On the Record: All that Glitters Isn't Tax Exempt
While the goal of any good fundraiser is to raise funds, it’s important to know that not all gifts are created equal. For instance: An alum gives his cattle ranch to his college or a patron gives the controlling interest of her business to the local art museum. These gifts might be of great value, but they also might have unexpected income-tax consequences for the receiving organizations.
Even though an organization is exempt from federal income tax, that doesn’t mean it never pays income tax. If the college retains the ranch or the museum keeps controlling interest in the business, the income generated by the gifts most likely will be characterized as unrelated business taxable income. As a consequence, the college or museum will be subject to unrelated business income tax (UBIT) at the regular corporate or trust rate on income it receives from the ranch or business.
If an exempt organization receives a donation of a business interest or other income-producing asset and sells it, no UBIT issue should arise. However, a prompt sale might not always be possible. The market for a particular asset might be depressed, or the asset might have restrictions on how and even if it can be transferred.
What UBIT is
UBIT is income earned by an organization from a regularly carried-on business that is not substantially related to the organization’s exempt purpose. Just because the organization uses the profits from the business to fulfill its mission, that doesn’t make the business substantially related to the organization’s exempt purposes. For example, even though all of the profits from a museum’s gift shop are used to support the museum, different income-tax rules apply to various types of merchandise. The museum will not be subject to UBIT on income from the sale of items such as posters of museum paintings, but it will be subject to UBIT from the sale of items not specifically related to the museum, such as sunglasses, mugs and other gift items.
