Publication 598 |
2001 Tax Year |
Examples
The following are examples of activities that were determined to be
(or not to be) unrelated trades or businesses using the definitions
and principles just discussed.
Sales commissions.
An agricultural organization, whose exempt purposes are to promote
better conditions for cattle breeders and to improve the breed
generally, engages in an unrelated trade or business when it regularly
sells cattle for its members on a commission basis.
Artists' facilities.
An organization whose exempt purpose is to stimulate and foster
public interest in the fine arts by promoting art exhibits, sponsoring
cultural events, and furnishing information about fine arts leases
studio apartments to artist tenants and operates a dining hall
primarily for these tenants. These two activities do not contribute
importantly to accomplishing the organization's exempt purpose.
Therefore, they are unrelated trades or businesses.
Membership list sales.
An exempt educational organization regularly sells membership
mailing lists to business firms. This activity does not contribute
importantly to the accomplishment of the organization's exempt purpose
and therefore is an unrelated trade or business. Also see
Exchange or rental of member lists under Excluded
Trade or Business Activities, later.
Hospital facilities.
An exempt hospital leases its adjacent office building and
furnishes certain office services to a hospital-based medical group
for a fee. The group provides all diagnostic and therapeutic
procedures to the hospital's patients and operates the hospital's
emergency room on a 24-hour basis. The leasing activity is
substantially related to the hospital's exempt purpose and is not an
unrelated trade or business.
The hospital also operates a gift shop patronized by patients,
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. These activities are also
substantially related to the hospital's exempt purpose and do not
constitute unrelated trades or businesses.
Book publishing.
An exempt organization engages primarily in activities that further
its exempt purposes. It also owns the publication rights to a book
that does not relate to any of its exempt purposes. The organization
exploits the book in a commercial manner by arranging for printing,
distribution, publicity, and advertising in connection with the sale
of the book. These activities constitute a trade or business regularly
carried on. Because exploiting the book is unrelated to the
organization's exempt purposes (except for the use of the book's
profits), the income is unrelated business income.
However, if the organization transfers publication rights to a
commercial publisher in return for royalties, the royalty income
received will not be unrelated business income. See Royalties
under Exclusions in chapter 4.
School handicraft shop.
An exempt vocational school operates a handicraft shop that sells
articles made by students in their regular courses of instruction. The
students are paid a percentage of the sales price. In addition, the
shop sells products made by local residents who make articles at home
according to the shop's specifications. The shop manager periodically
inspects the articles during their manufacture to ensure that they
meet desired standards of style and quality. Although many local
participants are former students of the school, any qualified person
may participate in the program. The sale of articles made by students
does not constitute an unrelated trade or business, but the sale of
products made by local residents is an unrelated trade or business and
is subject to unrelated business income tax.
School facilities.
An exempt school has tennis courts and dressing rooms that it uses
during the regular school year in its educational program. During the
summer, the school operates a tennis club open to the general public.
Employees of the school run the club, including collecting membership
fees and scheduling court time.
Another exempt school leases the same type of facilities to an
unrelated individual who runs a tennis club for the summer. The lease
is for a fixed fee that does not depend on the income or profits
derived from the leased property.
In both situations, the exempt purpose is the advancement of
education. Furnishing tennis facilities in the manner described does
not further that exempt purpose. These activities are unrelated trades
or businesses. However, in the second situation the income derived
from the leasing of the property is excluded from unrelated
business taxable income as rent from real property. See Rents
under Exclusions in chapter 4.
Services provided with lease.
An exempt university leases its football stadium during several
months of the year to a professional football team for a fixed fee.
Under the lease agreement, the university furnishes heat, light, and
water and is responsible for all ground maintenance. It also provides
dressing room, linen, and stadium security services for the
professional team.
Leasing of the stadium is an unrelated trade or business. In
addition, the substantial services furnished for the convenience of
the lessee go beyond those usually provided with the rental of space
for occupancy only. Therefore, the income from this lease is not
excluded from unrelated business taxable income as rent from
real property.
Broadcasting rights.
An exempt collegiate athletic conference conducts an annual
competitive athletic game between its conference champion and another
collegiate team. Income is derived from admission charges and the sale
of exclusive broadcasting rights to a national radio and television
network. An athletic program is considered an integral part of the
educational process of a university.
The educational purposes served by intercollegiate athletics are
identical whether conducted directly by individual universities or by
their regional athletic conference. Also, the educational purposes
served by exhibiting a game before an audience that is physically
present and exhibiting the game on television or radio before a much
larger audience are substantially similar. Therefore, the sale of the
broadcasting rights contributes importantly to the accomplishment of
the organization's exempt purpose and is not an unrelated trade or
business.
In a similar situation, an exempt organization was created as a
national governing body for amateur athletes to foster interest in
amateur sports and to encourage widespread public participation. The
organization receives income each year from the sale of exclusive
broadcasting rights to an independent producer, who contracts with a
commercial network to broadcast many of the athletic events sponsored,
supervised, and regulated by the organization.
The broadcasting of these events promotes the various amateur
sports, fosters widespread public interest in the benefits of the
organization's nationwide amateur program, and encourages public
participation. The sale of the rights and the broadcasting of the
events contribute importantly to the organization's exempt purpose.
Therefore, the sale of the exclusive broadcasting rights is not an
unrelated trade or business.
Yearbook advertising.
An exempt organization receives income from the sale of advertising
in its annual yearbook. The organization hires an independent
commercial firm, under a contract covering a full calendar year, to
conduct an intensive advertising solicitation campaign in the
organization's name. This firm is paid a percentage of the gross
advertising receipts for selling the advertising, collecting from
advertisers, and printing the yearbook. This advertising activity is
an unrelated trade or business.
Pet boarding and grooming services.
An exempt organization, organized and operated for the prevention
of cruelty to animals, receives unrelated business income from
providing pet boarding and grooming services for the general public.
These activities do not contribute importantly to its purpose of
preventing cruelty to animals.
Museum eating facilities.
An exempt art museum operates a dining room, a cafeteria, and a
snack bar for use by the museum staff, employees, and visitors. Eating
facilities in the museum help to attract visitors and allow them to
spend more time viewing the museum's exhibits without having to seek
outside restaurants at mealtime. The eating facilities also allow the
museum staff and employees to remain in the museum throughout the day.
Thus, the museum's operation of the eating facilities contributes
importantly to the accomplishment of its exempt purposes and is not
unrelated trade or business.
Halfway house workshop.
A halfway house organized to provide room, board, therapy, and
counseling for persons discharged from alcoholic treatment centers
also operates a furniture shop to provide full-time employment for its
residents. The profits are applied to the operating costs of the
halfway house. The income from this venture is not unrelated trade or
business income because the furniture shop contributes importantly to
the organization's purpose of aiding its residents' transition from
treatment to a normal and productive life.
Travel tour programs.
Travel tour activities that are a trade or business are an
unrelated trade or business if the activities are not substantially
related to the purpose for which tax exemption was granted to the
organization.
Example 1.
A tax-exempt university alumni association provides a travel tour
program for its members and their families. The organization works
with various travel agencies and schedules approximately ten tours a
year to various places around the world. It mails out promotional
material and accepts reservations for fees paid by the travel agencies
on a per-person basis.
The organization provides an employee for each tour as a tour
leader. There is no formal educational program conducted with these
tours, and they do not differ from regular commercially operated
tours.
By providing travel tours to its members, the organization is
engaging in a regularly carried on trade or business. Even if the
tours it offers support the university, financially and otherwise, and
encourage alumni to do the same, they do not contribute importantly to
the organization's exempt purpose of promoting education. Therefore,
the sale of the travel tours is an unrelated trade or business.
Example 2.
A tax-exempt organization formed for the purpose of educating
individuals about the geography and the culture of the United States
provides study tours to national parks and other locations within the
United States. These tours are conducted by teachers and others
certified by the state board of education. The tours are primarily
designed for students enrolled in degree programs at state educational
institutions, but are open to all who agree to participate in the
required study program associated with the tour taken. A tour's study
program consists of instruction on subjects related to the location
being visited on the tour. Each tour group brings along a library of
material related to the subjects being studied on the tour. During the
tour, five or six hours per day are devoted to organized study,
preparation of reports, lectures, instruction, and recitation by the
students. Examinations are given at the end of each tour. The state
board of education awards academic credit for tour participation.
Because these tours are substantially related to the organization's
exempt purpose, they are not an unrelated trade or business.
Insurance programs.
An organization that acts as a group insurance policyholder for its
members and collects a fee for performing administrative services is
normally carrying on an unrelated trade or business.
Exceptions.
Organizations whose exempt activities may include the provision of
insurance benefits, such as fraternal beneficiary societies, voluntary
employees beneficiary associations, and labor organizations, are
generally exceptions to this rule.
Magazine publishing.
An association of credit unions with tax-exempt status as a
business league publishes a consumer-oriented magazine four times a
year and makes it available to member credit unions for purchase.
By selling a magazine to its members as a promotional device, the
organization furnishes its members with a regular commercial service
they can use in their own operations. This service does not promote
the improvement of business conditions of one or more lines of
business, which is the exempt purpose of a business league.
Since the activity does not contribute importantly to the
organization's exempt function, it is an unrelated trade or business.
Directory of members.
A business league publishes an annual directory that contains a
list of all its members, their addresses, and their area of expertise.
Each member has the same amount of space in the directory and its
format does not emphasize the relative importance or reputation of any
member. The directory contains no commercial advertisement and is sold
only to the organization's members.
The directory facilitates communication among the members and
encourages the exchange of ideas and expertise. Because the directory
lists the members in a similar noncommercial format without
advertising and is not distributed to the public, its sale does not
confer private commercial benefits on the members. The sale of the
directory does contribute importantly to the organization's exempt
purpose and is not an unrelated trade or business. This directory
differs from the publication discussed next because of its
noncommercial characteristics.
Sales of advertising space.
A national association of law enforcement officials publishes a
monthly journal that contains articles and other editorial material of
professional interest to its members. The journal is distributed
without charge, mainly to the organization's members.
The organization sells advertising space in the journal either for
conventional advertising or to merely identify the purchaser without a
commercial message. Some of the noncommercial advertising identifies
the purchaser in a separate space, and some consists of listings of 60
or more purchasers per page. A business firm identified in a separate
space is further identified in an Index of Advertisers.
The organization solicits advertising by personal contacts.
Advertising from large firms is solicited by contacting their chief
executive officer or community relations officer rather than their
advertising manager. The organization also solicits advertising in
form letters appealing for corporate and personal contributions.
An exempt organization's sale of advertising placed for the
purchaser's commercial benefit is a commercial activity. Goodwill
derived by the purchaser from being identified as a patron of the
organization is usually considered a form of commercial benefit.
Therefore, advertising in an exempt organization's publication is
generally presumed to be placed for the purchaser's commercial
benefit, even if it has no commercial message. However, this
presumption is not conclusive if the purchaser's patronage would be
difficult to justify commercially in view of the facts and
circumstances. In that case, other factors should also be considered
in determining whether a commercial benefit can be expected. Those
other factors include:
- The normal manner in which the publication is
circulated,
- The territorial scope of the circulation,
- The extent to which its readers, promoters, or the like
could reasonably be expected to further, either directly or
indirectly, the commercial interest of the advertisers,
- The eligibility of the publishing organization to receive
tax-deductible contributions, and
- The commercial or noncommercial methods used to solicit the
advertisers.
In this situation, the purchaser of a separate advertising space
without a commercial message can nevertheless expect a commercial
benefit from the goodwill derived from being identified in that manner
as a patron of the organization. However, the purchaser of a listing
cannot expect more than an inconsequential benefit. Therefore, the
sale of separate spaces, but not the listings, is an unrelated trade
or business.
Publishing legal notices.
A bar association publishes a legal journal containing opinions of
the county court, articles of professional interest to lawyers,
advertisements for products and services used by the legal profession,
and legal notices. The legal notices are published to satisfy state
laws requiring publication of notices in connection with legal
proceedings, such as the administration of estates and actions to
quiet title to real property. The state designated the bar
association's journal as the place to publish the required notices.
The publication of ordinary commercial advertising does not advance
the exempt purposes of the association even when published in a
periodical that contains material related to exempt purposes. Although
the advertising is directed specifically to members of the legal
profession, it is still commercial in nature and does not contribute
importantly to the exempt purposes of the association. Therefore, the
advertising income is unrelated trade or business income.
On the other hand, the publication of legal notices is
distinguishable from ordinary commercial advertising in that its
purpose is to inform the general public of significant legal events
rather than to stimulate demand for the products or services of an
advertiser. This promotes the common interests of the legal profession
and contributes importantly to the association's exempt purposes.
Therefore, the publishing of legal notices does not constitute an
unrelated trade or business.
Museum greeting card sales.
An art museum that exhibits modern art sells greeting cards that
display printed reproductions of selected works from other art
collections. Each card is imprinted with the name of the artist, the
title or subject matter of the work, the date or period of its
creation, if known, and the museum's name. The cards contain
appropriate greetings and are personalized on request.
The organization sells the cards in the shop it operates in the
museum and sells them at quantity discounts to retail stores. It also
sells them by mail order through a catalog that is advertised in
magazines and other publications throughout the year. As a result, a
large number of cards are sold at a significant profit.
The museum is exempt as an educational organization on the basis of
its ownership, maintenance, and exhibition for public viewing of works
of art. The sale of greeting cards with printed reproductions of
artworks contributes importantly to the achievement of the museum's
exempt educational purposes by enhancing public awareness, interest,
and appreciation of art. The cards may encourage more people to visit
the museum itself to share in its educational programs. The fact that
the cards are promoted and sold in a commercial manner at a profit and
in competition with commercial greeting card publishers does not alter
the fact that the activity is related to the museum's exempt purpose.
Therefore, these sales activities are not an unrelated trade or
business.
Museum shop.
An art museum maintained and operated for the exhibition of
American folk art operates a shop in the museum that sells:
- Reproductions of works in the museum's own
collection and reproductions of artistic works from the collections of
other art museums (prints suitable for framing, postcards, greeting
cards, and slides),
- Metal, wood, and ceramic copies of American folk
art objects from its own collection and similar copies of art objects
from other collections of artworks,.
- Instructional literature and scientific books and
souvenir items concerning the history and development of art and, in
particular, of American folk art, and
- Scientific books and souvenir items of the city
in which the museum is located.
The shop also rents originals or reproductions of paintings
contained in its collection. All of its reproductions are imprinted
with the name of the artist, the title or subject matter of the work
from which it is reproduced, and the museum's name.
Each line of merchandise must be considered separately to determine
if sales are related to the exempt purpose.
The sale and rental of reproductions and copies of works
from the museum's own collection and reproductions of artistic works
not owned by the museum contribute importantly to the achievement of
the museum's exempt educational purpose by making works of art
familiar to a broader segment of the public, thereby enhancing the
public's understanding and appreciation of art. The same is true for
the sale of literature relating to art. Therefore, these
sales activities are not an unrelated trade or business.
On the other hand, the sale of scientific books and souvenir
items of the city where the museum is located has no causal
relationship to art or to artistic endeavor and, therefore, does not
contribute importantly to the accomplishment of the museum's exempt
educational purposes. The fact that selling some of these items could,
under different circumstances, be held related to the exempt
educational purpose of some other exempt educational organization does
not change this conclusion. Additionally, the sale of these items does
not lose its identity as a trade or business merely because the museum
also sells articles which do contribute importantly to the
accomplishment of its exempt function. Therefore, these sales are an
unrelated trade or business.
Business league's parking and bus services.
A business league, whose purpose is to retain and stimulate trade
in a downtown area that has inadequate parking facilities, operates a
fringe parking lot and shuttle bus service. It also operates, as an
insubstantial part of its activities, a park and shop plan.
The fringe parking lot and shuttle bus service operate in a manner
that does not favor any individual or group of downtown merchants. The
merchants cannot offer free or discount parking or bus fares to their
customers.
The park and shop plan allows customers of particular merchants to
park free at certain parking lots in the area. Merchants participating
in this plan buy parking stamps, which they distribute to their
customers to use to pay for parking.
Operating the fringe parking lot and shuttle bus service provides
easy and convenient access to the downtown area and, therefore,
stimulates and improves business conditions in the downtown area
generally. That activity contributes importantly to the organization's
accomplishing its exempt purpose and is not an unrelated trade or
business.
The park and shop plan encourages customers to use a limited number
of participating member merchants in order to obtain free parking.
This provides a particular service to individual members of the
organization and does not further its exempt purpose. Therefore,
operating the park and shop plan is an unrelated trade or business.
Youth residence.
An exempt organization, whose purpose is to provide for the welfare
of young people, rents rooms primarily to people under age 25. The
residence units are operated on, and as a part of, the premises in
which the organization carries on the social, recreational, and
guidance programs for which it was recognized as exempt. The
facilities are under the management and supervision of trained career
professionals who provide residents with personal counseling, physical
education programs, and group recreational activities. The rentals are
not an unrelated trade or business because renting the rooms is
substantially related to the organization's exempt purpose.
Health club program.
An exempt charitable organization's purpose is to provide for the
welfare of young people. The organization conducts charitable
activities and maintains facilities that will contribute to the
physical, social, mental, and spiritual health of young people at
minimum or no cost to them. Nominal annual dues are charged for
membership in the organization and use of the facilities.
In addition, the organization organized a health club program that
its members could join for an annual fee in addition to the annual
dues. The annual fee is comparable to fees charged by similar local
commercial health clubs and is sufficiently high to restrict
participation in the program to a limited number of members of the
community.
The health club program is in addition to the general physical
fitness program of the organization. Operating this program does not
contribute importantly to the organization's accomplishing its exempt
purpose and, therefore, is an unrelated trade or business.
Miniature golf course.
An exempt youth welfare organization operates a miniature golf
course that is open to the general public. The course, which is
managed by salaried employees, is substantially similar to commercial
courses. The admission fees charged are comparable to fees of
commercial facilities and are designed to return a profit.
The operation of the miniature golf course in a commercial manner
does not contribute importantly to the accomplishment of the
organization's exempt purpose and, therefore, is an unrelated trade or
business.
Sales of hearing aids.
A tax-exempt hospital, whose primary activity is rehabilitation,
sells hearing aids to patients. This activity is an essential part of
the hospital's program to test and evaluate patients with hearing
deficiencies and contributes importantly to its exempt purpose. It is
not an unrelated trade or business.
Nonpatient laboratory testing.
Nonpatient laboratory testing performed by a tax-exempt teaching
hospital on specimens needed for the conduct of its teaching
activities is not an unrelated trade or business. However, laboratory
testing performed by a tax-exempt non-teaching hospital on referred
specimens from private office patients of staff physicians is an
unrelated trade or business if these services are otherwise available
in the community.
Selling endorsements.
An exempt scientific organization enjoys an excellent reputation in
the field of biological research. It exploits this reputation
regularly by selling endorsements of laboratory equipment to
manufacturers. Endorsing laboratory equipment does not contribute
importantly to the accomplishment of any purpose for which exemption
is granted to the organization. Accordingly, the sale of endorsements
is an unrelated trade or business.
Sponsoring entertainment events.
An exempt university has a regular faculty and a regularly enrolled
student body. During the school year, the university sponsors the
appearance of professional theater companies and symphony orchestras
that present drama and musical performances for the students and
faculty members. Members of the general public also are admitted. The
university advertises these performances and supervises advance ticket
sales at various places, including such university facilities as the
cafeteria and the university bookstore. Although the presentation of
the performances makes use of an intangible generated by the
university's exempt educational functions--the presence of the
student body and faculty--such drama and music events contribute
importantly to the overall educational and cultural functions of the
university. Therefore, the activity is not an unrelated trade or
business.
Previous| First | Next
Publication Index | IRS-Forms Main | Home
|