Non-profit entities engage in a wide range of business activities. For example, hospitals primarily provide medical services, but they may also operate cafeterias, parking garages and gift shops. The main function of a college is to provide an education, but it may also operate dormitories and apartments, a bookstore, and various shops, as well as lease out space for other shops and collect rents.  If these non-core activities provided by the non-profit entity are “substantially related†to the non-profit organization’s tax-exempt purpose, income earned from the activity is generally not taxable.  However, income from an “unrelated†business activity may be subject to the Unrelated Business Income Tax  (“UBITâ€).

 

This article explores the intricacies of the UBIT and delves into Congressional intent in adopting section 511 et. seq.  We analyze Congressional efforts to eliminate an unfair competitive advantage a non-profit entity may enjoy over a tax paying entity engaged in the same income producing activity.   In addition, we examine legislative efforts to ensure tax revenue will not be foregone by the federal government simply because an entity incorporates as a non-profit but operates substantially unrelated businesses.  We further explore the concept of UBIT and the judicial interpretation of the applicability of UBIT to certain aspects of a non-profit’s activities.  Lastly, we provide some helpful guidelines to minimize the risk that a non-profit’s activities will be found to generate UBIT, or to be so significant as to threaten a non-profit’s tax-exempt status.