Even though an organization is recognized as tax exempt, it still may be liable for tax on its unrelated business taxable income. An exempt organization that has $1,000 or more gross income from an unrelated business must file Form 990-T PDF, Exempt Organization Business Income Tax Return. For additional information, see the Form 990-T instructions PDF. Section 512(a)(3) of the Internal Revenue Code provides for special unrelated business taxable income rules for organizations that are tax-exempt under section 501(c)(7), 501(c)(9), 501(c)(17), or 501(c)(20)*. The unrelated business taxable income (UBTI) of organizations described in Internal Revenue Code sections 501(c)(7), 501(c)(9), 501(c)(17), and 501(c)(20) includes all gross income, less deductions directly connected with producing that income, but not including exempt function income. Also, the dividends received deductions for corporations are not allowed in computing UBTI, because they are not expenses incurred in producing income. Exempt function income is gross income from dues, fees, charges, or similar items paid by members for the purposes for which exempt status was granted to the organization. Exempt function income also includes income that is set aside for qualified purposes. The investment income of these types of organizations generally is not taxed if it is set aside to be used for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals. In addition, for a section 501(c)(9), 501(c)(17), or 501(c)(20) organization, investment income is generally not taxed if it is set aside to provide for the payment of life, sick, accident, or other benefits. However, income on any amounts set aside that exceed the qualified asset account limit, figured under Code section 419A, is unrelated business income. Special rules apply to the treatment of existing reserves for post-retirement medical or life insurance benefits. Income derived from an unrelated trade or business may not be set aside and therefore cannot be exempt function income. In addition, any income set aside and later spent for purposes other than those specified must be included in unrelated business taxable income. Any gain on the sale of property used directly in performing an exempt function by a section 501(c)(7), 501(c)(9), 501(c)(17), or 501(c)(20) organization that is used to purchase other property that is used directly in performing an exempt function is recognized only to the extent the sales price of the old property exceeds the cost of purchasing the new property. For nonrecognition of gain to apply, the purchase of the new property must be within one year before the date of sale of the old property or within three years after the date of sale. For these purposes, the term sale of property includes the property's destruction in whole or in part, theft, seizure, requisition, or condemnation. Additional information UBIT: Current Developments PDF (2002 Exempt Organizations continuing professional education article) UBIT: Current Developments PDF (1999 Exempt Organizations continuing professional education article) Unrelated Business Income Tax Publication 598 PDF, Tax on Unrelated Business Income of Exempt Organizations *Note: Section 501(c)(20) does not apply to taxable years beginning after June 30, 1992. See Code section 120(e).