organization’s exempt purposes. Rev. Rul. 58–224, 1958–1 C.B. 242, distinguished. Rev. Rul. 67–219, 1967–2 C.B. 210, obsoleted by Rev. Rul. 85–123, 1985–2 C.B. 168, for taxable years beginning after October 4, 1976.

  16. Tuition fees.—Income from classes conducted by a professional association described in IRC 501(c) (6) in order to qualify persons for a specific status within the particular profession does not constitute income from unrelated trade or business subject to the tax imposed by IRC 511. Rev. Rul. 67–296, 1967–2 C.B. 212.

  17. Rev. Ruls. issued before December 13, l967,—-Applicability.—-Rev. Ruls. issued before December 13, 1967, are applicable to taxable years beginning after December 12, 1967, only to the extent consistent with Regs. 1.513–1 T.D. 6939, 1968–1 C.B. 274.

  18. Consulting services.—An organization described in IRC 501(c) (3) that performs consulting services for local businesses on matters relating to securing housing for their minority group employees is not thereby engaged in unrelated trade or business. Rev. Rul. 68–225, 1968–1 C.B. 283.

  19. Coupon redemption service.—An exempt retail food merchants association that regularly carries on as a minor portion of its activities a coupon redemption service for its members is engaged in unrelated trade or business. Rev. Rul. 68–267, 1968–1 C.B. 284.

  20. Hospital pharmacy.—An exempt hospital whose pharmacy facilities are freely available to patients and nonpatients alike is subject to tax on unrelated business income from the sale of pharmaceutical supplies to the general public. An exempt hospital that maintains a pharmacy for the use of its own patients also makes occasional sales to patients of doctors (nonhospital patients) occupying space in the hospital. Ordinarily, these sales would be unrelated trade or business but since they are considered casual sales, income therefrom is not from unrelated trade or business regularly carried on and is not unrelated business taxable income. See the discussion in Rev. Rul. 68–374, 1968–2 C.B. 242.

  21. Hospital pharmacy.—An exempt hospital operates a pharmacy in a nearby medical office building that it owns. It leases space therein to members of its medical staff. The pharmacy is maintained for the convenience of private patients of the physicians and the income is received primarily from sales to the private patients. This sales activity constitutes the conduct of unrelated business. Rev. Rul. 68–375, 1968–2 C.B. 245.

  22. Hospital; who is a patient.—For purposes of determining whether a hospital is engaged in unrelated business by selling pharmaceutical supplies to “patients,” see Rev. Rul. 68–376, 1968–2 C.B. 246.

  23. Horse racing.—An exempt county fair association that conducts a horse racing meet with pari-mutuel betting is engaged in unrelated trade or business under IRC 513. Rev. Rul. 68–505, 1968–2 C.B. 248.

  24. Mailing service.—An exempt organization owns certain automatic mailing equipment that it uses about one-fourth of the time for its fund raising campaign. The rest of the time it uses the equipment in operating a profitable mailing service for other organizations. Income from operating a mailing service for other organizations is income from unrelated trade or business under IRC 513. Rev. Rul. 68–550, 1968–2 C.B. 249.

  25. Sales; handicraft.—An exempt vocational school operates a shop where articles made by students and products made by local residents are sold. Held, the sale of articles made by students does not constitute unrelated trade or business; the sale of products made by local residents is an unrelated trade or business under IRC 513. Rev. Rul. 68–581, 1968–2 C.B. 250.

  26. Agricultural organization; sale of cattle.—The sale of cattle for its members on a commission basis by an IRC 501(c) (5) agricultural organization constitutes an unrelated trade or business under IRC 513. Rev. Rul. 69–51, 1969–1 C.B. 159.

  27. Hospital; gift shop.—The operation of a gift shop, patronized by patients, visitors, and employees, by an IRC 501(c) (3) hospital does not constitute unrelated trade or business under IRC 513. Rev. Rul. 69–267, 1969–1 C.B. 160.

  28. Hospital; cafeteria and coffee shop.—The operation of a cafeteria and coffee shop, primarily for employees and medical staff, by an IRC 501(c) (3) hospital does not constitute unrelated trade or business under IRC 513. Rev. Rul. 69–268, 1969–1 C.B. 160.

  29. Hospital; parking lot.—The operation of a parking lot for patients and visitors only by an IRC 501 (c) (3) hospital does not constitute unrelated trade or business under IRC 513. Rev. Rul. 69–269, 1969–1 C.B. 160.

  30. Sale of book.—Income from the publication and sale of a book on a topic unrelated to the organization’s exempt purpose is unrelated business income; however, if publication rights are transferred to a commercial publisher, royalty income received is not unrelated business income. Rev. Rul. 69–430, 1969–2 C.B. 129.

  31. Hospital; leasing space, furnishing services.—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 under IRC 513. Rev. Rul. 69–463, 1969–2 C.B. 131.

  32. Membership mailing lists.—The regular sales of membership mailing lists by an exempt educational organization to colleges and business firms for the production of income is an activity that does not contribute importantly to the accomplishment of the organization’s exempt purposes. Therefore, such activity constitutes unrelated trade or business. Rev. Rul. 72–431, 1972–2 C.B. 281. (See text 36.8.10, which discusses IRC 513(h) (1) (B).

  33. Sale of greeting cards.—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.

  34. Sale of scientific books.—The sale of scientific books and city souvenirs by a museum of folk art described in IRC 501(c)(3) constitutes unrelated trade or business even though other items sold in the museum shop are related to its exempt function. Rev. Rul. 73–105, 1973–1 C.B. 264.

  35. Business league; job injury information service.—An exempt business league that provides job injury histories on prospective employees from public state workmen’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.

  36. Sale of advertising.—Income derived by an exempt organization from the sale of advertising in its annual yearbook is unrelated business taxable income where an independent commercial firm under a contract covering a full calendar year conducts an intensive advertising solicitation campaign in the organization’s name and is paid a percentage of the gross advertising receipts for selling the advertising, collecting from advertisers, and printing the yearbook. Rev. Rul. 73–424, 1973–2 C.B. 190.

  37. Pet boarding and grooming services. —The income derived by an exempt organization, organized and operated for the prevention of cruelty to animals, from providing pet boarding and grooming services for the general public is income from unrelated trade or business under IRC 513. Rev. Rul. 73–587, 1973–2 C.B. 192.

  38. Sale of space in journal.—Income derived by an association of law enforcement officials described in IRC 501(c) (6) from the sale of space in its journal either for conventional advertising or merely to identify the purchasing organization without a further advertising message constitutes unrelated trade or business income under IRC 513. Rev. Rul. 74–38, 1974–1 C.B. 144.

  39. Volunteer fire company.—A non profit organization that was organized and operated as a volunteer fire company to provide fire protection and ambulance and rescue services to a community is described in IRC 501(c) (3) and contributions made to the organization are deductible under IRC 170. The organization may also be described in IRC 501(c) (4). Further, under IRC 513(a) (1), conducting weekly public dances does not constitute unrelated trade or business. Rev. Rul. 66–221 superseded and Rev. Rul. 71–47 clarified. Rev. Rul. 74–361, 1974–2 C.B. 159.

  40. Museum operating dining room, cafeteria, and snack bar.—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 unrelated trade or business activity. Rev. Rul. 74–399, 1974–2 C.B. 172.

  41. Sale of advertising.—The sale of advertising during a four-month period by the paid employees of an exempt organization, which raises funds for an exempt symphony orchestra and publishes a weekly concert program distributed free at the symphony performances over an eight-month period, is a business regularly carried on in determining unrelated income under IRC 512. Rev. Rul. 75–200, 1975–1 C.B. 163.

  42. Sale of advertising.—The sale of advertising by volunteers of an exempt organization, which raises funds for an exempt symphony orchestra and publishes an annual concert book distributed at the orchestra’s annual charity ball, is not a business regularly carried on in determining unrelated business income under IRC 512; Rev. Rul. 73–424 distinguished. Rev. Rul. 75–201, 1975–1 C.B. 164.

  43. Halfway house operating furniture shop.—A halfway house, organized to provide room, board, therapy and counseling for persons discharged from alcoholic treatment centers, which also operates a furniture shop to provide full-time employment for its residents, is described in IRC 501(c) (3) and is not conducting an unrelated trade or business under IRC 513. Rev. Rul. 75–472. 1975–2 C.B. 208.

  44. Rental of convention display space under enforced “no sale” contracts.—Income an exempt business league receives at its convention, from renting display space under enforced “no sales” contracts to exhibitors who exhibit and demonstrate their products and services used by the league members, does not constitute unrelated business taxable income. Rev. Rul. 75–516, 1975–2 C.B. 220, obsoleted by Rev. Rul. 85-123, 1985–2 C.B. 168, for taxable years beginning after October 4, 1976.

  45. Rental of convention display space with sales permitted.—Income an exempt business league receives at its annual convention from renting space, for a trade show not held or firmly contracted for before December 1, 1975, to suppliers and exhibitors who are permitted to sell and take orders for their exhibited products and services constitutes unrelated business taxable income. Rev. Rul. 75–517, 1975–2 C.B. 221, revoked by Rev. Rul. 85–123, 1985–2 C.B. 168, for taxable years beginning after October 4, 1976.

  46. Rental of convention display space under "no sale" contracts not enforced.—The renting of display space by an exempt teachers’ organization at its convention, for a trade show not held or firmly contracted for before December 1, 1975, to exhibitors of products, equipment, and services used by its members, under contracts with "no sales" clauses that it does not enforce, constitutes unrelated trade or business. Rev. Rul. 75–518, 1975–2 C.B. 225, revoked by Rev. Rul. 85–123, 1985–2 C.B. 168, for taxable years beginning after October 4, 1976.

  47. Rental of convention display space under contracts permitting sales. –The renting of display space by an exempt business league at its annual convention, for a trade show not held or firmly contracted for before December 1, 1975, to suppliers of products and services used by its members, under contracts which specifically permit sales within the rented space, constitutes unrelated trade or business. Rev. Rul. 75–519, 1975–2 C.B. 226, revoked by Rev. Rul. 85–123, 1985–2 C.B. 168, for taxable years beginning after October 4, 1976.

  48. Rental of convention display space under "sale" and "no sale" contracts.—Income from the rental of display space by an exempt business league at its annual convention, for a trade show not held or firmly contracted for before December 1, 1975, to exhibitors of a particular industry under contracts that permit sales constitutes unrelated business taxable income. Rental income from display space at the convention under other contracts with enforced "no sales" clauses is exempt. Rev. Rul. 75–520, 1975–2 C.B. 223, revoked by Rev. Rul. 85–123, 1985–2 C.B. 168, for taxable years beginning after October 4, 1976.

  49. Rental of dormitory facilities.—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 unrelated trade or business within the meaning of IRC 513. Rev. Rul. 76–33, 1976–1 C.B. 169.

  50. Construction trades training center; sale of homes.—A nonprofit organization that purchases building lots, furnishes funds to a public vocational training center for use in its on-the-job home construction training program, sells the completed homes to the general public at fair market value, and uses the income from home sales to finance new projects and obtain vocational training equipment for the public school system, is described in IRC 501(c) (3). Income from the sale of the homes is not unrelated business taxable income. Rev. Rul. 76–37, 1976–1 C.B. 148.

  51. Sale of space in journal.—Income derived by an organization from the sale of space in its journal for advertising, except space for 60-to-the-page listings that merely identify the purchaser without a further advertising message, constitutes unrelated trade or business income; Rev. Rul. 74–38 clarified. Rev. Rul. 76–93, 1976–1 C.B. 170.

  52. Retail grocery store.—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 no larger than is reasonably necessary for the performance of the organization’s exempt functions, is not unrelated trade or business within the meaning of IRC 513; Rev. Rul. 73–127 distinguished. Rev. Rul. 76–94, 1976–1 C.B. 171.

  53. Wages; members of religious organization paid by the organization.—The small remuneration paid by a religious organization described in IRC 501(c) (3) to its members for services they performed pursuant to contracts between the organization and third parties constitutes “wages” for purposes of FICA and income withholding; the contract amounts paid to the organization are not includible in the members’ gross income, but constitute unrelated business taxable income to the organization. Rev. Rul. 76–341, 1976–2 C.B. 307.

  54. Alumni association’s travel tour program.—A travel tour program operated by a university alumni association for members and their families, under which the association, working with various travel agencies, schedules several tours annually to destinations around the world, mails out promotional material, accepts reservations, and is paid a fee by the travel agencies on a per person basis, is unrelated trade or business within the meaning of IRC 513. Rev. Rul. 78–43, 1978–1 C.B. 164.

  55. Bar association; sale of standard legal forms.—The sale at a profit of standard legal forms to its members by a local bar association that is described in IRC 501(c) (6) of the Code is unrelated trade or business within the meaning of IRC 513. Rev. Rul. 78–51, 1978–1 C.B. 165.

  56. Business league; distribution of magazine.—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 unrelated trade or business. Rev. Rul. 78–52, 1978–1 C.B. 166.

  57. School operating ski facility.—An exempt school operates a ski facility for use in its physical education program and also for use, to a substantial degree, for recreational purposes by students attending the school and members of the public who are required to pay slope and ski lift fees comparable to nearby commercial facilities. The recreational use of the facility by students is substantially related to the school ‘s exempt purposes and the income derived from the students’ use of the facility is not from unrelated trade or business under IRC 513. However, income from use of the facility by the public is from unrelated trade or business. Rev. Rul. 78–98, 1978–1 C.B. 167.

  58. Blood bank. —Sale of plasma to commercial laboratories by an exempt blood bank, engaged in collecting and maintaining blood products for use by hospitals, is not unrelated trade or business where the blood bank sells either by-product plasma from which red blood cells have been removed for use by hospitals or plasma salvaged from whole blood nearing the end of its shelf life. However, sale of plasma derived from donors through plasmapheresis or purchased from other blood banks is unrelated trade or business. Rev. Rul. 66–323 modified. Rev. Rul. 78–145, 1978–1 C.B. 169.

  59. Business league; trade show.—An exempt business league that receives reasonable compensation for sponsoring and endorsing an international commercial trade show, which is not a sales facility and at which the league performs educational and supporting services, is not engaged in unrelated trade or business under IRC 513. Rev. Rul. 78–240, 1978–1 C.B. 170.

  60. Religious and educational broadcasting.—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 be described in 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.

  61. Hospital; hearing aid sales.—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 under IRC 513. Rev. Rul. 78–435, 1978–2 C.B. 181.

  62. Shuttle bus service, fringe parking lot.—The operation of a fringe parking lot and a shuttle bus service by an organization described in IRC 501(c) (6) whose primary purpose is to retain and stimulate trade in a city’s downtown area is not unrelated trade or business within IRC 513. 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 an unrelated trade or business. Rev. Rul. 79–31, 1979–1 C.B. 206.

  63. Exempt employees’ trust.—The investment of an exempt employees’ trust as a limited partner in a partnership carrying on an unrelated trade or business may result in unrelated business taxable income. Rev. Rul. 79–222, 1979–2 C.B. 236.

  64. Interest income of exempt employees trust.—Interest income earned by an exempt employees’ trust from mortgage loans, which form a significant portion of the trust’s assets, is excluded from unrelated trade or business by IRC 512(b) (1). However, the service fee receipts earned in connection with the loans constitute unrelated business income. Rev. Rul. 79–349,1979–2 C.B. 233.

  65. Health club facilities—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.

  66. Miniature golf course.—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.

  67. Membership directory—The sale by an organization described in IRC 501(c) (6) of a membership directory that contributes importantly to the achievement of the organization’s purpose and confers no private commercial benefit on any of the members, who are the directory’s sole purchasers, does not constitute unrelated trade or business. Rev. Rul. 74–38, distinguished. Rev. Rul. 79–310, 1979–2 C.B. 238.

  68. Sale of broadcasting rights.—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 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.

  69. Sale of radio and television broadcasting rights.—The sale of radio and television broadcasting rights to an independent producer by an exempt organization created as a national governing body for 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.

  70. Sale of broadcasting rights.—The sale of broadcasting 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.

  71. Dual use of tennis facilities.—An exempt school that uses its tennis facilities for ten weeks in the summer as a public tennis club operated by employees of the school’s athletic department is engaged in unrelated trade or business, and the income earned is not excludable from unrelated business taxable income as rent from real property. If the school leases the tennis facilities for a fixed fee to an unrelated individual who operates a tennis club for the public, the school is still engaged in unrelated trade or business, but the lease income is excluded from unrelated business taxable income as rent from real property. Rev. Rul. 76–402, amplified. Rev. Rul. 80–297, 1980–2 C.B. 196.

  72. Lease of football stadium.—An exempt university that leases its stadium to a professional football team for several months of the year and provides the utilities, grounds maintenance, and dressing room, linen, and stadium security services is engaged in unrelated trade or business. Further, the university’s income from the lease is not excluded from unrelated business taxable income as rent from real property. Rev. Rul. 80–298, 1980–2 C.B. 197.

  73. Vending machines and laundry facilities.—The operation of machines that provide soft drink and food vending services and laundromat facilities on campus by an organization formed to assist a university is not unrelated trade or business. Rev. Rul. 81–19, 1981–1 C.B. 353.

  74. Senior citizens’ center beauty and barber shop.—The operation of a beauty shop and a barber shop by an exempt senior citizens’ center for use by senior citizens is not unrelated trade or business. Rev. Rul. 81–61, 1981–1 C.B. 355.

  75. Senior citizens’ center sale of appliances. —The sale of heavy-duty appliances to senior citizens by an exempt senior citizens’ center is unrelated trade or business. Rev. Rul. 81–62, 1981–1 C.B. 355.

  76. Language translation service.—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. Rev. Rul. 81–75, 1981–1 C.B. 356.

  77. Certification of export documents.—The certification of export documents by an exempt chamber of commerce is not unrelated trade or business. Rev. Rul. 81–127, 1981–1 C.B. 357.

  78. Commercial advertising and legal notices.—The publication of ordinary commercial advertising for products and services used by the legal profession in a bar association’s journal is unrelated trade or business; however, the publication of legal notices is not unrelated trade or business. Rev. Rul. 82–139, 1982–2 C.B. 108.

  79. Laboratory services for private patients of hospital’s staff physicians.—The Service will not follow that portion of the decision in St. Luke’s Hospital of Kansas City v. U.S. holding that a tax-exempt hospital’s performance of laboratory testing upon referred specimens from private patients of the hospital’s staff physicians is not unrelated trade or business because the services were performed for the convenience of the hospital’s members. The Service disagrees with the court’s characterization of staff physicians as members of the hospital. Rev. Rul. 85–109,1985–2 C.B. 165.

  80. Laboratory services for private patients of hospital’s staff physicians.—The performance of diagnostic laboratory testing on referred specimens from private patients of staff physicians by an IRC 501(c) (3) hospital is unrelated trade or business, unless unique circumstances exist whereby such services may further the hospital’s exempt function. Rev. Rul. 85–110, 1985–2 C.B. 166.

  81. Convention display space rental; trade show selling activity.—Rev. Ruls. 75–517 through 520, 1975–2 C.B. 222–226, which hold that income from rental of booth space at a show or convention is unrelated trade or business taxable income, are revoked. Rev. Rul. 67–219, 1967–2 C.B. 210 and Rev. Rul. 75–516, 1975–2 C.B. 221, which imply that selling activity at a trade show would result in unrelated trade or business, are obsoleted. Rev. Rul. 85–123, 1985–2 C.B. 168.


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