The tax on unrelated business income applies to most organizations
exempt from tax under section 501(a). These organizations include
charitable, religious, scientific, and other organizations described
in section 501(c), as well as employees' trusts forming part of
pension, profit-sharing, and stock bonus plans described in section
401(a).
In addition, the following are subject to the tax on unrelated
business income.
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Individual retirement arrangements (IRAs), including
traditional IRAs, Roth IRAs, education IRAs, simplified employee
pensions (SEP-IRAs), and savings incentive match plans for employees
(SIMPLE IRAs).
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State and municipal colleges and universities.
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Qualified state tuition programs.
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Medical savings accounts (MSAs) described in section
220(d).
U.S. instrumentalities.
A corporation that is a U.S. instrumentality described in section
501(c)(1) is not subject to the tax on unrelated business income. This
exception applies if the corporation is organized under an Act of
Congress and, under the Act, is exempt from federal income taxes.
Colleges and universities.
Colleges and universities that are agencies or instrumentalities of
any government or any political subdivision of a government, or that
are owned or operated by a government or political subdivision of a
government, are subject to the tax on unrelated business income. As
used here, the word government includes any foreign
government (to the extent not contrary to a treaty) and all domestic
governments (the United States and any of its possessions, any state,
and the District of Columbia).
The tax is on the unrelated business income of both the
universities and colleges themselves and on their wholly owned
subsidiary organizations that are tax exempt. It is immaterial whether
the business is conducted by the university or by a separately
incorporated wholly owned subsidiary. If the business activity is
unrelated, the income in both instances will be subject to the tax. If
the primary purpose of a wholly owned subsidiary is to operate or
carry on any unrelated trade or business (other than holding title to
property and collecting income from it), the subsidiary is not an
exempt organization and this rule does not apply.
Title-holding corporations.
When an exempt title-holding corporation, described in section
501(c)(2), pays any of its net income to an organization that itself
is exempt from tax under section 501(a) (or would pay such an amount
except that the expenses of collecting its income exceed the amount
collected) and files a consolidated return with that organization, the
title-holding corporation is treated, for unrelated business income
tax purposes, as organized and operated for the same purposes as the
exempt payee organization.
Thus, a title-holding corporation whose source of income is related
to the exempt purposes of the payee organization is not subject to the
unrelated business income tax if the holding corporation and the payee
organization file a consolidated return. However, if the source of the
income is not so related, the title-holding corporation is subject to
unrelated business income tax.
Example.
X, a title-holding corporation, is required to distribute its net
income to A, an exempt organization. During the tax year, X realizes
net income of $900,000 from source M, which is related to A's exempt
function. X also receives $100,000 from source N, which is not related
to A's exempt function. X and A file a consolidated return for the tax
year. X has unrelated business income of $100,000.
