The Catholic University of America

Summary of Federal Laws

Tax

Miscellaneous Tax Issues

Unrelated Business Income Tax

26 U.S.C. § 511(a)(2);26 C.F.R. §§ 1.511-1 to 1.513-4
Income from an activity that is a trade or business, regularly carried on, and not substantially related to the conduct of the institution's educational or scientific research purposes will be considered unrelated business income and is taxable. The IRS has opined that income derived by a college or university from fees received by alumni or the general public is unrelated business income. Those items sold by the university to students, faculty and staff that are required or otherwise necessary for courses of instruction or fall under the "convenience exception" will not constitute unrelated business income. With the exception of items that have the university logo affixed, the IRS takes the position that non-educational items with a useful life of more than one year are subject to the unrelated business income tax (UBIT). The IRS holds that an institution must have an accounting system in place to deal with sales that are subject to UBIT and those that are not subject to UBIT.

Use of university facilities in unrelated activities will be subject to UBIT. Mailing list income is not subject to UBIT if the list is sold or exchanged to other exempt organizations. A corporate sponsorship issue arises when a company makes a gift to the school and in return receives certain publicity and exposure beyond a mere acknowledgment of the payment. The IRS will closely examine the relationship between the university and any related entity that has potentially unrelated business activities.

 

Tax Cuts and Jobs Act (HR1) Section 13702- Unrelated Business Income Separately Computed for Each Trade or Business Activity-

The provision requires Unrelated Business Income Tax (“UBIT”) computations, including the use of Net Operating Losses (“NOLs”), to be made on a line-of-business basis. Pre-2018 NOL carryovers may be used to offset income from any unrelated activity. There is no definition of what constitutes a separate business activity. UBIT is taxable at the new 21 percent corporate tax rate. See K&L Gates: Just Passed Tax Cuts and Jobs Act Will Significantly Impact Higher Education. 

Here is the text of HR1 on UBIT:

C. 13702. UNRELATED BUSINESS TAXABLE INCOME SEPARATELY
COMPUTED FOR EACH TRADE OR BUSINESS ACTIVITY.
(a) IN GENERAL.—Subsection (a) of section 512 is amended
by adding at the end the following new paragraph:
‘‘(6) SPECIAL RULE FOR ORGANIZATION WITH MORE THAN
1 UNRELATED TRADE OR BUSINESS.—In the case of any organization with more than 1 unrelated trade or business—
‘‘(A) unrelated business taxable income, including for purposes of determining any net operating loss deduction, shall be computed separately with respect to each such trade or business and without regard to subsection (b)(12),
‘‘(B) the unrelated business taxable income of such organization shall be the sum of the unrelated business taxable income so computed with respect to each such trade or business, less a specific deduction under subsection (b)(12), and
‘‘(C) for purposes of subparagraph (B), unrelated business taxable income with respect to any such trade or business shall not be less than zero.’’.
(b) EFFECTIVE DATE.—
(1) IN GENERAL.—Except to the extent provided in paragraph (2), the amendment made by this section shall apply to taxable years beginning after December 31, 2017.
(2) CARRYOVERS OF NET OPERATING LOSSES.—If any net operating loss arising in a taxable year beginning before January 1, 2018, is carried over to a taxable year beginning
on or after such date—
(A) subparagraph (A) of section 512(a)(6) of the Internal Revenue Code of 1986, as added by this Act, shall not apply to such net operating loss, and (B) the unrelated business taxable income of the organization, after the application of subparagraph (B) of such section, shall be reduced by the amount of such net
operating loss.

SEC. 13703. UNRELATED BUSINESS TAXABLE INCOME INCREASED BY
AMOUNT OF CERTAIN FRINGE BENEFIT EXPENSES FOR WHICH DEDUCTION IS DISALLOWED.
(a) IN GENERAL.—Section 512(a), as amended by this Act, is
further amended by adding at the end the following new paragraph:
‘‘(7) INCREASE IN UNRELATED BUSINESS TAXABLE INCOME
BY DISALLOWED FRINGE.—Unrelated business taxable income of an organization shall be increased by any amount for which a deduction is not allowable under this chapter by reason
of section 274 and which is paid or incurred by such organization for any qualified transportation fringe (as defined in section 132(f)), any parking facility used in connection with qualified parking (as defined in section 132(f)(5)(C)), or any on-premises athletic facility (as defined in section 132(j)(4)(B)). The preceding sentence shall not apply to the extent the amount paid or incurred is directly connected with an unrelated trade or business which is regularly carried on by the organization.
The Secretary shall issue such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this paragraph, including regulations or other guidance providing
for the appropriate allocation of depreciation and other costs with respect to facilities used for parking or for onpremises athletic facilities.’’.
(b) EFFECTIVE DATE.—The amendment made by this section shall apply to amounts paid or incurred after December 31, 2017.



 

Resources

National Council of NonProfits 2018 Tax Law Checklist

UBIT: What your Nonprofit needs to Know about Sponsorships, Advertising, Royalties and Cause Marketing, April 2016, Venable, LLP.

PLR 200625035: IRS new position on UBIT and Hotel and Dormitory Rentals; Nov. 16, 2010
Private dorm rentals to non-students and faculy members should be treated as UBIT. Only students of the school can be be treated as not subject to UBIT.

Group operated solely for purpose of travel tours not exempt and tours are UBIT, PLR 201031034; IRS release date 5/10/10

IRS Revenue Ruling 2004-51 (2004-22 IRB June 1, 2004) On UBIT and Joint Ventures with For Profit Entities: This ruling dealt with a joint venture between a university and a for profit and stated that equal ownership of a joint venture would not result in distributions to the university being subject to UBIT. In this fact setting, the university's participation was an insubstantial part of the university's activities.

Questions and Answers on Alumni Magazines, UBIT and Non-Profit Mailing Rates

Question: Can a university alumni magazine accept paid advertising without affecting the magazine's non-profit mailing rates?

Answer: The tax issue first: Advertising that is unrelated to the university's purposes (which probably would be most advertising that would appear) would be subject to the unrelated business income tax ("UBIT"). Technical rules are in place to apply expenses of the publication against its editorial content and against its advertising content. Only the net income from advertising (i.e., gross advertising revenue minus the appropriate portion of expenses attributable to advertising) is subject to UBIT. Frequently, for publications not intended to make a profit, but rather to build relationships, the expenses can eat up a large portion of the revenue; thus net advertising revenue, and the resulting UBIT, can be minimized significantly.

On the mailing issue, there are two kinds of postage for alumni magazines, standard nonprofit and nonprofit periodical (formerly called nonprofit second class). If the university uses "standard nonprofit" for its alumni magazine, there are significant restrictions on advertising in a publication mailed at "standard nonprofit" rates. Those restrictions are extremely complex and this is one issue on which greater detail may be necessary. Suffice it here to say that for "standard nonprofit," the advertising must be related to the purposes of the nonprofit organization, there may be no credit, debit or charge card advertising, and advertising for insurance policies and travel are severely restricted. These restrictions are attributable solely to an historical anomaly. Nonetheless, the advertising restrictions associated with "standard nonprofit" mailings would significantly restrict the advertising that the university could include in its Alumni Magazine.

The second kind of postage that can be used for an alumni magazine is nonprofit periodical class, i.e., the postage rate used for periodicals and magazines. The appeal of nonprofit periodical class is threefold. First, there are no restrictions on advertising. Second, ninety percent of the time, nonprofit periodical class will be less costly than standard nonprofit. Third, nonprofit periodical mail moves more quickly than does standard nonprofit mail. The downside is that the publication must qualify for nonprofit periodical class. Generally it must be published like a magazine with a regular number of issues per year (at least 4), mailed at regular, or agreed upon, intervals, and the publication must be "authorized" by the postal service (not a difficult process).

-------------------------------

Question and Answer on Alumni Magazines courtesy of Thomas Arden Roha, Esquire, Roha & Flaherty, Washington, D.C. Attorney Roha serves as tax counsel for The Catholic University of America.

Publication 598  Tax on Unrelated Business Income

NACUANOTES Vol. 11, No. 16 - Forewarned Is Forearmed: Frequent Issues in College and University Audits (August 21, 2013)

 

updated 8-24-18 mlo