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The University sells advertising in multiple ways, including commercial ads in the student newspaper, professional journals, and athletic programs, and sponsorship agreements for using and displaying the company's product. As a general rule, advertising income is UBTI. Advertising is given a fairly broad definition as slogans, trademarks, logos, and other information similar to listings in professional journals, newspapers, and the yellow pages. Income from ads on an organization's facility wall space was also held to be UBIT from advertising.
To be advertising, a trade or business must exist, and is present when the advertising activity or the sale of the publication is generally profitable. When one or both activities are operated at a loss year after year, it can be argued there is no profit motive and no trade or business. In addition, such business must be regularly carried on, meaning the ad is part of a journal, newspaper, or similar periodical published on a regular basis.
The following are a few exceptions to the usual UBTI determination. In Reg. § 1.513-1(d)(4)(iv), Ex 5 – An exempt university provides facilities, instruction, and faculty supervision for the student-operated campus newspaper. The newspaper also contains paid advertising, which is solicited, sold and published by students. However, there is no UBTI as this advertising contributes importantly to the university's educational program through student training. The same would be true if the newspaper were published by a separate section 501(c)(3) organization, if qualified under university rules for recognition of student activities, even if the organization uses its own facilities and is not under faculty supervision. It would have to perform its function by means of student instruction and participation in editorial and advertising activities. Under TAM 199914035, a 501(c)(3) organization that was separately incorporated but had a close working relationship with the university published a university's daily student newspaper. The university had donated office space where the department of journalism was located. Students and faculty members comprised the board of directors, and students conducted the reporting and writing functions of the paper. The business functions were conducted by 17 students and 10 non-students. It was held the ad income was still substantially related, but this is a "safe-harbor" and not a bright line test. (Top)
Under the test for UBTI, one prong is whether the activity is conducted for the primary purpose of generating income/profit. The IRS and Tax Courts have adopted a facts-and-circumstances test to answer this question. It should be noted that while many universities have used the argument of an activity with a history of consistent losses not being conducted for the primary purpose of generating income or profit, and hence not being an unrelated business activity, the IRS has used this to disallow claimed loss deductions for allegedly unrelated business activities. Such history should be determined on an activity by activity basis.
In National Water Well Association v. IRS, the court held a contractual right to receive commissions or fees is not necessary to find a profit motive; such can be inferred from the objective facts that the petitioner was extensively involved in endorsing and administering a program that proved highly profitable for the petitioner. In PLR 8846002, a 501(c)(3) organization's primary activity consisted of providing public television broadcasting to a particular region of the US. It rented certain facilities to the general public, including studio space and equipment. It reported a large loss from this activity, due to accelerated depreciation and administrative costs, and argued its losses have substantially decreased over the years and it has always had a profit motive in this activity. The IRS held a series of consistent losses is relative, but not the only factor. The loss this year could be attributable to factors such as the depreciation, which will not be present in future years. Its pricing was competitive, and it conducted this activity in a businesslike manner. The rentals are more than incidental and there is repeat business. The organization was subject to UBIT. In PLR 8428008, a 501(c)(5) organization provided qualified officer personnel and maintained an office for the provision of insurance to union members. For three years the organization sustained a loss and in the fourth year the agreement was changed, giving the organization its first profit. The IRS found a profit motive based upon the following reasons: the organization was not independently negotiating contracts that produced losses, increasing volume was a factor in reaching a break-even point, the organization made a profit in the last year, and the losses under the contracts were decreasing every year. Finally, in TAM 8508004, X operated a clubhouse for its members and guests. It consistently suffered substantial losses from all of its activities with nonmembers and sales to nonmembers were at prices insufficient to recover the cost of sales. There was not a profit motive and X may not use these sales to deduct against other income. (Top)
This occurs when an university earns income from admissions to athletic events or from the sale of television and broadcast rights. HR Report No. 2319 states income from admission charges is not UBTI because athletic activities are substantially related to a university's educational purpose. In the following PLR and Rev. Ruling, the IRS held income from the sale of radio or television rights are likewise not UBTI because these are other methods of exhibiting the game to the public. In PLR 7948113, the IRS ruled the gift of the rights, title, and interest in the operation, production and exhibition of an all-star college football game played by a university to an exempt organization which supported the university would not endanger the organization's exempt status. In addition, an agreement with another entity to broadcast the game for profit would not generate UBTI. In Rev. Ruling 80-296, the sale of broadcasting rights to a national radio and television network by an organization created by a regional collegiate athletic conference made up of universities to hold an athletic event was not UBIT. Finally, in PLR 200151047, the IRS ruled income from video production and satellite uplink services provided by a exempt public broadcasting corporation to a noncommercial television network, and income from educational programming services provided to a commercial television station, was not UBTI. (Top)
The IRS breaks down this area into two categories:
Situation 1 -- University leases bookstore facilities to a for-profit company and receives rental income. A question is raised as to whether the relationship is a bona fide lease, with payments received qualifying for a rental income exclusion, or the for-profit company is simply acting as an agent in return for a management fee.
Situation 2 -- University retains a for-profit company to manage under a management contract, or University operates the bookstore itself or arranges for operation by a separate, nonprofit entity controlled by the University. Under this category, all bookstore sales are UBIT, unless the sale is either
- i. A sale to students, faculty and other ees of items directly related to the school's educational purposes (i.e. books, general supplies) and athletic wear used in the athletic and physical education programs or
ii. A sale of noneducational items for the convenience of students and faculty, and other employees (not alumni). This is determined by a convenience test with two requirements – the item should be of recurrent demand because of day-to-day campus living, like toiletries, and the item should not have a useful life of more than one year. The IRS goes by a general rule that any noneducational item with a useful life of more than one year does not fall within the exception, except for clothing, and novelty and other items embossed with the school's logo.
There are a few additional considerations. The sale terms might affect the convenience test. For example, if a refrigerator or television set is leased on a short-term basis, it is considered for convenience. In addition, while the sale of one computer to a student/faculty member may be considered exempt, the sale of multiple computers to a single student or the sale of a computer to someone not enrolled may be UBTI. (Top)
This arises when an university provides its own catering services for the following: (1) university or affiliated group sponsored events; (2) university department invitation to a nonaffiliated group; (3) university permission for a nonaffiliated group to use the dining facilities in connection with a meeting; (4) university caters wedding receptions, graduation and birthday parties, or private parties for senior officials; (5) catering department of university advertises to the general public for catering services. Under Rev. Ruling 81-69, a social club that sells food and beverages to non-members at prices insufficient to recover the costs may not deduct losses from its other UBTI because the activity is not profit motivated. Under PLR 8020010 university-held functions requiring the use of the facilities, including alumni dinners and class reunions, are not UBIT because these activities kept the alumni abreast of current development on campus and as such, the catering for these events was a related activity. (Top)