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Types of Activities

Types of Activities


The sale of advertising may be taxable even if the activity is carried on within a larger complex of other endeavors that are substantially related to an organization's exempt purpose (e.g. the publication of a newsletter, magazine, scholarly journal, or website, or the sale of advertising in sports programs). (IRC Section 513(c)).

Related advertising (acknowledgments) are incidental recognitions of sponsorship with no qualitative or comparative bases. This form of advertising is not subject to UBIT. Advertising in a college newspaper as part of an instructional program or advertising that serves an "informational function" (as opposed to serving a means of stimulating demand for products) may be considered related to an organization's exempt purpose. (IRS Revenue Ruling 82-139).

Taxable advertising provides a more tangible benefit such as promotion of the sponsor's name according to negotiated terms of a contract, linking amount of payment received to the amount of exposure the sponsor receives, or recipient making publicized qualitative and/or quantitative statements or comparisons about the sponsor and their goods and/or services. Also, the IRS considers general consumer advertising in an exempt organization's journal as "trade or business" since it does not "contribute importantly" to its exempt purpose.

Student Participation

Consumer advertising may be regarded as related to the exempt purpose if students are actively involved in the solicitation, sale and publication of the advertising under the supervision and instruction of the university/agency. For example, a campus newspaper operated by students publishes paid advertising. Although the services rendered to the advertisers are of a commercial character, the advertising business contributes importantly to the university's educational program through the training and participation of students involved. (IRS Treasury Regulation 1.513-1(d)(4)(iv) Example 5).

However, just because students are involved, the activity is not automatically considered exempt from taxable income. The deciding factor lies with the overall purpose of the program. For example, a university acquires a radio station that serves as a laboratory for training students in the radio industry. The radio station also provides a source of income to the school, serves as a medium for advertising the university, and serves as a medium for adult education. If the greatest portion of time is devoted to the activities conducted by regularly constituted commercial radio stations and not student training, the advertising activity will be deemed taxable. (IRS Revenue Ruling 55-676, 1955-2 CB 266).


Bookstore, Museum Gift Shop, and other Merchandise Operations

In general, bookstore operations are related activities and not subject to UBIT. The IRS will typically fragment sales into three major categories:

  • directly educational materials (nontaxable);
  • non-educational, convenience exception (nontaxable); and
  • other merchandise sales (taxable).

A. Exempt Sales

The IRS College and University Audit Examination Guidelines indicate items that are "required or otherwise necessary" for participation in a course of instruction and other educational materials that "further the unstructured intellectual life of the campus community", such as books, tapes, records, CD's, computer hardware and software, would not be taxable. Non-educational items that may fall under the convenience exception include items that are low in cost and in recurrent demand.

In Technical Advice Memorandum 9550003, the IRS provided additional detail guidance with respect to merchandise sold at a museum gift shop. The ruling held that "it is necessary to ascertain the museum's primary purpose" for selling the items. Where the primary purpose is to further the organization's exempt purpose, the sale is related. It is only where the primary purpose is to generate income that the sale is taxable. However, the IRS determined that simply printing the organization's name on an item is generally not enough to have the income treated as exempt from tax. In order to show that the primary purpose of the sale is in furtherance of the exempt purpose, the IRS suggested the organization must:

  • sell instructional materials that pertain to that organization , its activities, or its collections;
  • sell "accurate reproductions or adaptations" of items in the organization's collection;
  • imprint items with "detailed and accurate pictures" of something in the organization's collection; or
  • sell items that are clearly for the convenience of the patrons, such as food and beverage, etc.

B. Taxable Sales

The IRS holds that the "convenience exception" does not apply to items with a useful life of more than one year, unless it is a logo novelty item or logo clothing. (IRS Private Letter Ruling 8025222; General Counsel Memorandum 35811). These items may include the sale of novelty items, bathroom articles, non-logo apparel, candy, cigarettes, magazines, film, radios, and appliances.

In IRS Private Letter Ruling 9720002 and 8326003, the IRS has taken the position that an art museum's gift shop sales of interpretive teaching items with artistic themes furthered the museum's educational purpose. Thus, items that develop artistic ability were considered substantially related to the museum's educational purpose. However other items that merely develop motor skills were judged to be unrelated and were subject to UBIT.


Food Service Agreements


Often a food services department will cater special functions such as wedding receptions, birthdays, anniversary parties, dances, etc. to the general public. These services are considered UBI. (IRC Section 513(a)(2); IRS Revenue Ruling 78-98). If commissions are received from outside contractors for the rental of a facility, the financial agreement should be reviewed to determine if rent includes building (real property) and/or equipment (personal property). The personal property commissions may be subject to UBIT.

Museum Restaurant

Use of a museum restaurant by individuals that are neither visitors nor employees of the museum is considered general public usage subject to unrelated business income tax. (IRS Private Letter Ruling 9720002).


Artistic, Entertainment and Theatrical Events

Educational Purposes

Auditors will review contracts with performance artists to determine if they were consummated for related educational purposes.

Distinguishable from Commercial Productions

The IRS is specifically looking for events that are produced by the institutions that are not distinguishable from those efforts of a commercial promoter and arena.

Advertising Income

Advertising revenues from the sale of programs, signage, etc., is generally taxable to the extent that revenues exceed the direct cost of publication. Expenses can only be deducted up to the amount of revenues received from advertising.


Alumni Usage

IRS Letter Ruling 9645004 issued November 8, 1996, established the IRS's position that "there is no principle reason" to treat alumni differently than the general public. The convenience exception is limited to the classes of individuals specifically mentioned in IRC Section 513(a)(2) - members, students, patients, officers, or employees. Thus amounts received from alumni usage constitute income from an unrelated trade or business within the meaning of IRC Section 513(a).


Computer Sales to Faculty/Staff/Students

Auditors will review the sales of computers and other related products to determine if these sales should be considered as taxable. The IRS is contending that there must be some direct evidence that such sales programs lead to the enhanced computer literacy of the organization's membership (faculty, staff, and students). The IRS College and University Audit Guidelines advise agents to closely review computer sales made by a university. These guidelines state that while the sale of a single computer to a student or faculty member is not taxable, sales of multiple computers to such individuals and sales of a single computer to alumni and members of the general public may be taxable.


Leased Parking Spaces/Lots

Income generated by the operation of parking lots and parking garages that are necessary for the normal conduct of the university's mission (i.e. for the use of students, faculty, staff, vendors and others on premises for official university business or to participate in university programs) would be nontaxable. Parking revenues that are generated from the general public for non-university events would likely be treated as taxable by the IRS, depending on factors such as whether the parking spaces were leased to an independent contractor and if additional services were performed. (General Counsel Memorandum 39825).

Leased parking spaces/lots to the general public may be considered rental real estate and not subject to UBIT if additional services are not offered. If services beyond the furnishing of heat and light, the cleaning of public entrances, exits, stairways, and lobbies, and the collection of trash, are provided, the additional service may cause the rental to be subject to taxation.


Recreational and Athletic Facility Membership Fees

IRS Letter Ruling 9645004 states that usage to students, faculty, and staff are considered for the convenience of the members. However, it was determined by the IRS that the following groups constitute income from an unrelated trade or business within the meaning of Section 513(a) of the IRC: (1) spouses and children of students, (2) spouses and dependents of university employees, (3) alumni of the university, and (4) guests of members of the facility. If membership fee income is collected from spouses, dependents, alumni, or guests, then that income is subject to UBIT.


Summer Dormitory Rentals and Food Service for Conferences

The IRS has held that rentals of dormitory space were exempt income as the university's mission was not necessarily limited to its own students, but could encompass students of another organization that utilized its facilities. (IRS Letter Ruling 9014069). Particularly, if the university leases space to another educational organization having the identical charitable purposes and they use the facility in a noncommercial manner, then UBI does not occur. The IRS is beginning to challenge the educational mission of some summer conferences and camps. The greater the participation of the university in such camps (i.e., university used its own personnel to conduct the camp), the stronger the link to the educational mission of the university. When the university merely contracts with an outside individual or organization to operate the camp, a closer look is needed at the specific agreement to determine taxability. Additional services play a key role in the UBI determination.


Service Centers

Service department's primary users should be internal System departments. Use by private organizations should be secondary or incidental to the operation of the service department. Service departments should not compete with established community businesses for private customers or users. If sales of goods and/or services to individuals or non-UC organizations and entities occur, the activities should be reviewed for UBIT considerations.


Privatized Housing Contracts

The UBIT "convenience" exception applies to privatized housing contracts for dormitory/apartment space available to students. The housing is providing a basic need to bona fide members (students) of the organization. However, recommendation is to submit contract for review and structure contract to be based on fixed amounts or a percentage of gross receipts.


Long Distance Carrier Commissions

Commissions received from a long distance carrier may be subject to UBIT, even if students purchase services directly and no marketing or promotion of the service is conducted by the university for the benefit of the long distance carrier. Often, contracts possess many different factors and need to be reviewed individually for UBI considerations.


Childcare Centers

If purchasers of the service are students, faculty, and staff, and the childcare facility is provided for their convenience, the income is not subject to UBIT. However, if the service is available to the general public as well, the portion attributable to general public usage may be subject to UBIT depending upon other factors such as education training and college credit given for student participation. (IRC Section 513(a)(2); IRS Revenue Ruling 78-98).


Joint Ventures

Generally, income from a joint venture will not be taxable if it contributes importantly to the exempt purpose or if it is carried on for the convenience of university/agency members. However, joint venture relationships have been scrutinized by the IRS to ensure that a tax-exempt organization is not serving the private purpose of the for-profit entity.