Example 2.
A volunteer fire company conducts weekly public dances. Holding
public dances and charging admission on a regular basis may, given the
facts and circumstances of a particular case, be considered an
unrelated trade or business. However, because the work at the dances
is performed by unpaid volunteers, the activity is not an unrelated
trade or business.
Convenience of members.
A trade or business carried on by a 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 an
unrelated trade or business. For example, a laundry operated by a
college for the purpose of laundering dormitory linens and students'
clothing is not an unrelated trade or business.
Qualified sponsorship activities.
Soliciting and receiving qualified sponsorship payments is not an
unrelated trade or business, and the payments are not subject to
unrelated business income tax.
Qualified sponsorship payment.
This is any payment made by a person engaged in a trade or business
for which the person will receive no substantial benefit other than
the use or acknowledgment of the business name, logo, or product lines
in connection with the organization's activities. Use or
acknowledgment does not include advertising the sponsor's products
or services. The organization's activities include all its activities,
whether or not related to its exempt purposes.
For example, if, in return for receiving a sponsorship payment, an
organization promises to use the sponsor's name or logo in
acknowledging the sponsor's support for an educational or fundraising
event, the payment is a qualified sponsorship payment and is not
subject to the unrelated business income tax.
Providing facilities, services, or other privileges (for example,
complimentary tickets, pro-am playing spots in golf tournaments, or
receptions for major donors) to a sponsor or the sponsor's designees
in connection with a sponsorship payment does not affect whether the
payment is a qualified sponsorship payment. Instead, providing these
goods or services is treated as a separate transaction in determining
whether the organization has unrelated business income from the event.
Generally, if the services or facilities are not a substantial benefit
or if providing them is a related business activity, the payments will
not be subject to the unrelated business income tax.
Similarly, the sponsor's receipt of a license to use an intangible
asset (for example, a trademark, logo, or designation) of the
organization is treated as separate from the qualified sponsorship
transaction in determining whether the organization has unrelated
business taxable income.
If part of a payment would be a qualified sponsorship payment if
paid separately, that part is treated as a separate payment. For
example, if a sponsorship payment entitles the sponsor to both product
advertising and the use or acknowledgment of the sponsor's name or
logo by the organization, then the unrelated business income tax does
not apply to the part of the payment that is more than the fair market
value of the product advertising.
Advertising.
A payment is not a qualified sponsorship payment if, in return, the
organization advertises the sponsor's products or services. For
information on the treatment of payments for advertising, see
Exploitation of Exempt Activity - Advertising Sales
in chapter 4.
Advertising includes:
- Messages containing qualitative or comparative language,
price information, or other indications of savings or value,
- Endorsements, and
- Inducements to purchase, sell, or use the products or
services.
The use of promotional logos or slogans that are an established
part of the sponsor's identity is not, by itself, advertising. In
addition, mere distribution or display of a sponsor's product by the
organization to the public at a sponsored event, whether for free or
for remuneration, is considered use or acknowledgment of the product
rather than advertising.
Exception for contingent payments.
A payment is not a qualified sponsorship payment if its amount is
contingent, by contract or otherwise, upon the level of attendance at
one or more events, broadcast ratings, or other factors indicating the
degree of public exposure to one or more events. However, the fact
that a sponsorship payment is contingent upon an event actually taking
place or being broadcast does not, by itself, affect whether a payment
qualifies.
Exception for periodicals.
A payment is not a qualified sponsorship payment if it entitles the
payer to the use or acknowledgment of the business name, logo, or
product lines in the organization's periodical. For this purpose, a
periodical is any regularly scheduled and printed material (for
example, a monthly journal) published by or on behalf of the
organization. It does not include material that is related to and
primarily distributed in connection with a specific event conducted by
the organization (for example, a program or brochure distributed at a
sponsored event).
The treatment of payments that entitle the payer to the depiction
of the payer's name, logo, or products lines in an organization's
periodical is determined under the rules that apply to advertising
activities. See Sales of advertising space under
Examples, earlier in this chapter. Also see
Exploitation of Exempt Activity - Advertising Sales
in chapter 4.
Exception for conventions and trade shows.
A payment is not a qualified sponsorship payment if it is made in
connection with any qualified convention or trade show activity. The
exclusion of qualified convention or trade show activities from the
definition of unrelated trade or business is explained later under
Convention or trade show activity.
Selling donated merchandise.
A trade or business that consists of selling merchandise,
substantially all of which the organization received as gifts or
contributions, is not an unrelated trade or business. For example, a
thrift shop operated by a tax-exempt organization that sells donated
clothes and books to the general public, with the proceeds going to
the exempt organization, is not an unrelated trade or business.
Employee association sales.
The sale of certain items by a local association of employees
described in section 501(c)(4), organized before May 17, 1969, is not
an unrelated trade or business if the items are sold for the
convenience of the association's members at their usual place of
employment. This exclusion applies only to the sale of work-related
clothes and equipment and items normally sold through vending
machines, food dispensing facilities, or by snack bars.
Bingo games.
Certain bingo games are not included in the term unrelated trade
or business. To qualify for this exclusion, the bingo game must
meet the following requirements.
- It meets the legal definition of bingo.
- It is legal where it is played.
- It is played in a jurisdiction where bingo games are not
regularly carried on by for-profit organizations.
Legal definition.
For a game to meet the legal definition of bingo, wagers must be
placed, winners must be determined, and prizes or other property must
be distributed in the presence of all persons placing wagers in that
game.
A wagering game that does not meet the legal definition of bingo
does not qualify for the exclusion, regardless of its name. For
example, instant bingo, in which a player buys a pre-packaged
bingo card with pull-tabs that the player removes to determine if he
or she is a winner, does not qualify.
Legal where played.
This exclusion applies only if bingo is legal under the laws of the
jurisdiction where it is conducted. The fact that a jurisdiction's law
that prohibits bingo is rarely enforced or is widely disregarded does
not make the conduct of bingo legal for this purpose.
No for-profit games where played.
This exclusion applies only if for-profit organizations cannot
regularly carry on bingo games in any part of the same jurisdiction.
Jurisdiction is normally the entire state; however, in certain
situations, local jurisdiction will control.
Example.
Tax-exempt organizations X and Y are organized under the laws of
state N, which has a law that permits exempt organizations to conduct
bingo games. In addition, for-profit organizations are permitted to
conduct bingo games in city S, a resort community located in county R.
Several for-profit organizations conduct nightly games. Y conducts
weekly bingo games in city S, while X conducts weekly games in county
R. Since state law confines the for-profit organizations to city S,
local jurisdiction controls. Y's bingo games conducted in city S are
an unrelated trade or business. However, X's bingo games conducted in
county R outside of city S are not an unrelated trade or business.
Gambling activities other than bingo.
Any game of chance conducted by an exempt organization in North
Dakota is not an unrelated trade or business if conducting the game
does not violate any state or local law.
Pole rentals.
The term unrelated trade or business does not include qualified
pole rentals by a mutual or cooperative telephone or electric
company described in section 501(c)(12). A qualified pole rental
is the rental of a pole (or other structure used to support wires) if
the pole (or other structure) is used:
- By the telephone or electric company to support one or more
wires that the company uses in providing telephone or electric
services to its members, and
- According to the rental, to support one or more wires (in
addition to the wires described in (1)) for use in connection with the
transmission by wire of electricity or of telephone or other
communications.
For this purpose, the term rental includes any sale of the
right to use the pole (or other structure).
Distribution of low cost articles.
The term unrelated trade or business does not include activities
relating to the distribution of low cost articles incidental to
soliciting charitable contributions. This applies to organizations
described in section 501 that are eligible to receive charitable
contributions.
A distribution is considered incidental to the solicitation of a
charitable contribution if:
- The recipient did not request the distribution,
- The distribution is made without the express consent of the
recipient, and
- The article is accompanied by a request for a charitable
contribution to the organization and a statement that the recipient
may keep the low cost article regardless of whether a contribution is
made.
An article is considered low cost if the cost of an item (or the
aggregate costs if more than one item) distributed to a single
recipient in a tax year is not more than $5, indexed annually for
inflation. The maximum cost of a low cost article is $7.40, for 2000.
The cost of an article is the cost to the organization that
distributes the item or on whose behalf it is distributed.
Exchange or rental of member lists.
The exchange or rental of member or donor lists between
organizations described in section 501 that are eligible to receive
charitable contributions is not included in the term unrelated trade
or business.
Hospital services.
The providing of certain services at or below cost by an exempt
hospital to other exempt hospitals that have facilities for 100 or
fewer inpatients is not an unrelated trade or business. This exclusion
applies only to services described in section 501(e)(1)(A).
Public entertainment activity.
An unrelated trade or business does not include a qualified
public entertainment activity. A public entertainment activity
is one traditionally conducted at a fair or exposition promoting
agriculture and education, including any activity whose purpose is
designed to attract the public to fairs or expositions or to promote
the breeding of animals or the development of products or equipment.
A qualified public entertainment activity is one
conducted by a qualifying organization:
- In conjunction with an international, national, state,
regional, or local fair or exposition,
- In accordance with state law that permits the activity to be
operated or conducted solely by such an organization or by an agency,
instrumentality, or political subdivision of the state, or
- In accordance with state law that permits an organization to
be granted a license to conduct an activity for not more than 20 days
on paying the state a lower percentage of the revenue from the
activity than the state charges nonqualifying organizations that hold
similar activities.
For these purposes, a qualifying organization is an
organization described in section 501(c)(3), 501(c)(4), or 501(c)(5)
that regularly conducts an agricultural and educational fair or
exposition as one of its substantial exempt purposes. Its conducting
qualified public entertainment activities will not affect
determination of its exempt status.
Convention or trade show activity.
An unrelated trade or business does not include qualified
convention or trade show activities conducted at a convention,
annual meeting, or trade show.
A qualified convention or trade show activity is any
activity of a kind traditionally carried on by a qualifying
organization in conjunction with an international, national,
state, regional, or local convention, annual meeting, or show if:
- One of the purposes of the organization in sponsoring the
activity is promoting and stimulating interest in, and demand for, the
products and services of that industry or educating the persons in
attendance regarding new products and services or new rules and
regulations affecting the industry, and
- The show is designed to achieve its purpose through the
character of the exhibits and the extent of the industry products that
are displayed.
For these purposes, a qualifying organization is one
described in section 501(c)(3), 501(c)(4), 501(c)(5), or 501(c)(6).
The organization must regularly conduct, as one of its substantial
exempt purposes, a qualified convention or trade show activity.
The rental of display space to exhibitors (including exhibitors who
are suppliers) at a qualified convention or trade show is not an
unrelated trade or business even if the exhibitors who rent the space
are permitted to sell or solicit orders. For this purpose, a
supplier's exhibit is one in which the exhibitor displays goods or
services that are supplied to, rather than by, members of the
qualifying organization in the conduct of these members' own trades or
businesses.
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