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(Last Modified on December 22, 2010)

Generally speaking, activities cannot be considered taxable unless they are deemed to be a �г��ٸ���Ƶ�trade or business�г��ٸ���Ƶ� as defined in IRC Section 162. Among other things, a trade or business has to include competitive promotional efforts, and exhibit the intent to generate a profit. If the intent is simply to recover costs, the activity may lack a profit motive and be exempt from UBI treatment.

Note: For more information on the definition of trade or business, refer to: .

IRS regulations also consider the frequency and continuity of the activity when evaluating UBI applicability. If an activity occurs infrequently or for a short period of time during the year, it may fail to meet the IRS definition for �г��ٸ���Ƶ�regularly carried on.�г��ٸ���Ƶ�

Even if an activity meets all criteria for treatment as unrelated business income, one or more of the following conditions may qualify the activity for exemption under IRS guidelines:

1. Community Need Exemption: Activities fulfill an unmet medical need in the community, such as non-patient specimen testing or services provided to another tax-exempt hospital.

2. Convenience Exemption: Activities are performed for the convenience of the institution�г��ٸ���Ƶ�s students, faculty, staff or patients, and/or the activities relate to sales where the product has a useful life of less than one (1) year.

3. Donation Exemption: Eighty-five per cent (85%) or more of the income is related to donated merchandise, property or services, even if the labor to operate the activity is paid or volunteered.

4. Editorial Exemption: Publications include editorial content related to the accomplishment of the institution�г��ٸ���Ƶ�s exempt purposes.

5. Educational Function Exemption: Activities are important to the overall educational function of the institution, such as a performing arts theater, symphony, etc.

6. Other Miscellaneous Exemptions:

   • Activities relate to �г��ٸ���Ƶ�expendable�г��ٸ���Ƶ� sales; and,
   • Activities relate to sales in an area near other commercial facilities selling similar products.

7. Passive Participation Exemption: Passive income such as dividends, interest, annuities, royalties, licensing agreements, etc., without any active business participation or management.

8. Student Participation Exemption: Activities include substantial student participation, which directly supports the institution�г��ٸ���Ƶ�s educational program(s).

9. Volunteer Exemption: Eighty-five per cent (85%) or more of the work related to an activity is performed by volunteers.

23.4.1 Special Considerations

(Last Modified on December 22, 2010)

The following types of activities receive special IRS consideration when determining whether the activity is excluded from UBI reporting and taxation:

1. Acknowledgements: Incidental recognition of sponsorship with no qualitative or comparative basis may not subject to UBI treatment.

2. Advertisements: Ads in newsletters, magazines, journals, websites, or sports programs may be taxable even if the activity is carried on within a larger complex of other endeavors substantially related to an institution�г��ٸ���Ƶ�s exempt purpose. Advertisements that serve an �г��ٸ���Ƶ�informational function,�г��ٸ���Ƶ� as opposed to serving as a means for stimulating demand for a product, may not be taxable.

3. Artistic, Entertainment, and Theatrical Events: IRS guidelines focus on the contracts negotiated with performance artists to determine whether they were consummated for related educational purposes. If the event is not distinguishable from those efforts of a commercial promoter and arena, the proceeds from ticket sales, advertisements, etc. may qualify for treatment as UBI.

4. Bookstores: IRS guidelines typically separate bookstore sales into three major categories when determining UBI applicability:

   • Educational materials (exempt);
   • Non-educational, convenience products low in cost and in current demand (exempt); and,
   • Other merchandise that does not further the institution�г��ٸ���Ƶ�s exempt purposes (not exempt).

5. Child Care Centers: IRS guidelines focus on whether the service is available to general public.

6. Computer Sales to Faculty, Staff, and Students: IRS guidelines focus on whether the program leads to the enhanced computer literacy of the institution�г��ٸ���Ƶ�s faculty, staff, and students.

7. Dormitory Rentals and Food Service Charges for Conferences: IRS guidelines focus on whether the program is clearly linked to the institution�г��ٸ���Ƶ�s educational mission and whether institution personnel participate in or benefit from the program.

8. Food Service Agreements: IRS guidelines focus on whether the financial agreement includes commissions, building (real property) rents, and/or equipment (personal property) rents. Personal property payments may be subject to UBI treatment, unless the IRS determines the payments are an �г��ٸ���Ƶ�incidental�г��ٸ���Ƶ� part of the total amount received under the agreement. The following rules apply to personal property/equipment payments:

   • 10% or less (�г��ٸ���Ƶ�incidental�г��ٸ���Ƶ� and exempt);
   • 11-50% - taxable in proportion to the percent of personal property payments to total payments (not exempt); and,
   • 51% or more (not exempt �г��ٸ���Ƶ� 100% taxable).

9. Leased Parking Spaces/Lots: IRS guidelines focus on whether the parking revenues are generated from the general public for non-institution events. In some instances, leases of parking spaces or lots to the general public qualify for treatment as rental real estate. Real estate leases are not subject to UBI treatment, if additional services are not offered.

10. Long Distance Carrier Commissions: IRS guidelines may dictate treatment as UBI, even if students purchase the services directly and the institution conducts no marketing or promotion of the service.

11. Mailing Lists and Affinity Cards: IRS guidelines focus on the whether the specific services provided under the agreement are deemed to be de minimis, or �г��ٸ���Ƶ�courtesy services.�г��ٸ���Ƶ�

12. Recreational and Athletic Facility Memberships: IRS guidelines treat usage by students, faculty, and staff as a convenience not subject to UBI. However, usage by alumni, guests, and/or spouses and children of students, faculty, and staff generates unrelated business income, subject to UBI treatment.

13. Rents: IRS guidelines focus on whether the rents are derived from real or personal property, or from a mixed lease of both real and personal property.

14. Research: IRS guidelines focus on the type of research performed by the institution when evaluating whether income is taxable:

    • Performed for any level of government;
    • Performed by a college, university, or hospital �г��ٸ���Ƶ�for any person�г��ٸ���Ƶ� as defined in IRC Section 512(b)(8) http://www.law.cornell.edu/uscode/26/usc_sec_26_00000512—-000-.html;
    • Performed for any person for purposes of carrying out �г��ٸ���Ƶ�fundamental research,�г��ٸ���Ƶ� as distinguished from �г��ٸ���Ƶ�applied research,�г��ٸ���Ƶ� the results of which are freely made available to the public; or,
    • Performed as a part of clinical trials or FDA drug testing protocol, where the institution can demonstrate the program contributes to the training of students or to patient care.

15. Research By-Products: IRS guidelines focus on the state of the product sold. If the product is manufactured or processed after completing the research phase, income from its sale may be treated as unrelated.

16. Special Circumstance Activities: IRS guidelines recognize special circumstances in which an unrelated activity may be recognized as �г��ٸ���Ƶ�serving an exempt purpose.�г��ٸ���Ƶ� The IRS makes this determination on a case-by-case basis.

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