UBIT and Universities: Inside and Outside the Educational Purpose, Should
Universities Face Taxation on Real Estate Holdings?
by Judith Peck
Abstract
The Unrelated Business Income Tax (UBIT) is imposed on the income of nonprofit
organizations when this income is generated by businesses unrelated to the purpose of the
organization. The Internal Revenue Service defines unrelated business income as income that: 1)
is in a trade or business, 2) is regularly carried on, and 3) is not substantially related to furthering
the exempt purpose of the organization. Once a nonprofit business meets these three conditions,
the income generated by the nonprofit business is taxable.
Nonprofit organizations are generally exempt from tax under I.R.C. § 501(c)(3).
Universities qualify as nonprofit organizations. UBIT applies to universities under I.R.C. §
511(a)(2)(B). Universities are restricted by UBIT as to what type of income can retain this tax
exempt status. A regularly carried on business that is unrelated to the purpose of the university
will be taxed. However, it is not always easy to determine if a university’s activities fall within
the exemption or are subject to UBIT taxation.
When a university ventures into an unrelated business, then the income generated from
this unrelated business is taxable. Recently, universities have ventured into businesses that may
or may not be defined as related to the purposes of the universities. Examples include; alumni
condominiums, public restaurants, bookstores, and child care facilities.
The exemption under UBIT is particularly relevant when universities step into the
business of real estate because the university has the ability to deduct income and property taxes.
1
For profit businesses with the same real estate holdings would pay both income and property tax.
Real estate holdings potentially generate substantial opportunities for taxation or exemption.
A simple solution to taxation on university real estate holdings is fragmentation. Thus,
the university should be able to maximize its tax exemptions derived from our tax laws. At the
same time our government receives taxes when the UBIT requirements are met. Public policy
encourages exemptions for our educational entities, for much of our hope for the future lies in the
education of our youth. On the other hand, taxes fund our governmental services. In fact some
taxes collected find their way back to the educational system through government funds.
Should a university enter the real estate market? Yes, but only if the university can
clearly differentiate which income from the property falls inside and outside the educational
purposes of the institution.
Table of Contents
I. OUR TAX SYSTEM AND NONPROFIT ORGANIZATIONS............................................................... 3
A. TAXATION V. EXEMPTION ........................................................................................................ 4
B. NONPROFIT ORGANIZATIONS.................................................................................................... 4
C. UBIT........................................................................................................................................ 4
II. THE HISTORY OF UBIT............................................................................................................. 6
III. THE UBIT AND UNIVERSITIES ................................................................................................ 9
A. OUTSIDE THE UNIVERSITY’S PURPOSE ..................................................................................... 9
1. It is a trade or business ...................................................................................................... 10
2. It is regularly carried on .................................................................................................... 10
3. It is not substantially related to furthering the exempt purpose of the organization ......... 10
B. INSIDE THE UNIVERSITY’S PURPOSE ....................................................................................... 11
1. It is not a trade or business ................................................................................................ 11
2. It is not regularly carried on .............................................................................................. 11
3. It is substantially related to furthering the exempt purpose of the organization ............... 11
IV. FRAGMENTING UBIT INCOME ............................................................................................ 11
V. FRAGMENTING UNIVERSITY REAL PROPERTY INCOME ........................................................ 14
2
A. UNIVERSITY ALUMNI CONDOS ............................................................................................... 14
B. UNIVERSITY RESTAURANTS ................................................................................................... 16
C. UNIVERSITY BOOKSTORES ..................................................................................................... 18
D. UNIVERSITY CHILD CARE FACILITIES..................................................................................... 19
VI. CONCLUSION .......................................................................................................................... 19
"No government can exist without taxation. This money must necessarily be levied on the
people; and the grand art consists of levying so as not to oppress.''1
Our nation was founded on ideals of justice, fairness, and equality. These principles have
guided both the creation and the application of our laws, including our tax laws. From the very
birth of our country, taxation has been at the foundation of our sense of justice. Eliminating
unfair taxation was at the heart of many of the revolutionaries who established our nation. Even
today, Americans want to believe that our system of taxation is fair. This goal of fairness satisfies
the taxpayer’s desire for justice.
I. OUR TAX SYSTEM AND NONPROFIT ORGANIZATIONS
Our government is funded through tax revenues. Without taxation, our government
would not be able to provide basic community services, such as schools and roads. Thus,
taxation is necessary to our form of government. James Madison stated, "The power of taxing
people and their property is essential to the very existence of government.''2 Although our tax
system is essential, it is not always simple. Even Albert Einstein found tax difficult stating,
“This is too difficult for a mathematician. It takes a philosopher.”3 Difficulty, however, is no
excuse for failing to do our best in understanding and applying our tax system.
1
Frederick the Great, 18th Century Prussian King, http://www.irs.gov/newsroom/article/0,,id=110483,00.html.
James Madison, 4th U.S. President, http://www.irs.gov/newsroom/article/0,,id=110483,00.html.
3
Albert Einstein, http://www.cornerstoneexchange.com/quotes.htm.
2
3
A. TAXATION V. EXEMPTION
Fundamentally, taxes involve money. People do not want to part with money without
good cause. Our tax system need not be perfect, but it should strive to be just and fair. Taxation
involves more than mere numbers, it involves philosophy through public policy. Tax only
enough to fund the government, and leave the rest of the money in the hands of the people. Thus,
a fine line is created between taxable entities and exempt organizations.
B. NONPROFIT ORGANIZATIONS
Nonprofit organization charities are granted an exemption from income tax through
I.R.C. § 501(c)(3).4 In order to qualify as nonprofit under this code5, an organization must:
1) Be organized and operated exclusively for a tax exempt purpose.
2) Not allow earnings to inure to shareholders.
3) Not participate in political activities.
C. UBIT
The UBIT was created to help refine the line between taxation and exemption.6 In order
to understand why we have the UBIT, it is necessary to first recognize why nonprofit
organizations have a unique tax status. Nonprofits serve our communities in a variety of ways by
providing services that benefit our society. This paper specifically explores universities which
provide educational opportunities. Universities qualify as nonprofit organizations.7 Taxing these
nonprofit organizations only takes away from the benefits that they are able to provide. Thus, to
4
I.R.C. § 501(c)(3).
Id.
6
ROBERT R. STATHAM & RICHARD W. BUEK, ASSOCIATIONS AND THE TAX LAWS 42-80 (Chamber of Commerce of
the United States, 1978).
7
I.R.C. § 501(c)(3).
5
4
maximize these benefits to our society, nonprofits, including universities, are allowed exemption
from taxation.
Public policy is served through encouraging education. Society wants people to be
educated in many areas, including law, medicine, and science. Universities must have funds
available for scholarships, new technologies, and research. When universities are taxed, funds
for the educational purposes are diminished.
However, it is also important that these nonprofit organizations stay within the purposes
that serve public policy. One way a nonprofit organization may step outside the boundaries of its
purposes is by running an unrelated business. If a nonprofit organization begins an unrelated
business, this brings into question whether or not the nonprofit purpose is actually being
furthered.
Nonprofit organizations do not retain tax exempt status because the government is
generous, or even because helping others through charity makes us feel like better people.
Nonprofits are tax exempt because this exemption serves public policy. The theory is that
nonprofit organizations provide services that would otherwise go unfulfilled unless the
government became the provider. Of course, any new government service would require funding
from tax dollars. This would lead to an increase in taxes.
Another concern with nonprofit organizations entering unrelated businesses is unfair
competition. A nonprofit organization could reinvest all profits back into the organization itself.
A for profit business cannot reinvest all profits, some profits must be used to pay taxes. This
5
situation presents the opportunity for an unfair advantage for nonprofit organization over a for
profit business.
Societal interests are best served when nonprofit organizations are tax exempt and for
profit businesses are taxed. The UBIT was created to ensure this sense of fairness in our tax
system. However, the UBIT is open to interpretation, and sometimes the line between exemption
and taxation is blurred.
II. THE HISTORY OF UBIT
The UBIT has not always been a part of our tax system. Until 1950, nonprofit
organizations did not have specific guidance on the taxation or exemption status of an unrelated
business. At that time, nonprofit organizations risked their entire tax exempt status when they
entered an unrelated business. Simply put, it was all taxation or all exemption. The UBIT was
enacted in response to several cases involving nonprofit organizations involved in unrelated
business.
Nonprofit organizations must obtain funds in order to operate. Many times, these funds
come from donations. However, nonprofit organizations have looked for other ways to obtain
funds.
In Trinidad v. Sagrada Orden de Predicadores,8 a religious nonprofit organization found
a way to create its own income. The religious organization sold chocolates and wine for a profit.
These profits were used to further the purposes of the organization. In that case, the Supreme
Court held that the means of obtaining the funds was inconsequential in determining tax
exemptions. The important matter was where the funds were to be used. Thus, as long as the
8
263 U.S. 578 (1924).
6
funds furthered the purpose of the organization, the funds were tax exempt even though they
came from an unrelated business.
A few years later in 1938, the Second Circuit reaffirmed this idea in Roche’s Beach, Inc.
v. Commissioner.9 That case involved a nonprofit organization that cared for the poor.10 To
obtain funds, the organization started a business selling umbrellas, food, and drink to
beachgoers.11 The income from this business was used to help the poor.12 Since the funds were
used for charity, they were tax exempt. It did not matter that the funds came from an unrelated
business.
New York University School of Law ran an unrelated business to generate funds for the
law school.13 In 1947, NYU School of Law became the proud owner of a spaghetti factory.
While this might seem an odd investment, the spaghetti deal proved very lucrative.14 In fact,
much of the university law school’s success in the late 1940s can be attributed to spaghetti.15
The law school received well over six figures in profit each year, and $67 million on the sale of
the spaghetti factory.16 The law school was able to build a new academic building, new student
housing, and increase professor salaries.17 These improvements greatly contributed to NYU’s
prestige as a law school. The law school was well within the laws concerning funding the school
9
96 F.2d 776 (2d Cir. 1938).
Id.
11
Id.
12
Id.
13
John Brooks, The Marts of Trade: The Law School and The Noodle Factory (1977), reprinted in NICHOLAS P.
CAFARDI & JACLYN FABEAN CHERRY, TAX EXEMPT ORGANIZATIONS: CASES AND MATERIALS 815-897 (2nd. ed.
2008).
14
Id.
15
Id.
16
Id.
17
Id.
10
7
from an unrelated business. It was the destination of the funds from the unrelated business that
mattered, and no one questioned whether the law school was furthering its educational purposes
with the spaghetti funds. The funds were spent to enhance the educational environment, thus the
funds were tax exempt under the Sagrada theory.
Although the university had academic goals in mind when it acquired the spaghetti
factory, should that be enough? What would prevent universities across the nation from acquiring
a variety of businesses in order to fund their own academic goals? Since the only restraint on
maintaining tax exemption was that the funds from the unrelated business be used within the
purpose of the university, the universities could own any kind of business as long as the income
was funneled back to the university for educational purposes. Each business that was acquired by
a university would thus effectively be taken out of the taxpaying base.
Our government is funded through tax dollars. Universities are nonprofit organizations
that are not paying tax. Thus, income from a university spaghetti factory would not provide our
government with funding. On the other hand a private spaghetti factory would pay tax to our
government. So, the government was losing money every time a university acquired an unrelated
business, i.e. spaghetti factory.
It is not enough that the educational purposes were furthered with the funds from the
unrelated businesses. The tax exemption for nonprofit organizations was not intended to create
university spaghetti moguls. While the public policy wants our universities to succeed in their
educational purposes, this does not outweigh the societal interest in funding our government.
8
Congress recognized this loophole allowed by the Sagrada theory of nonprofit
exemptions. In order to prevent nonprofits from taking advantage of this loophole, the UBIT was
enacted. The Internal Revenue Code defines the requirements of the UBIT for nonprofit
organizations under three conditions; 1) is trade or business, 2) is regularly carried on, and 3) is
not substantially related to furthering the exempt purpose of the organization.18
III. THE UBIT AND UNIVERSITIES
“The tax which will be paid for education is not more than the thousand part of what will
be paid if we leave the people in ignorance.” President Thomas Jefferson19
Universities must follow the UBIT.20 Most universities strive to adhere to the laws of our
nation.21 This does not prevent universities from seeking to maximize the benefit of their
nonprofit status. Thus, a prudent university will find ways to increase income while still
following our tax code. This has been true for many decades. Before the UBIT was enacted,
NYU legally received money from the spaghetti business. Prior to UBIT, universities bought
several different businesses in order to gain income, including gas stations, an airport, and a
cattle ranch.22 Still today universities seek to gain tax exempt income wherever possible.23
A. OUTSIDE THE UNIVERSITY’S PURPOSE
The UBIT provides a three prong test for determining the tax status of a nonprofit
organization’s unrelated business.24
18
I.R.C. § 13; see also I.R.S. Pub. No. 598 (Nov. 2007).
President Thomas Jefferson, http://www.taxanalysts.com/www/freefiles.nsf/Files/Yablon.pdf/$file/Yablon.pdf.
20
I.R.C. § 511(a)(2)(B).
21
American Council On Education and Others Respond to Treasury Proposals to Ways and Means Oversight
Subcommittee on UBIT Revisions, 87 Tax Analyst, Tax Notes Today, 167-36.
22
Michael S. Knoll, The UBIT: Leveling an Uneven Playing Field or Tilting a Level One?, 76 FORDHAM L. REV.
857 (2007).
23
Bittker and Lokken, FED. TAX'N INCOME, EST.& GIFTS ¶ 103.3(2008).
24
I.R.C. § 513(a).
19
9
1. It is a trade or business
A “trade or business” is any activity carried on for the production of income from the
sale of goods or the provision of services.25 The Supreme Court examined this definition in
United States v. American College of Physicians.26 The court stated that each business must be
examined on its own.27 In that case advertising within a medical journal was found to be outside
the purpose of the nonprofit organization.28 Even though a business might appear to fit within the
broader purposes of the nonprofit, an examination of the individual business and its purpose was
necessary.
2. It is regularly carried on
Oregon State University Alumni Ass'n., Inc. v. C.I.R. determined that royalties from credit
card was not in competition with other business.29 In that case, the university’s minimal
involvement in the credit card solicitations was not enough involvement to meet the requirements
of the UBIT.30 There must be more than occasional business transactions in order to be
considered “regularly carried on.”
3. It is not substantially related to furthering the exempt purpose of the
organization
Henry E. & Nancy Horton Bartels Trust For Ben. of University of New Haven v. U.S.
examined whether a trust fund created to benefit the university was substantially related to the
university’s purpose.31 In that case the funds used to create the trust came from borrowed money.
25
I.R.C. § 513(c).
475 U.S. 834 (1986).
27
Id. at 836
28
Id.
29
T.C. Memo. 1996-34, 1996 WL 33213, U.S.Tax Ct.,1996.
30
Id.
31
209 F.3d 147 (2d Cir. 2000).
26
10
The court determined that the university purposes were not furthered by borrowing money to
make money.32
B. INSIDE THE UNIVERSITY’S PURPOSE
Fortunately, the I.R.S. has provided guidance as to what falls within university purposes
and thus remains tax exempt.33
1. It is not a trade or business
For example, rock concerts and sporting events held at university campuses by outside
promoters are not considered a trade or business that furthers the purpose of the university.34
2. It is not regularly carried on
Vending machines that are maintained by an outside service company are not considered
to be “regularly carried on.”35 Thus, the UBIT requirement is not met and the university does not
have to pay tax on this form of income.
3. It is substantially related to furthering the exempt purpose of the organization
Revenue Ruling 76-33 sets out the taxation rules for nonprofit universities and the
unrelated income from the rental of dormitory facilities and provides a starting point for existing
rules as how to treat university owned housing that is rented for income.36
IV. FRAGMENTING UBIT INCOME
The complexities of the UBIT must be addressed. The UBIT focuses on our societal need
for a sense of fairness in our tax system. The tax system needs to achieve a believable sense of
32
Id. at 148.
Michael A. Rosenhouse, Annotation, When Will Income of Tax-Exempt Organization Be Deemed Income
from Unrelated Trade or Business Taxable Under §§ 511 to 513 of Internal Revenue Code (26 U.S.C.A. §§ 511 to
513), 199 A.L.R. Fed. 591 (2005).
34
Streckfus, Paul, IRS'S Owens Briefs Universities on Tax Liabilities, 93 Tax Analyst, Tax Notes Today, 233-7.
35
2001 Tax Analyst, Tax Notes Today, 192-9.
33
11
fairness. Simply put, we must use our best effort in the attempt to achieve a sense of fairness.
Otherwise, nonprofits will feel that they are carrying too heavy a tax burden, while at the same
time for profits will feel that they are carrying too heavy a tax burden. The lack of fairness creates
resentment.
The UBIT debate pits for-profit organizations, primarily
representing small business, against an array of tax-exempt
organizations ranging from hospitals to universities. Small business
has taken the offensive position, arguing for a tax remedy that would
drastically scale down, if not eliminate, the edge held by tax-exempt
entities engaging in competing business activities. The tax-exempt
organizations have countered by noting the disappearance of many
traditional funding sources and the subsequent need for tax-exempts
to branch out. It is a struggle not between a David and a Goliath but
between two Davids.37
A system of fragmentation within the UBIT is necessary. We want nonprofit
organizations to continue serving our communities with tax exempt funds. We also want for
profit enterprises to continue to fund our government through tax dollars. The nonprofit sector
and the for profit sector do not have to be mutually exclusive of one another. Fragmenting
university income from real estate holdings presents a fair solution to this problem.
So, when the question arises as to whether a university should deal in real estate holding,
the answer is yes as long as there is fragmentation. Fragmentation can be accomplished through
rather simple means. Indeed, this is not the first time that our tax system has dealt with
fragmentation.
The following text explains one author’s approach to fragmenting the sales of a nonprofit
organization’s gift shop:
36
37
Rev. Rul. 76-33, 1976-1 C.B. 169.
House Oversight Subcommittee Ubit Proposals Elicit Cautious Reaction, 88 Tax Analyst, Tax Notes Today, 78-1.
12
Apply UBIT to income from sale of gift shop items except income from (1) onpremise sales of low-cost mementos (such as memorabilia and souvenirs); (2) sale of any
article of an educational nature purchased at an on-premise gift shop which relates to the
organization visited; (3) sale of guides to the organization's exhibits, events or facilities;
and, (4) the sale of articles purchased from an on-premise hospital gift shop of a nature
generally used by or for inpatients of the hospital. 38
Table 1 sets forth guidelines for museums that would provide for the fragmentation of
unrelated business income. In fact, the fragmentation provides a detailed example of when the
UBIT applies. If the museum has a dinosaur display about triceratops, then books on triceratops
would be exempt. However, a book that includes all dinosaurs generally would be taxed. If this
level of detail is applied in the museum setting, then the same level could be applied in the
university setting. Fragmentation of university income is not only possible, it is plausible.
Table 1. Museum Unrelated Business
UBIT would not apply to:
-income from a paperweight, key chain, or
other low-cost memento of the visit to the
exempt organization's facility.
UBIT would apply to:
-income from a museum shop sale of a
general art history book and sale of furniture
sold by a private foundation for a historical
landmark.
-income from the sale of a bookmark, tote
bag, or other item with the museum's name
imprinted that indicates a visit to the museum.
-sales of museum publications about its own
photography collection or Van Gogh exhibit
or miniature replica of a museum's collection
of furniture.
-income from the sale of all hospital gift shop
items such as flowers, loungewear, greeting
cards, and candy.
38
List of Recommendations on the Unrelated Business Income Tax for the Consideration of the House Ways and
Means Oversight Subcommittee, 88 Tax Analyst, Tax Notes Today, 71-7
13
V. FRAGMENTING UNIVERSITY REAL PROPERTY INCOME
Universities have dealt in real property for many years. Recently, the real property
holdings have developed into new ways to create income. Thus, we must decide what should be
taxed and what should remain exempt.
A. UNIVERSITY ALUMNI CONDOS
Recently, the University of Michigan built condos for its alumni.39 Other universities are
also joining this trend.40 This calls into question whether condos for alumni further the
educational purposes of the university. Having university alumni around could enhance the
educational atmosphere because these alumni would presumably because these alumni would
bring a wealth of knowledge when interacting with the student body. However, the university’s
purpose is not to provide housing for alumni. The university has an educational purpose. The
question is whether alumni condos fit within the educational purpose. Student housing is
appropriately owned by the university because students are in the process of pursuing a degree at
the university.
Alumni living on campus could serve an education purpose. Alumni would have
knowledge and experience that could be shared with students. The interaction between alumni
and students would fall under the educational purpose of the university. However, there would
need to be limitations on qualifying alumni housing.
Universities might intend to fill alumni condos with alumni, but what happens when not
enough alumni are interested? The university will likely allow non alumni in the condos. At what
39
Associated Press, Alumni Return to College Towns for Retirement, MSNBC, March 17, 2005,
http://www.msnbc.msn.com/id/7193144.
40
Lisa Belkin, Alumni Condos on Campus, N.Y. Times, March 5, 2006,
http://www.nytimes.com/2006/03/05/magazine/305speculator.1-1.html.
14
available
at
point are there too few alumni to satisfy the educational purpose? There must be a breaking point
at which the condos filled with non alumni should not qualify for an exemption under the UBIT.
Alumni condos would need to be within a reasonable distance of the university campus in
order to facilitate alumni and student interaction. University condos built 10 miles from the
campus would not likely induce interaction between alumni and students. The question is what
distance is reasonable to facilitate this interaction. This might be decided on a case by case basis.
A university with a sprawling campus might reasonably build condos further away than a
university with a compact campus.
Alumni would need to spend a reasonable amount of time living in the condo in order to
facilitate interaction with students. Some alumni might purchase the condo as a second home,
and thus maintain a part time residence. This could still meet the educational purpose. However,
what if alumni only stay on campus a short time each year? Does this meet the educational
purpose? Probably not, if the alumni are on campus only for a few short weekends each year.
At Texas Tech University, developers (not the university) plan to build condos alumni
and students.41 The developers expect some of the condos purchased by alumni to be used as a
place to stay on football game weekends.42 Although this example is not university owned,
university alumni condos could be purchased for this same use. Thus, in order to meet the
education purpose, alumni condos should require a minimum use time. Table 2 provides
examples of possible limitations.
41
42
http://www.lubbockonline.com/stories/121006/bus_121006015.shtml.
Id.
15
Table 2. University Unrelated Business, Alumni Condos
UBIT would not apply to:
UBIT would apply to:
-housing comprised of 75% or higher
university alumni residents.
-housing comprised of less than 75%
university alumni residents.
-housing within 3 miles of the university
campus areas.
-housing further than 3 miles from the
university campus areas.
-live in the condo 6 months or more a year
-live in the condo less than 6 months a year
B. UNIVERSITY RESTAURANTS
Another current issue involves a nonprofit organization going into the restaurant business
in New York City.43 This brings into question whether nonprofits in an unrelated business have
an unfair advantage over for profit entities.44 This is another example of current university
ventures into unrelated business or trade.
Restaurants operated by a nonprofit organization remain exempt from tax when
“substantially related” to the nonprofit’s purpose.45 “The operation of a dining room, cafeteria,
and snack bar by an exempt art museum for use by the museum staff, employees, and members
of the public visiting the museum does not constitute an unrelated trade or business activity.46”
Thus, a university restaurant used by university patrons should remain tax exempt. However, not
all university restaurants have only university patrons. When income is received from university
and non university patrons, some income should be exempt and some should be taxed.
43
Michael S. Knoll, The UBIT: Leveling an Uneven Playing Field or Tilting a Level One?, 76 FORDHAM L. REV.
857 (2007).
44
Id.
45
Rev. Rul. 74-399, 1974-2 C.B. 172.
46
Id.
16
How do we fragment a nonprofit restaurant? Similar to the list above for gift shops, we
could create a list of taxable and exempt income. The location of the restaurant should be taken
into account. A location in the heart of campus would seem to serve mainly university patrons,
thus serving a university interest. A location on a busy street on the outskirts of campus would
naturally bring in patrons from outside the university.
A percentage of the profits could be attributed to the university patrons and a percentage
could be attributed to outside patrons. The income generated from these outside patrons would be
taxable. University patrons could identify themselves through a swipe of a university identity
card. Table 3 provides examples of possible limitations.
Table 3. University Unrelated Business, Restaurants
UBIT would not apply to:
-restaurants with no storefront visible from
non campus areas
UBIT would apply to:
-restaurants with storefront visible from non
campus areas: income from percentage of non
university patrons
-restaurants with storefront visible from non
campus areas: income from percentage of
university patrons (students, faculty, staff).
OR
-all income generated by the restaurant when
65 percent or more of the patrons are
university patrons
OR
-all income generated by the restaurant when
less than 35 percent of the patrons are
university patrons
17
C. UNIVERSITY BOOKSTORES
UBIT application to university bookstores has been addressed in Tax Notes Today.47 To
determine whether the bookstore income is “substantially related” to the purpose of the
university, convenience is considered.48 If the business itself is unrelated to the nonprofit
purpose, the UBIT applies. However, there is an exception when the business is for the
convenience of the nonprofit organization.
A bookstore on the campus of the University of Oklahoma provides books and items for
the convenience of university patrons. However, not all patrons are university patrons. The
location of this bookstore is in the concourse area of the university football stadium. This
bookstore also serves non university patrons on football game days. The bookstore offers
clothing, jewelry, and gifts. Although support of the university football team is important, selling
team trinkets does not contribute to the educational purpose of the university.
Textbooks purchased by university students should be exempt. Sweatshirts purchased by
football fans should not be exempt. The income generated by this bookstore should be
fragmented. Table 4 provides examples of possible limitations.
Table 4. University Unrelated Business, Bookstores
UBIT would not apply to:
-textbooks
-books and items provided for the
convenience of university patrons
UBIT would apply to:
- books and items not related to the
educational purpose that are not provided for
the convenience of university patrons
47
Parker, Byron A., Dillon, Randy, KPMG Peat Marwick, Schools Anxious About Proposed Examination
Guidelines, Says Peat Marwick, 93 Tax Analyst, Tax Notes Today, 62-32.
48
Id.
18
D. UNIVERSITY CHILD CARE FACILITIES
Child care facilities located on a university campus are a “convenience” for university
students, faculty, and staff. Child care is not substantially related to the educational purpose of
the university. This is a business unrelated to the educational purpose unless the facility is used
as a teaching tool for students studying early childhood education. However, since child care is a
convenience for university patrons, it should be exempt.
If the facility is not used as a teaching tool, it is subject to UBIT. The income generated
from caring for children of university student, faculty or staff should be exempt. The income
generated from caring for children of non university patrons should be taxed. Table 5 provides
examples of possible limitations.
Table 5. University Unrelated Business, Child Care Facilities
UBIT would not apply to:
UBIT would apply to:
-children of university students, faculty, and
staff
- children of non university patrons
VI. CONCLUSION
Determining where the UBIT applies in university real estate holdings is necessary in
order to maintain a sense of fairness in our tax system. As three authors in Tax Notes Today
state, “…Guidelines can serve as an important educational device to the tax-exempt community
if issues are clearly stated, if objective criteria can be utilized to the greatest extent possible, and
if the positions expressed comport more closely to the statutes and regulations.49”
When a nonprofit organization operates an income-producing business, it is important to
49
Id.
19
determine whether this income should be taxed. In order to increase the funds available for
nonprofit organizations (to further purposes that serve the greater good), public policy approves
the tax exempt status of nonprofit organizations.50 On the other hand, the public interest is also
served by our tax-funded government. Without the collection of taxes, our government would
lack operational funds. Thus, we must balance the need to collect taxes with the need of
nonprofit organizations to retain funds for purposes that serve societal interests.
These unrelated university businesses must be considered when allowing tax exemptions
for nonprofit organizations. Taxpaying businesses could suffer a disadvantage when forced to
compete with tax exempt businesses.51 Unrelated university businesses should not be tax exempt.
If these university businesses, that are unrelated to the purposes of the university, compete with
taxed for profit businesses, then university businesses would receive an unfair economic
advantage through tax law.52
Specifically, when universities venture into real property, tax exemptions are magnified
because nonprofits are exempt from property tax. So, not only do other businesses suffer
economic disadvantages, but local governments also lose out on property tax income.
Consequently, it is imperative that each university unrelated business is evaluated under
the UBIT. A determination of what falls inside and outside the university’s purpose is essential.
Since many university businesses encompass both related and unrelated purposes, fragmenting
the taxable and tax exempt portions of the business allows fair competition and necessary
taxation.
50
51
Henry B. Hansmann, The Role of the Nonprofit Enterprise, 89 YALE L.J. 835, 838 (1980).
John D. Colombo, Commercial Activity and Charitable Tax Exemption, 44 WM. & MARY L. REV. 487 (2002).
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52
Boris I. Bittker, The Exemption of Nonprofit Organizations from Federal Income Taxation, 85 Yale L.J. 299,
301 (1976).
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