1. Unrelated Business Income Tax aka ~ UBIT
INTRO
ASK QUESTIONS AT ANY TIME DURING THE SESSION
Dave McGarry
Associate Controller,
Financial Reporting & Cost Accounting
Controller’s Office

2. Overview UBIT Background IRS Definition Exclusions from UBIT
Problem Areas
Selected Examples
Controller’s Office

3. UBIT Background Congressional Legislation - 1950 Revenue Act of 1951
Goal was to eliminate unfair competition
Revenue Act of 1951
Inclusion of Public Colleges and Universities
Tax Reform Act of 1969
All tax-exempt entities
Controller’s Office

4. IRS Definition
Unrelated business income is defined as gross income derived by an exempt organization from any unrelated trade or business that is regularly carried on.
Three Important Tests
Trade or Business
Regularly Carried On
Not Substantially Related to Exempt Purpose
Controller’s Office

5. IRS Definition (cont) Trade or Business Regularly Carried On
Includes any activity which is carried on for the production of income from the sale of goods or the performance of services - IRC Sec. 513(c)
At some point the activity must produce a profit
No part may be excluded merely because it does not make a profit
Regularly Carried On
Exhibits frequency and continuity and pursued in a manner similar to comparable commercial activity
Not Substantially Related to Exempt Purpose
Contribute importantly to accomplishment of exempt purpose – IRC Sec. 513(a)
Seasonal activities may still meet the “regularly carried” on test
The fact that the profits will be used for an exempt purpose does not make the activity related
Controller’s Office

6. Exclusions from UBIT Interest, Dividends, and Annuities
Some Exceptions
Rental of Property
Sponsored Research
Qualified Sponsorship Payments
Does anyone see a pattern forming here
General exceptions are only as good as the specific facts and circumstances allow
Controller’s Office

7. Exclusions (cont) Business Conducted by Volunteers
Sale of Donated Merchandise
Royalties
Convenience Exception
Convenience is a catch all that only applies to customers that are Faculty Staff or students of the university
Controller’s Office

8. Problem Areas University Web Pages Qualified Sponsorship Payments
Corporate logos vs links
Sponsorship vs taxable advertizing
Qualified Sponsorship Payments
Substantial return benefit to sponsor
Advertizing in General
Qualitative or comparative language
Price or “savings” information
A call to Action
Product endorsement
Controller’s Office

9. Problem Areas (cont) Travel Tours Sales to the General Public
Alumni Activities
Summer Camps
Investments
Debt Financed Property
Related activities can become partially or wholly unrelated if size of activity is inconsistent with what is needed by exempt activity.
Controller’s Office

10. Selected Examples Web Page Links - UBIT
College web page has direct link to Dell On-line order page
College receives small payment from Dell
Diagnostic Laboratory Testing Services - UBIT
Services available in the community
Students not involved in the testing process
Product Sales – UBIT yes/no
Excess milk from university animals used for teaching purpose
Ice cream and butter sales created from excess milk
Revenue from Web Page links on university web sites which send the user directly to product ordering sites would most like be subject to Tax
Testing Services - No student involvement (instruction purpose) and competition with local providers would make revenue subject to Tax
Product sales – key is the additional processing past what is necessary to meet exempt purpose
Controller’s Office

11. Selected Examples (cont)
University Facilities - UBIT
Public allowed to use swimming pool for a fee
Tennis Courts – public charged for use
Golf Course - public charged for use
Parking lots – Public use for non university event
Electric Services – Town customers
University Facilities – Non UBIT
Summer Camps sponsored by the university
Professional performances – public invited to attend
Athletic rental of meeting rooms – no services
Rooms used for educational conferences open to public
The use of these facilities is more than just rent – if significant services are provided to the public along with the actual use of facility – scheduling, cleaning, monitoring uses etc. then the activity is Taxable
Above Examples:
Swimming Pool, Tennis Courts, Golf Course are UBIT activities
Parking Lot would have to be reviewed but most likely would be UBIT
Electric Service – cost would be allocated between taxable (town) and non taxable (university) use
Controller’s Office

12. Selected Examples (cont)
Rental of University Equipment - UBIT
Renting an Electron microscope to an outside business
Rental of recreational equipment to general public and alumni
Renting street sweeper to town
Advertizing – UBIT maybe
Student Newspaper
Game day programs recognizing sponsorship
General consumer advertizing in scholarly journal
Catering – UBIT yes/no
Wedding receptions, parties open to general public
Departmental faculty retreat
Students manage a newspaper as part of curriculum, advertizing sold seen as part of learning process
General Ads like relator, attorneys or restrurants don’t serve the educational purpose
Controller’s Office

13. Summary Unrelated Business Income Tax There are Exclusions
Is it a Trade or Business
Regularly Carried On
Substantially Unrelated to Exempt Purpose
There are Exclusions
Real Property rental
Fundamental research Activities
Convenience to Faculty, Staff and Students
When in doubt Ask
Consideration to ALL Facts and circumstances
Subjective analysis of specific facts and circumstance – a small change can make the difference
There are generally no absolutes, must look at the details
Don’t assume non taxable.
Controller’s Office

14. Questions Points of Contact Reference Materials
Ken Miller, University Controller
Phone
Dave McGarry, Financial Reporting and Cost Accounting
Phone
Barbara Starling, Manager of Financial Reporting
Phone
Reference Materials
IRS Publication 598
University Controller’ Web Page
QUESTIONS