Deborah Kosnett, a tax principal with experience advising non-profits, gave a presentation on unrelated business income tax (UBIT). She explained that while UBIT seems simple, covering trade or business regularly carried on that is unrelated to exempt purpose, there are many less obvious situations where it can apply, such as certain property rentals, services provided to members and non-members, web-based media, goods and products sales, facility operations, and more. She provided examples of activities that could trigger UBIT and exceptions that could apply to avoid taxation. The presentation aimed to help non-profits identify potential UBIT issues and take steps to structure operations to minimize unrelated taxable activities.

1. That's Not UBIT! . . . Is It?
presented by
Deborah G. Kosnett, CPA
Tate & Tryon, CPA’s, Washington, DC

2. Speaker Biography
Deborah G. Kosnett, CPA, is a Tax Principal with Tate &
Tryon, CPAs and Consultants, in Washington, DC, a firm
specializing solely in not-for-profit organizations. She has
nearly 25 years' experience as a tax advisor to not-for-profit
organizations throughout the country. Prior to joining Tate &
Tryon in 1999, Ms. Kosnett was a senior tax manager with
both KPMG and Ernst & Young in Washington, DC, where
she worked with numerous exempt organizations, as well as
not-for-profit hospitals and multi-entity health systems.
Ms. Kosnett is a frequent contributor to American Society of Association Executives
(ASAE) publications; her most recent article is "Need-to-Knows in the New 990,"
published in the January 2010 Associations Now Volunteer Leadership Issue. She
is also a regular presenter at conferences held by AICPA, ASAE, the Greater
Washington Society of CPAs, and the Finance and Administration Roundtable, and
is a co-author of ASAE's "Guide to the Newest Form 990.” Ms. Kosnett currently
serves on the AICPA's Exempt Organizations Technical Resource Panel, where
she assists with numerous initiatives, including the TRP's Form 990 Task Force.
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3. UBIT is Easy to Spot. Right??
We all know what UBIT is . . .
• A trade or business,
• Regularly carried on,
• That is not related to exempt purpose.
Seems pretty simple . . . magazine ads, etc.
Yes . . . but! There are other interesting
creatures out there in the UBIT universe.
Come along with me as we do some exploring!
I promise to get you home before dark . . .
Let’s GO!
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4. What’s Out There?
UBIT may be hiding in:
Property rentals
Services
Web and web-based media
Goods and products
Facilities operations
And more . . .
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5. Property Rental
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6. But Aren’t Rents Excluded??
Only for real property
UBI can arise when:
• Real property is leased with significant
personal property
• Rents are entirely from personal property
• Rents are based on income or profits
• Services are rendered
• Property is debt-financed (UDFI)
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7. More on the UDFI Rules
Applies to “property” . . .
• Held to produce income
• With acquisition indebtedness
• Use of which is not “substantially related” to the
organization’s exempt purpose
Taxed to the extent of indebtedness:
• Income stream
• Capital gains
UDFI rules do not trump UBI rules!
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8. Services
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9. The Wide World of Services
Accounting and administration
Special projects
• Being a “consultant,” not a “librarian”
Mediation and arbitration
Data processing
Pathology and lab work
Speakers’ bureau
Language translation
Catering
Printing and mailing
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10. Particular Services
Unique to membership associations
Benefits purchaser over industry
Particular service?
• Does the activity provide an industry-wide benefit?
- Require cooperative effort and/or sharing of expense?
- Provide intangible, indirect benefit?
• To whom do benefits flow?
- Members and nonmembers equally?
- Members more than nonmembers?
- No benefit to nonmembers?
But there may be an exception . . .
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11. “Best Practice” Documents
TAXABLE EXCEPTED
Standard documents: “Gold standard” docs:
• “Boilerplate” contracts • Preprinted lease forms &
• Merely a convenience • Landlord’s manual
• Not markedly different from • Used in educational and
commercially-available legislative programs
Where goods and services are “…the educational benefits
available on the open market, from TAA's dissemination of its
“a trade association need not updated materials improved
provide [them] to accomplish management practices in
an exempt purpose.” Texas.”
-Illinois Ass’n of Pro’s Ins Agents v. Comr., -Texas Apartment Assn v. U.S., 869 F.2d
801 F.2d 987 (7th Cir. 1986) 884 (5th Cir. 1989)
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12. Web and Web-
Based Media
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13. Ads, Trade Shows, and More
Banner and pop-up advertising
Web-based periodicals
E-mail and web-based newsletters
“Virtual” trade shows
Job boards
Databases
Business – to – business sites
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14. Goods and
Products
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15. Goods and Products . . .
Insurance
Pharmaceutical supplies
Standard forms and agreements
Housing
Affinity products
By-products of exempt function
Even . . . cattle!
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16. Facilities
Operations
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17. Operation of . . .
Cafeterias, cafes, snack bars
Shops and stores
Stadiums, arenas, and theatres
Health clubs, recreational facilities
Storage facilities
Parking garages
Orchards and farms
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18. And More . .
(the really WEIRD stuff!)
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19. Exotic UBI Specimens
Income from partnerships/LLPs
Securities purchased on margin
“Cash out” refi investments
Travel tours
Associate member dues (rare)
Certification activities of §501(c)(3)s
501(c)(7), (9), (17) and (20) – special rules
Drug testing
Mailing lists!
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20. And One Other Thing . . .
The dreaded “commerciality doctrine!”
“I often tell my Nonprofit Law students that the
Commerciality Doctrine is like a “bludger” in a game of
quiddich . . . The bludger is a small, hard ball that flies
through the air knocking quiddich players off their
broomsticks when they are concentrating on other
aspects of the game . . The bludger produces anxiety
in players because it is utterly unpredictable. No one
knows when it will strike and what kind of damage it
will cause.”
-- Thomas A. Kelley III, Professor of Law, UNC School of Law
“Nonprofit Law Prof Blog”
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21. The Commerciality Doctrine
Reins in charities operating in a
“commercial manner”
Limits supposed “unfair competition”
with for-profit sector
Fabricated entirely by case law
Is unevenly applied:
• Hospitals and educational institutions
frequently have a “commercial hue”
Focuses on “means” rather than “ends”
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22. Commerciality Factors
Competition with for-profit sector
Generation and accumulation of profits
Market-rate pricing
“For-profit” business and marketing
practices
“Customer” base – general public vs.
other charities
Lack of donative support
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23. How Can I Make it
“Not UBIT?”
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24. The Original Exceptions
Not regularly carried on!
The 1950 exceptions:
• “Volunteer” exception
• “Convenience” exception
• “Donation” exception
More than one can apply
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25. Other Common Exceptions
Qualified public entertainment
Qualified convention/trade show
Certain hospital services
Noncommercial bingo games
Distribution of low-cost
articles/solicitation
Exchange/rental of certain membership
lists
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26. Other Common Exceptions
Qualified sponsorship payments
Certain research activities
Activities consistently losing money
Dividends, interest, rents, royalties, etc.
• But may be taxable if from controlled orgs
(§512(b)(13))
Certain exceptions applying to social
clubs and VEBAs
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27. Property Rental
Keep personal property rentals to a
minimum
Lease your garage to a commercial
enterprise
Eschew income- or profit-based rents
Leave catering and other services to
lessees
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28. Debt-Financed Income
Unrelated use not more than 15%
Elimination of debt (“year and a day” rule for
capital gains)
Certain UBI exceptions and exclusions apply:
• Property used for research & excluded under §512(b)(7),
(8) or (9)
• The “volunteer,” convenience,” and “donation” exceptions
• Property used by a “related” org for exempt purposes
Why only these exceptions, and not all of them?
• (Hint: it has nothing to do with an exclusion’s merits)
The “neighborhood land rule”
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29. Services
Let a 3rd party operate
• Especially for potential “particular services”
• Try to avoid “agency” relationship
• Lease name/logo/mail list and nothing else
Try to meet “volunteer,” “convenience”
exceptions
Services to related EOs may escape UBI
Be a “librarian;” avoid private projects
Minimize/eliminate services in affinity contracts
Make lessees provide their own services
• Catering, music, security
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30. Web and Web-Based Media
Job board: 3rd party operation
• Consider a disclaimer: “All services offered on this
page are products of JobsNow, LLC, and are not
offered by the ABC Association”
Frame potential ads as “acknowledgements”
• Does not work for “periodicals” – online magazines,
e-newsletters
“Related” web costs usually -0- out tax
Limit “virtual” trade shows – time and/or ad
content
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31. Goods and Products
As with services:
• Let a 3rd party do the selling
- Try to avoid “agency” relationship
- Lease name/logo/mail list and nothing else
Try to utilize “volunteer” and “donation”
exceptions
Qualified trade show – permits sales and
order-taking
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32. Facilities Operations
Use “convenience,” “volunteer,” and
“donation” exceptions where possible
Offer space rental but no additional
services
Make items sold relate to purpose
Let a 3rd party operate
• Avoid income or profit-based rents
Be aware of “dual use” rules
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33. “Commerciality” Avoidance
Charities relying heavily on goods and
services revenue:
• Periodically revisit pricing policies
• Adjust advertising budgets
• Boost charitable fundraising
Large-scale operations: taxable
subsidiary may be an option
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