On October 30, 2015, the IRS released Public Letter Ruling 201544025.
In the PLR, M was a non-for-profit alumni association
relating to a two-year community college that runs a weekly public fair-type exhibition. M does not charge an admittance fee to the fair.
In order to raise money, any person wishing to sell at the weekly fair must submit an application for vendor space and pay an application fee along with a pace fee. There is also an ATM available at the fair, which M receives $1.50 for each transaction run through the ATM.
Section 513(a) provides that the term “unrelated trade or business” means any trade or business the conduct of which is not substantially related (aside from the need of such organization for income) to the exercise or performance by such organization of its charitable, educational, or other purpose constituting the basis for its exemption under § 501. In this case, the IRS believes M’s income from the fair is not related to its exempt organization.
M provides three reasons why the fair does not qualify for UBIT. These reasons are:
- Recruiting for the college,
- Lessening the burdens of government, and
- Relieving stress to the elderly.
First, M argues the fair is related to its exempt purpose because it is used as a recruitment tool for students and donors to the community college. The IRS denied this challenge based on Living Faith, Inc. v. Comm’r which states “a mere speculative assertion that an activity is in furtherance of exempt purposes is neither self-justifying nor dispositive, and that an organization’s purpose may be inferred from its activity and manner of operations.” M did not provide enough documents, such as advertising, that shows the fair is used for as a recruitment tool.
Second, under Revenue Ruling 85-2, the income may not be UBIT if M can show it is lessening the burdens of government. In order to do so, M must perform an activity that the governmental unit itself considers to be a governmental burden and second, the activity must lessen the burden of that governmental unit. M was unable to show it meets either of these tests.
Finally, M used Revenue Ruling 77-246 applies as when surveyed, the fair is attended primarily by the elderly and thus, the operation of the fair is to relieve stress to the elderly. The IRS shoots down this argument as M never identifies a special need of the elderly that the fair helps. The mere fact that the elderly socialize is not enough to fall under Revenue Ruling 77-246.
Since all three of M’s arguments fail, the income from the fair is treated as UBIT under Section 513. Since the income is UBIT, M attempts to have the income fall under the exemption in 512(b)(3) which excludes all rents from real property from UBIT.
The IRS contends the income from the vendors is not rents as M provides substantial services for the convenience of the vendors. The PLR agrees with this assertion as the services provided by M are extensive enough to fall under the substantial services exception for rent. Thus, the income from these vendors is UBIT and does not fall under the exemption in section 512(b)(3).
The main take away from this PLR is not-for-profits need to be aware of their advertisements. Most UBIT rulings are very facts and circumstance based, so how the not-for-profit holds its event out in advertisements can be crucial in if the income from the event will be considered UBIT or not.
The content of this post is accurate as of the date below. Always ensure you are reviewing the most recent information available. Contact your tax advisor if you need clarification.