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This occurs when non-profit organization utilizes the Internet for fundraising or advertising purposes. The rulings in this area are not as developed as other areas concerning UBTI. The 2002 Tax Exempt Organizations and World Wide Web Fundraising and Advertising on the Internet, Training Manual for Field Agents states that use of the Internet to accomplish a particular task does not change how the tax laws apply to that task, but it can change the manner in which the tasks are accomplished, affecting the resulting tax treatment. Use of a hypertext link in a message that otherwise meets the corporate sponsorship guidelines will retain the passive character of a corporate sponsorship while a moving banner is more likely to be considered advertising. A distinction is drawn between periodicals and most online content except where the organization has online editions and print publications that are sufficiently segregated from other traditional Website materials.
In PLR 200225046, a 501(c)(3) educational incorporated N as a for-profit corporation with the same mailing address as a wholly owned subsidiary of the organization. The organization entered into licensing agreements with N, and N delivered products and services to business professionals through an Internet vertical portal. The license granted was non-exclusive, non-transferable, and non-sublicensable, except N had an exclusive North American license to use the organization's trademarks, logos, trade dress, and domain name for the purpose of hosting or sponsoring a website on the Internet. The organization established standards and guidelines relating to permitted use, depiction, and display or licensed marks and content and quality control procedures. The two parties also entered into an advertising agreement whereby N agreed to give the organization banner advertising space on the website and in consideration for such, the organization would provide N advertising in its periodicals and publications. The organization would report any additional revenue from N as UBTI. The IRS held income from the licensing agreement was to be considered royalties and income from the ads should be UBTI. Similarly, in PLR 200303062 a 501(c)(5) organization was committed to the advancement and prosperity of agriculture. It regularly published news publications, and accepted advertising, treating it as UBTI. M had membership benefits through other service providers, and provided information in brochures and on its website about these companies. It simply listed the service provider on its webpage and provides benefit information. It did not encourage the use of such benefits nor provide a link to the service provider's website. The organization did not accept advertising from the service providers for its website, although it did for other periodicals. Some of these service providers also sponsored activities, and the organization asked for permission to acknowledge the sponsors on the website with links to the main corporate page of the sponsors' websites without recognition of UBTI. The IRS held the information listing of service providers does not generate UBTI. Any website advertising that is offered in addition to periodical advertising has some separate value and may or may not have to be included in the computation of periodical advertising. As long as the corporate sponsorship listings and links can be categorized as an acknowledgement, rather than an advertisement, such would not generate UBIT.
Finally, in Rev. Ruling 2004-112 – Two examples are given and a distinction is drawn:
- a. A trade association exempt under 501(c)(6) maintains an information website about its trade shows. In conjunction with its semi-annual trade show, it adds a section enhancing the trade show by allowing members and the public to access information. This section is available during the 10 day trade show, and during a 3 day period prior to and a 3 day period after the trade show. The IRS held the activities conducted on the supplementary website section during the 16 day period that coincides with the trade show meet the requirements of a qualified convention and trade show activity and therefore do not generate UBIT.
b. A similar trade association establishes an Internet site available to the general public 24 hours a day, 7 days a week for a 2 week period. The 2 week period does not overlap or coincide with any international, national, state, regional, or local convention, annual meeting or show. The IRS held the Internet activities are not carried on in conjunction with or enhancing any convention, meeting, or trade show. Therefore the operation of the website, even for a short period of time, is an unrelated trade or business. (Top)
This issue arises when a school has excess parking spaces available and leases these spaces to local businesses or members of the general public. Such operations were a key concern, shown by legislative history, and the resulting Regulations hold a strong position in favor of treating revenue from such leases as UBTI. Because of inconsistent previous rulings a 1990 GCM was issued to make the IRS's position clear, and it stated the following:
- a. A tax-exempt organization that engages in the operation of a parking lot for unrelated use will never qualify for the rental income exclusion because of the Regulation's strong statements tracking the legislative history.
b. A tax-exempt organization that "net leases" the parking lot to a third party lot operator can qualify for the rental income exclusion, if the organization provides only minimal services as part of the arrangement.
The IRS has also held parking lot income is exempt under the convenience exception, but only in the context of income generated from students, faculty, and staff, not outside public or visitors. (Top)
IRS §512 requires an exempt organization to include in its UBTI its share of the gross income from any activity conducted by a partnership that would not be a related activity if the organization conducted the activity itself. Any income included under this section is still subject to the other UBTI modifications. In addition, the Tax Court has held there is no distinction drawn by the status between a general and a limited partnership interest. Finally, the IRS issued a major ruling in 1998 that set forth guidelines on the extent to which a tax-exempt organization can enter into a partnership with a for-profit entity. In such the IRS requires the tax-exempt organization to be in control of the partnership, and failure to meet this requirement can result in loss of 501(c)(3) status. In public presentations IRS officials have stated if the partnership arrangement violates the control requirement, but the facts are insufficient to support loss of the status, partnership distributions will be treated as UBTI. (Top)
This situation arises when an university sponsors a professional performance involving paid entertainers, not students. Such events are related to a school's educational purposes only if "operated primarily as an integral part of the educational program of the university, but unrelated if operated in substantially the same manner as a commercial operation." In a 1991 TAM and GCM, the IRS set forth factors used to distinguish between related and unrelated events. In these, a state university owned and operated an auditorium at which many related activities were conducted, including registration, athletic events, and commencement. The university also held 45 different "ticket events" in the facility, including performances by rock bands, contemporary professional entertainers, and professional boxing matches and basketball games. In its analysis, the IRS listed the following nonexempt factors:
- a. General public fees are comparable to those charged by commercial facilities.
b. Only those who purchase the goods/services benefit from the activity in direct proportion to the fees charged.
c. The organization's own employees perform substantial services and the organization furnishes the facilities.
d. The organization's reputation as an educational institution is secondary, if even a factor, in attracting attendees.
e. The predominant motivation underlying the organization's conduct of the activities is revenue maximization.
The following was of great importance in the IRS concluding the ticket events generated UBIT:
- a. A director with more than 30 years experience in promoting commercial events managed the facility.
b. The fine arts department of the university had no involvement in the selection of events or their presentation.
c. During the year, more than 25% of the tickets were sold off-campus.
d. No pricing discrimination existed between students and the general public, and students received discounts on only 3 occasions. No records were maintained distinguishing between student sales and general public sales.
e. The events were indistinguishable from similar commercial events in price or type of performance.
f. Entertainers received the same pay as they would have at a for-profit facility, under university negotiations.
g. The university and the entertainer jointly negotiated the ticket price.
h. Tickets were sold through a commercial ticket service.
i. The university included in its standard contract a non-compete clause forbidding artists from performing within a 75-mile radius of the university 60 days before or after the performance.
The IRS further stated the focus is on the manner in which a university decides to secure performers and the business considerations used as the decision foundations. The emphasis on revenue maximization to the exclusion of other factors indicates the trade or business is not operated as an integral part of educational programs.
This issue also involves the fragmentation rule. Although all 45 events were grouped together in this analysis, the question is unanswered whether the IRS would do the same in the future or instead view each activity as separate. The concern here is events that are unprofitable will be viewed as related and events that generate a profit will be classified as unrelated, thus leaving no losses to offsets the gains of unrelated business income. (Top)
This issue usually arises where an organization's sole or primary activity is publication. Colleges and universities usually do not have to worry about this area because they meet the four part test below. The four part test to determine whether an organization's publication activities are educational based on the facts and circumstances is as follows:
- a. The publication content is educational in nature.
b. The material preparation follows methods generally thought to be educational in character.
c. The material distribution is necessary or valuable in achieving the organization's educational purpose.
d. The distribution manner is distinguishable from ordinary commercial publishing practices.
In example, the IRS has held the publication and sale of foreign-language books and a scholarly magazine by a university were substantially related to its exempt purpose, and the publication of a bimonthly journal containing scholarly business articles by the business administration department of a university was substantially related.
However, the 1999 IRS Training Manual Textbook stated a university press may generate UBTI if it publishes a large number of different books each year, has more than a nominal per-book press run, and pay normal commercial royalties to authors. (Top)