On the Record: All that Glitters Isn't Tax Exempt
What UBIT is not
Numerous exceptions to the basic UBIT rule exist. The most common are:
- a business conducted substantially by volunteers, such as a PTA conducting a bake sale;
- a business conducted by a 501(c)(3) organization, such as a college or university, primarily for the convenience of its members, students, patients, officers or employees (a laundry service conducted by a university, for example); and
- an organization selling merchandise that has been donated for the purpose of sale (such as a school-operated thrift store or a bingo event).
All gains from the sale, exchange or other disposition of property other than inventory and property held primarily for sale to customers in the ordinary course of trade or business is not subject to UBIT. Consequently, the sale by an exempt organization of its investment portfolio is exempt from the tax.
Rental income received by an exempt organization from real property is exempt from UBIT. However, rental income from personal property is subject to the tax. Therefore, if a donor gives a vacant lot to the church next door and the church rents the real property to a third party, the rental income is not subject to UBIT. If a lease includes both personal property and real property, the amount of the rental income that could be subject to UBIT would be determined on a sliding scale tied to how the rental income is allocated between the personal and real property(3).
UBIT vs. CRUT
Charitable Remainder Unitrusts, which we discussed in our last column, are especially affected by the UBIT rules. In Newhall Unitrust v. Commissioner, 104 TC 236 (1995), the CRUT received unrelated business income from three of its investments. The U.S. Tax Court ruled that if a CRUT receives any amount of unrelated business income, the CRUT’s entire income for the year is subject to UBIT.
