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PLR 201640021

Civic Leagues and Social Welfare Groups (See Also 0501.03-25)

Official textIRS Written Determinations (PLR · TAM · CCA)irs.gov
Summarize

# Issue

Year/Period Ended
6/30/20:XX and
6/30/20:XX
Whether , a 50l(c)(4) organization, should be revoked of its exempt status effective July 1, 20XX, where the organization does not have an exempt purpose and has substantial non-exempt activity.

# Facts

The was incorporated under the General Not for Profit Corporation
Act of on April 17, 19XX. operates in . The organization was granted exempt status under IRC §501(c)(4) by the Internal Revenue Service on July 10, 19XX.
The organization's exempt purpose was for the purchase, acquiring, and maintaining of and for the promotion of . The was to be used for the cultural benefit of the membership and the community.
The own and maintain the was created by the that is used by . The to is located in is the owner of the property and the property has a mortgage. Taxpayer indicated that the was set up as a separate organization so that in the event that the lost their , the organization would still maintain has a separate EIN and has separate filing requirements from has its own exemption under IRC §50l(c)(4). The is exempt under IRC § 50l(c)(8) as a All members of the are automatically members of . This is per the Bylaws of The meetings occur twice a month. The the holds their general meetings at the facility. The general also holds an annual fundraiser in provides During the the organization provides to the public. , has a available, and the organization also during the . The organization vendor for specific events and charges the organization pays for the and about The from a than the are advertised on N arne of Taxpayer the website ( providing the name of the contact ( Year/Period Ended 6/30/20XX and 6/30/20XX ) and there is a sign on the door of the facility ) to make a of the The facility is available for including and other . The facility can handle large crowds up to XXX people with a , and . The organization also has a private room for groups of XXX or less. The organization includes the on the website and advertises the The are as follows:
$X, XXX .XX
$XXX.XX
$XXX.XX
$XXX.XX
The organization also the following:
$X.XX each
$X.XX each
$XX.XXeach
$X.XX each makes the available to the public. The are made to individuals, businesses, and exempt organizations and community organizations. Exempt organizations and community organizations pay the same rate as individuals or businesses. They do not receive a lower rate or a discount.
Taxpayer indicated that makes approximately X to X to charities and exempt organizations per year. The rest of the to individuals or businesses for private events. income for tax years ending June 30, 20XX and June 30, 20XX is as follows:
Sources of Income
Tax Year Ending June 30, 20XX
Account Amount
$XX,XXX.XX
$XX,XXX.XX
$XX,XXX.XX
$XX.XX
$XX.XX
Total Income for tax year ending June 30, 20XX $XXX,XXX.XX
Name ofTaxpayer
Year/Period Ended
6/30/20XX and
6/30/20XX
Sources of Income
Tax Year Ending June 30, 20XX
Account Amount
$XX,XXX.XX
$XX,XXX.XX
$XX,XXX.XX
$XX.XX
Total Income for tax year ending June 30, 20XX $XXX,XXX.XX has a compensated and who are responsible for the and The IS responsible for showing the facility to and getting a The has the authority to execute on the organization's behalf.
The is the point of contact for and is responsible for , and . The is responsible for organizing the . The is responsible for the , , and . This includes ensuring that the is clean and in good working order and is responsible for ensuring the has supplies.

# Law

IRC §501(c)(4)(A) provides for the exemption of Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.
501(c)(4)(B) Subparagraph (A) shall not apply to an entity unless no part of the net earnings of such entity inures to the benefit of any private shareholder or individual.
Federal Tax Regulation§l.501(c)(4)-l(a)(l) defines civic leagues and local associations of employees. -

(a) Civic organizations
Form886A Department of the Treasury - Internal Revenue Service
N arne ofT axpayer
Year/Period Ended
6/30/20XX and
6/30/20XX

(1) In general. -A civic league or organization may be exempt as an organization described in section 501(c)(4) if:

(i) It is not organized or operated for profit; and

(ii) It is operated exclusively for the promotion of social welfare.

(2) Promotion of social welfare

(i) In general. -An organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community. An organization embraced within this section is one which is operated primarily for the purpose of bringing about civic betterments and social improvements. A "social welfare" organization will qualify for exemption as a charitable organization if it falls within the definition of "charitable" set forth in paragraph ( d)(2) of§ 1.501 ( c )(3)-1 and is not an "action" organization as set forth in paragraph ( c )(3) of§ 1.501 ( c )(3 )-1.

(ii) Political or social activities. -The promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office. Nor is an organization operated primarily for the promotion of social welfare if its primary activity is operating a social club for the benefit, pleasure, or recreation of its members, or is carrying on a business with the general public in a manner similar to organizations which are operated for profit. See, however, section 501(c)(6) and §1.501(c)(6)-1, relating to business leagues and similar organizations. A social welfare organization that is not, at any time after October 4, 1976, exempt from taxation as an organization described in section 501(c)(3) may qualify under section 501(c)(4) even though it is an "action" organization described in § 1.501 ( c )(3 )-1 ( c )(3 )(ii) or (iv ), if it otherwise qualifies under this section. For rules relating to an organization that is, after October 4, 1976, exempt from taxation as an organization described in section 501(c)(3), see section 504 and §1.504-1.
Federal Tax Regulation §1.501(c)(4)-1(b) Local associations of employees. -Local associations of employees described in section 501 (c)( 4) are expressly entitled to exemption under section 501(a). As conditions to exemption, it is required (1) that the membership of such an association be limited to the employees of a designated person or persons in a particular municipality, and

(2) that the net earnings of the association be devoted exclusively to charitable, educational, or recreational purposes. The word "local" is defined in paragraph (b) of§ 1.501(c)(12)-l. See paragraph ( d)(2) and (3) of§ 1.501 ( c )(3 )-1 with reference to the meaning of "charitable" and "educational" as used in this section. [Reg. § 1.501 (c)( 4)-1.]
Federal Tax Regulation §1.50l(c)(3)-1 defines charitable organization as organizations organized and operated for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or for the prevention of cruelty to children or animals.
Santa Cruz Building Association v. United States of America (411 F. Supp. 871)
Form886A Department of the Treasury- Internal Revenue Service
N arne of Taxpayer
Year/Period Ended
6/30/20XX and
6/30/20XX
In Santa Cruz Building Association v. United States of America, a building association created by the Knights of Columbus # 1215 which was used substantially to make rentals to the public, was held not to qualify for exempt status.
The Santa Cruz Building Association was incorporated by the Knights of Columbus Santa Cruz
Council to promote better relations among its members; to provide grounds, buildings and equipment for educational and physical activities for the members, to produce, secure and provide funds and facilities to Santa Cruz Council of Knights of Columbus to assist, provide and promote the welfare of charitable organizations. The Building Association was a separate corporation which is not subject to the rules of the National Knights of Columbus. The Building Association charged both members and non-members rent for use of its hall. The Council used the hall30% of the time while the public used the hall 70% of the time. The Building Association advertised its rentals in the yellow pages and in the Knights of Columbus golf magazine. The Building Association derived its income from bar sales, building rentals, and parking lot rentals.
Plaintiff Building Association requested a finding of exemption under any of four subsections of section 501 (c) of the Internal Revenue Code (IRC). Any organization that is listed under§ 501 (c) is exempt from tax under§ 501 (a). Specifically, plaintiff contended that it is exempt as a title holding corporation under§ 501 (c)(2), or as a corporation organized and operated exclusively for religious or charitable purposes under§ 501 (c)(3), or as a civic organization under§ 501 (c)(4), or as a club organized and operated exclusively for pleasure, recreation and other non-profitable purposes under§ 501 (c)(7). Each code section was analyzed separately.
Section 501 (c)(2) in conjunction with§ 501 (a) exempts:
Corporations organized for the exclusive purpose of holding title to property, collecting income therefrom and turning over the entire amount thereof, less expenses, to an organization which itself is exempt under this section.
501 ( c )(2) was held not to be applicable to the Building Association for three reasons: the
Association has accumulated income over the years rather than turning it over to an exempt organization, the Association was not organized exclusively to hold title to property, and the Association engages in business activities other than holding title and collecting income.
Section 501 (c)(4) in conjunction with§ 501 (a) exempts:
N arne ofT axpayer
Year/Period Ended
6/30/20XX and
6/30/20XX
Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare.
The Building Association was held not to be exempt under this provision because the
Association was operated primarily for the benefit of its members, not the community as a whole, and because it carried on a business for profit with the general public. Under the Regulations neither of these elements may be present if an exemption is sought. The Building Associations primary source of income was derived from rentals (of building space and parking lot) and bar receipts.
Organizations primarily engaged in profit making and nonsocial welfare activities cannot take an exemption under section 501(c)(4).
Section 501 (c)(7) in conjunction with§ 501 (2) provides an exemption for:
Clubs organized and operated exclusively for pleasure, recreation and other nonprofitable purposes, no part of the net earnings of which inures to the benefit of any private shareholder.
The Building Association was held not to quality for exemption under IRC §501(c)(7). The facts showed that the plaintiff was engaged in a business. The Association's dealings with the general public involved neither "one-shot affairs," nor insubstantial amounts of money, nor activities distinguishable from those of profit-making organizations. Plaintiff stipulated that the building facilities were rented on a recurring basis and that its primary source of income came from rentals and bar receipts. When rented, the hall was used for activities such as meetings and weddings, which were events totally unconnected with the Building Association's membership purpose.
Furthermore, to be exempt as a social club, there must exist a meaningful "commingling of members" which plays a material part in the life of the organization. Rev. Rul. 58-589, 1958-2
Cum. Bull. 266. While the Building Association was organized with such a purpose, it was not operated to carry out that purpose. In the stipulated facts, it stated that its purpose was to act "as a housekeeping organization for the Santa Cruz Council of the Knights of Columbus". There is no evidence that the Building Association, as a separate entity, engaged in any social or recreational activities. That it may have done so through the Knights of Columbus is irrelevant.
Polish Army Veterans v. Commissioner, 236 F.2d 509 (3rd Cir. 1956) (An association formed with members of the veterans Post whose primary function was to provide a building or clubrooms to the Post was not functioning as a social club).
Form 886A Department of the Treasury- Internal Revenue Service
N arne of Taxpayer
Year/Period Ended
6/30/20XX and
6/30/20XX
Section 501 (c)(3) in conjunction with§ 501 (a) exempts:
Corporations and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific ... purposes ... no part of the net earnings of which inures to the benefit of any private shareholder or individual.
Under the Regulations, two requirements must be met for an organization to qualify under this subsection. The organization must be both organized and operated exclusively for the purposes listed.
It was found that the Building Association was not organized exclusively for charitable purposes.
Plaintiffs purposes are set forth in Article II of its Articles of Association. Prior to 1967, when the article was amended, the object ofthe organization was "of a social nature ... to promote better relations amongst its members, to provide grounds, buildings and equipment for educational, recreational and physical activities for the members". In 1967 the Articles were amended to delete the first phrase and to add: "to produce, secure and provide funds and facilities to SANTA CRUZ COUNCIL OF KNIGHTS OF COLUMBUS to assist, provide and promote the welfare of charitable organizations."
The language of neither amendment limits the corporate purposes to one or more exempt purposes. Moreover, there is no limitation requiring that activities not in furtherance of exempt purposes be but an insubstantial part of its activities. Providing a building for the recreational use of its members does not embody any charitable purpose as that term is construed in the Regulations.
Santa Cruz Building Association, Plaintiffv. United States of America, Defendant case found that the Building Association is an organization which is devoted to an unspecified extent to activities benefiting its own members, and did not qualify for exemption under IRC 501 ( c )(2), IRC 501(c)(4), IRC 501(c)(7), or IRC 501(c)(3).
Knights of Columbus Building Association of Stamford, Connecticut, Inc., Plaintiffv.
United States of America, Defendants (1988 U.S. Dist.; A.F.T.R.2d (RIA) 1212)
The Building Association corporation was formed as a convenient means for a nonprofit fraternal benefit society to hold title to real estate. The society was a§ 501 (c)(8) organization that could not hold title to property because it was an unincorporated association. The corporation did not qualify for exemption under§ 501 (c)(2) as merely a title holding entity primarily because of the presence of a bar and buffet business on the premises. When the corporation sold its building it Name ofTaxpayer Year/Period Ended 6/30/20XX and 6/30/20XX made an application for tax exemption under§ 501 (c)(8). The IRS denied the application, and the corporation paid the assessed income tax. The corporation sought a refund, arguing that an exemption was attributed to the corporation under the adjunct theory because it operated as a necessary and indispensable adjunct of the society. The court denied the corporation's request for a refund, holding that the adjunct doctrine did not have general applicability. The court found that § 501 (c)(2) unequivocally precluded a title holding entity from doing anything other than holding title and refused to countenance an end run around § 501 (c)(2) by way of the adjunct doctrine.
The Association applied for a full refund of the tax it paid for 1979, arguing that it was entitled to a refund under Sections 501 (c)(2), (3), (4), (7), (8) and (10), and because it operated as a "necessary and indispensable adjunct of the Council which is itself exempt under Section 501 (c)(8) and therefore, such exemption should be attributed to the Association under the adjunct theory." The Commissioner denied the refund claim. The Association instituted this action to recover the income tax it paid for 1979. For the reasons set forth below, the Association's claim for a refund was denied.
In addressing the Association's adjunct argument, the government simply distinguishes factually the cases on which the taxpayer relies. It argues further that because the Association is neither organized as a fraternal beneficiary society, Section 501 (c)(8), nor operated as merely a title holding entity, Section 501 (c)(2), it is not organized for the same purposes of the Council and cannot be exempt as an adjunct.
I.R.C. § 7805(b)(8) provides that "[t]he Secretary [of the Treasury] may prescribe the extent, if any, to which any ruling (including any judicial decision or any administrative determination other than by regulation) relating to the internal revenue laws shall be applied without retroactive effect." Pursuant to this authority the Secretary has given the IRS discretion to retroactively revoke exemption rulings or determination letters where "the organization omitted or misstated a material fact, operated in a manner materially different from that originally represented, or engaged in a prohibited transaction of the type described in subdivision (vii) of this subparagraph." 26 C.F.R. sec. 601.201(n)(6)(i), Statement of Procedural Rules. See also Revenue Procedure 2013-9.
Taxpayer's Position
Taxpayer's position is not known at this time.
N arne of Taxpayer
Government's Position
Year/Period Ended
6/30/20XX and
6/30/20XX , a 501(c)(4) organization should be revoked of its exempt status effective July 1, 20XX because the organization does not have an exempt purpose and has substantial non-exempt activity.
The organization's activities consist of holding and maintaining for the and of making . Neither of these activities is an exempt activity as defined in IRC 501(c)(4). A 501(c)(4) must be organized as a not-for-profit organization and operated exclusively for social welfare purposes. Its primary activities must promote the common good and general welfare of the people in the community. Social welfare activities do not include social or business activities. Providing and and during the is not a social welfare purpose.
IRC §50 1 (c)( 4) provides for the exemption of Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes. activities of holding and maintaining a for a local and making do not promote social welfare. The organization's income is derived by making to the public and providing and services. The , and constitute the organization's primary activity. While the uses the facility twice a month for general meetings and for an annual fundraiser, this activity does not further the promotion of social welfare as defined in IRC 501(c)(4). In addition, to the public constitute a substantial nonexempt activity. Federal Tax Regulation §1.501(c)(4)-l(a) provides that a 501(c)(4) organization may not be organized or operated for profit.
For these reasons, exempt status should be revoked effective July 1, 20XX. is responsible for filing Form 1120 U.S. Corporation Income Tax Return.
Name ofTaxpayer

# Conclusion

Year/Period Ended
6/30/20XX and
6/30/20XX exempt status should be revoked effective July 1, 20XX where the organization does not have an exempt purpose and has substantial non-exempt activity.
Name ofTaxpayer
ALTERNATIVE ISSUE
Year/Period Ended
6/30/20X:X and
6/30/20X:X
An Alternative Resolution has been prepared should the IRS not uphold the Revocation
Position
Alternative Position
Whether is liable for filing Form 990-T and for unrelated business income from the public. , and income from made to

# Facts

The was incorporated under the General Not for Profit Corporation
Act of on April 17, 19XX. operates in . The organization was granted exempt status under IRC §501(c)(4) by the Internal Revenue Service on July 10, 19XX.
The organization's exempt purpose was for the purchase, acquiring, and maintaining of and for the promotion of . The was to be used for the cultural benefit of the membership and the community.
The own and maintain the was created by the that is used by to . The is located in is the owner of the property and the property has a mortgage. Taxpayer indicated that the was set up as a separate organization so that in the event that the lost their , the organization would still maintain has a separate EIN and has separate filing requirements from has its own exemption under IRC §501(c)(4). The is exempt under IRC § 50l(c)(8) as a All members ofthe . This is per the Bylaws of The meetings occur twice a month. The the are automatically members of holds their general meetings at the facility. The general also holds an annual fundraiser in Department of the T rcasury - Internal Revenue Service N arne ofT axpayer ALTERNATIVE ISSUE provides During the the organization provides available, and the organization also during the . The organization from a vendor for specific events and charges the than the organization pays for the and about . The Year/Period Ended 6/30/20XX and 6/30/20XX to the public. , has a are advertised on the website ( ) and there is a sign on the door of the facility providing the name of the contact ( ) to make a of the The facility is available for including and other The facility can handle large crowds up to XXX people with a , and . The organization also has a private room for groups of XXX or less. The organization includes the on the website and advertises the The are as follows:
$X,XXX.XX
$XXX.XX
$XXX.:XX
$XXX.XX
The organization also the following:
$X.XX each
$X.XX each
$XX.XXeach
$X.XX each makes the available to the public. The are made to individuals, businesses, and exempt organizations and community organizations.
Exempt organizations and community organizations pay the same rate as individuals or businesses. They do not receive a lower rate or a discount.
Taxpayer indicated that and exempt organizations per year. private events. makes approximately X to X to charities The rest of the to individuals or businesses for N arne of Taxpayer ALTERNATIVE ISSUE Year/Period Ended 6/30/20XX and 6/30/20XX income for tax years ending June 30, 20XX and June 30, 20XX is as follows:
Sources of Income
Tax Year Ending June 30, 20XX
Account Amount
$XX,XXX.XX
$XX,XXX.XX
$XX,XXX.XX
$XX.XX
$XX.XX
Total Income for tax year ending June 30, 20XX $XXX,XXX.XX
Sources of Income
Tax Year Ending June 30, 20XX
Account Amount
$XX,XXX.XX
$XX,XXX.XX
$XX,XXX.XX
$XX.XX
Total Income for tax year ending June 30, 20XX $XXX,XXX.XX has a compensated who are responsible for the and responsible for showing the facility to and getting a and The has the authority to execute on the organization's behalf. The is the point of contact for and is responsible for IS . The , and . The is responsible for organizing the . The is responsible for the , and . This includes ensuring that the is clean and in good working order and is responsible for ensuring the has supplies.
N arne of Taxpayer

# Law

ALTERNATIVE ISSUE
Year/Period Ended
6/30/20XX and
6/30/20XX
IRC §511(a)(l) provide for the imposition of unrelated business income tax -There is hereby imposed for each taxable year on the unrelated business taxable income (as defined in section
512) of every organization described in paragraph (2) a tax computed as provided in section 11.
In making such computation for purposes of this section, the term "taxable income" as used in section 11 shall be read as "unrelated business taxable income".
IRC §512(a)(l) defines unrelated business income as follows -Except as otherwise provided in this subsection, the term "unrelated business taxable income" means the gross income derived by any organization from any unrelated trade or business (as defined in section 513) regularly carried on by it, less the deductions allowed by this chapter which are directly connected with the carrying on of such trade or business, both computed with the modifications provided in subsection (b).
IRC §513(a) GENERAL RULE. -The term "unrelated trade or business" means, in the case of any organization subject to the tax imposed by section 511, any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501 (or, in the case of an organization described in section 511(a)(2)(B), to the exercise or performance of any purpose or function described in section 501(c)(3)), except that such term does not include any trade or business -513(a)(l) in which substantially all the work in carrying on such trade or business is performed for the organization without compensation; or 513(a)(2) which is carried on, in the case of an organization described in section 501(c)(3) or in the case of a college or university described in section 511 (a)(2)(B), by the organization primarily for the convenience of its members, students, patients, officers, or employees, or, in the case of a local association of employees described in section 501(c)(4) organized before May 27, 1969, which is the selling by the organization of items ofwork-related clothes and equipment and items normally sold through vending machines, through food dispensing facilities, or by snack bars, for the convenience of its members at their usual places of employment; or 513(a)(3) which is the selling ofmerchandise, substantially all ofwhich has been received by the organization as gifts or contributions.
Name ofTaxpayer
ALTERNATIVE ISSUE
Year/Period Ended
6/30/20XX and
6/30/20XX
Federal Tax Regulation §1.512(a)-1(a) defines unrelated business taxable income-
Definition. -{a) In general. -Except as otherwise provided in §1.512(a)-3, §1.512(a)-4, or paragraph (f) of this section, section 512(a)(l) defines "unrelated business taxable income" as the gross income derived from any unrelated trade or business regularly carried on, less those deductions allowed by chapter 1 of the Code which are directly connected with the carrying on of such trade or business, subject to certain modifications referred to in § 1.512(b )-1. To be deductible in computing unrelated business taxable income, therefore, expenses, depreciation, and similar items not only must qualify as deductions allowed by chapter 1 of the Code, but also must be directly connected with the carrying on of unrelated trade or business. Except as provided in paragraph ( d)(2) of this section, to be "directly connected with" the conduct of unrelated business for purposes of section 512, an item of deduction must have proximate and primary relationship to the carrying on of that business. In the case of an organization which derives gross income from the regular conduct of two or more unrelated business activities, unrelated business taxable income is the aggregate of gross income from all such unrelated business activities less the aggregate of the deductions allowed with respect to all such unrelated business activities. For the treatment of amounts of income or loss of common trust funds, see § 1.584-2( c )(3).
Federal Tax Regulation §1.512(a)-l(b) Expenses attributable solely to unrelated business activities. -Expenses, depreciation and similar items attributable solely to the conduct of unrelated business activities are proximately and primarily related to that business activity, and therefore qualify for deduction to the extent that they meet the requirements of section 162, section 167 or other relevant provisions of the Code. Thus, for example, salaries of personnel employed full-time in carrying on unrelated business activities are directly connected with the conduct of that activity and are deductible in computing unrelated business taxable income if they otherwise qualify for deduction under the requirements of section 162. Similarly, depreciation of a building used entirely in the conduct of unrelated business activities would be an allowable deduction to the extent otherwise permitted by section 167.
Form 886A Department of the Treasury- Internal Revenue Service
N arne ofT axpayer
ALTERNATIVE ISSUE
Schedule No- or
Year/Period Ended
6/30/20XX and
6/30/20:X:X
Federal Tax Regulation §1.512(a)-1(c) Dual use of facilities or personnel. -Where facilities are used both to carry on exempt activities and to conduct unrelated trade or business activities, expenses, depreciation and similar items attributable to such facilities (as, for example, items of overhead) shall be allocated between the two uses on a reasonable basis. Similarly, where personnel are used both to carry on exempt activities and to conduct unrelated trade or business activities, expenses and similar items attributable to such personnel (as, for example, items of salary) shall be allocated between the two uses on a reasonable basis. The portion of any such item so allocated to the unrelated trade or business activity is proximately and primarily related to that business activity, and shall be allowable as a deduction in computing unrelated business taxable income in the manner and to the extent permitted by section 162, section 167 or other relevant provisions of the Code. Thus, for example, assume that X, an exempt organization subject to the provisions of section 511, pays its president a salary of $20,000 a year. X derives gross income from the conduct of unrelated trade or business activities. The president devotes approximately 10 percent ofhis time during the year to the unrelated business activity. For purposes of computing X's unrelated business taxable income, a deduction of $2,000 (1 0 percent of $20,000) would be allowable for the salary paid to its president.
Federal Tax Regulation§l.513-1(a) provides the definition of unrelated trade or business.-
In general. -As used in section 512 the term "unrelated business taxable income" means the gross income derived by an organization from any unrelated trade or business regularly carried on by it, less the deductions and subject to the modifications provided in section 512. Section 513 specifies with certain exceptions that the phrase "unrelated trade or business" means, in the case of an organization subject to the tax imposed by section 511, any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational or other purpose or function constituting the basis for its exemption under section 501 (or, in the case of an organization described in section 511(a)(2)(B), to the exercise or performance of any purpose or function described in section 501(c)(3)). (For certain exceptions from this definition, see paragraph (e) of this section. For a special definition of"unrelated trade or business" applicable to certain trusts, see section 513(b).) Therefore, unless one of the specific exceptions of section 512 or 513 is applicable, gross income of an exempt organization subject to the tax imposed by section 511 is includible in the computation of unrelated business taxable income if (1) it is income from trade or business, (2) such trade or business is regularly carried on by the organization, and (3) the conduct of such trade or business is not substantially related (other than through the production of funds) to the organization's performance of its exempt functions.
N arne of Taxpayer
ALTERNATIVE ISSUE
Schedule No. o.r
Year/Period Ended
6/30/20XX and
6/30/20XX
Federal Tax Regulation 1.513-1(b) Trade or business. -The primary objective of adoption of the unrelated business income tax was to eliminate a source of unfair competition by placing the unrelated business activities of certain exempt organizations upon the same tax basis as the nonexempt business endeavors with which they compete. On the other hand, where an activity does not possess the characteristics of a trade or business within the meaning of section 162, such as when an organization sends out low cost articles incidental to the solicitation of charitable contribution, the unrelated business income tax does not apply since the organization is not in competition with taxable organizations. However, in general, any activity of a section 511 organization which is carried on for the production of income and which otherwise possesses the characteristics required to constitute "trade or business" within the meaning of section 162 -and which, in addition, is not substantially related to the performance of exempt functions -presents sufficient likelihood of unfair competition to be within the policy of the tax.
Accordingly, for purposes of section 513 the term "trade or business" has the same meaning it has in section 162, and generally includes any activity carried on for the production of income from the sale of goods or performance of services. Thus, the term "trade or business" in section 513 is not limited to integrated aggregates of assets, activities and good will which comprise businesses for the purposes of certain other provisions of the Internal Revenue Code. Activities of producing or distributing goods or performing services from which a particular amount of gross income is derived do not lose identity as trade or business merely because they are carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which may, or may not, be related to the exempt purposes of the organization. Thus, for example, the regular sale of pharmaceutical supplies to the general public by a hospital pharmacy does not lose identity as trade or business merely because the pharmacy also furnishes supplies to the hospital and patients of the hospital in accordance with its exempt purposes or in compliance with the terms of section 513(a)(2). Similarly, activities of soliciting, selling, and publishing commercial advertising do not lose identity as a trade or business even though the advertising is published in an exempt organization periodical which contains editorial matter related to the exempt purposes of the organization. However, where an activity carried on for the production of income constitutes an unrelated trade or business, no part of such trade or business shall be excluded from such classification merely because it does not result in profit.
Fonn 886-A(Rev.4-68)
N arne ofT axpayer
ALTERNATIVE ISSUE
Federal Tax Regulation §1.513-l(c) defines Regularly carried on
Year/Period Ended
6/30/20:XX and
6/30/20:XX

(1) General principles. -In determining whether trade or business from which a particular amount of gross income derives is "regularly carried on," within the meaning of section 512, regard must be had to the frequency and continuity with which the activities productive of the income are conducted and the manner in which they are pursued. This requirement must be applied in light of the purpose of the unrelated business income tax to place exempt organization business activities upon the same tax basis as the nonexempt business endeavors with which they compete. Hence, for example, specific business activities of an exempt organization will ordinarily be deemed to be "regularly carried on" if they manifest a frequency and continuity, and are pursued in a manner, generally similar to comparable commercial activities of nonexempt organizations.
Federal Tax Regulation §1.513-1(d) defines Substantially related

(1) In general. -Gross income derives from "unrelated trade or business," within the meaning of section 513(a), if the conduct of the trade or business which produces the income is not substantially related (other than through the production of funds) to the purposes for which exemption is granted. The presence of this requirement necessitates an examination of the relationship between the business activities which generate the particular income in question - the activities, that is, of producing or distributing the goods or performing the services involved -and the accomplishment of the organizations exempt purposes.

(2) Type of relationship required. -Trade or business is "related" to exempt purposes, in the relevant sense, only where the conduct of the business activities has causal relationship to the achievement of exempt purposes (other than through the production of income); and it is "substantially related," for purposes of section 513, only ifthe causal relationship is a substantial one. Thus, for the conduct of trade or business from which a particular amount of gross income is derived to be substantially related to purposes for which exemption is granted, the production or distribution of the goods or the performance of the services from which the gross income is derived must contribute importantly to the accomplishment of those purposes. Where the production or distribution of the goods or the performance of the services does not contribute importantly to the accomplishment of the exempt purposes of an organization, the income from the sale of the goods or the performance of the services does not derive from the conduct of related trade or business. Whether activities productive of gross income contribute importantly to the accomplishment of any purpose for which an organization is granted exemption depends in each case upon the facts and circumstances involved.
Form 886A Department of the Treasury - I ntemal ReYenue Serrice
Name ofTaxpayer
ALTERNATIVE ISSUE
Year/Period Ended
6/30/ZOXX and
6/30/ZOXX

(3) Size and extent of activities. -In determining whether activities contribute importantly to the accomplishment of an exempt purpose, the size and extent of the activities involved must be considered in relation to the nature and extent of the exempt function which they purport to serve. Thus, where income is realized by an exempt organization from activities which are in part related to the performance of its exempt functions, but which are conducted on a larger scale than is reasonably necessary for performance of such functions, the gross income attributable to that portion of the activities in excess of the needs of exempt functions constitutes gross income from the conduct of unrelated trade or business. Such income is not derived from the production or distribution of goods or the performance of services which contribute importantly to the accomplishment of any exempt purpose of the organization.
Federal tax Regulation §1.513-1(e) provide for Exceptions from unrelated business income-
Section 513(a) specifically states that the term "unrelated trade or business" does not include-
( 1) Any trade or business in which substantially all the work in carrying on such trade or business is performed for the organization without compensation; or

(2) Any trade or business carried on by an organization described in section 501(c)(3) or by a governmental college or university described in section 511(a)(2)(B), primarily for the convenience of its members, students, patients, officers, or employees; or, any trade or business carried on by a local association of employees described in section 501 (c)( 4) organized before May 27, 1969, which consists of the selling by the organization of items of work-related clothes and equipment and items normally sold through vending machines, through food dispensing facilities, or by snack bars, for the convenience of its members at their usual places of employment; or

(3) Any trade or business which consists of selling merchandise, substantially all of which has been received by the organization as gifts or contributions.
Taxpayer's Position
Taxpayer believes that the is excluded from unrelated business income under the volunteer exclusion. Taxpayer stated that the majority of the , , and activities is conducted by volunteers. The volunteers are members of the and Taxpayer indicated that the volunteers help set up the and after the . Taxpayer indicates that they believe that they meet the volunteer exclusion.
I
N arne ofT axpayer
Government's Position
Explanation of Items
ALTERNATIVE ISSUE is subject to unrelated business income from
Year/Period Ended
6/30/20XX and
6/30/20XX , and . The unrelated business income is generated by the organization when they make the available to the public. In addition to providing the , the organization also provides , and they also , and . The are advertised on the organization's website and on the facility's entrance. The are made in a similar manner to a for-profit organization.
The are available to individuals, businesses, and exempt organizations. The exempt organizations must pay the same fee as individuals and businesses. They do not receive a lower rate, actual cost rate, or a discount. Providing the use of the facility to school organizations, exempt organizations, or community groups without charge or for actual cost would be a social welfare activity. Charging and providing does not further social welfare.
The are not substantially related to the organization's exempt purpose and they are regularly carried on. does not meet the volunteer exclusion because substantially all of the activity, activity, and activity is conducted by compensated individuals and . The is the point of contact for the The is responsible for showing the facility to potential , and is responsible for securing the , for and the facility, for , and . The is responsible for the , and . This includes ensuring the and in good working order. While the organization does have volunteer labor who help and after events, the majority of the unrelated business activity including the , and is conducted by compensated individuals who are compensated to carry out those activities. For these reasons, the organization does not meet the volunteer exclusion. is liable for unrelated business income from , and (See Enclosed Form 4549-A for Unrelated Business Income Adjustment Amounts) Conclusion is liable for unrelated business income from , and is responsible for filing Form 990-T to report unrelated business income.

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