Unrelated business income is the income from a trade or
business that is regularly carried on by an exempt
organization and that is not substantially related to the
performance by the organization of its exempt purpose or function,
except that the organization uses the profits derived from this
Certain trade or business activities are not treated as an
unrelated trade or business. See Excluded Trade or Business
Trade or business.
The term "trade or business" generally includes any activity
carried on for the production of income from selling goods or
performing services. An activity does not lose its identity as a trade
or business merely because it is carried on within a larger group of
similar activities that may, or may not, be related to the exempt
purposes of the organization.
For example, the regular sale of pharmaceutical supplies to the
general public by a hospital pharmacy does not lose its identity as a
trade or business, even though the pharmacy also furnishes supplies to
the hospital and patients of the hospital in accordance with its
exempt purpose. Similarly, soliciting, selling, and publishing
commercial advertising is a trade or business even though the
advertising is published in an exempt organization's periodical that
contains editorial matter related to the organization's exempt
Regularly carried on.
Business activities of an exempt organization ordinarily are
considered regularly carried on if they show a frequency and
continuity, and are pursued in a manner similar to comparable
commercial activities of nonexempt organizations.
For example, a hospital auxiliary's operation of a sandwich stand
for 2 weeks at a state fair would not be the regular conduct of a
trade or business. The stand would not compete with similar facilities
that a nonexempt organization would ordinarily operate year-round.
However, operating a commercial parking lot every Saturday,
year-round, would be the regular conduct of a trade or business.
Not substantially related.
A business activity is not substantially related to an
organization's exempt purpose if it does not contribute
importantly to accomplishing that purpose (other than through
the production of funds). Whether an activity contributes importantly
depends in each case on the facts involved.
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 that they intend to serve. For example,
to the extent an activity is conducted on a scale larger than is
reasonably necessary to perform an exempt purpose, it does not
contribute importantly to the accomplishment of the exempt purpose.
The part of the activity that is more than needed to accomplish the
exempt purpose is an unrelated trade or business.
Also in determining whether activities contribute importantly to
the accomplishment of an exempt purpose, the following principles
Selling of products of exempt functions.
Ordinarily, selling products that result from the performance of
exempt functions is not an unrelated trade or business if the product
is sold in substantially the same state it is in when the exempt
functions are completed. Thus, for an exempt organization engaged in
rehabilitating handicapped persons (its exempt function), selling
articles made by these persons as part of their rehabilitation
training is not an unrelated trade or business.
However, if a completed product resulting from an exempt function
is used or exploited in further business activity beyond what is
reasonably appropriate or necessary to dispose of it as is, the
activity is an unrelated trade or business. For example, if an exempt
organization maintains an experimental dairy herd for scientific
purposes, the sale of milk and cream produced in the ordinary course
of operation of the project is not an unrelated trade or business. But
if the organization uses the milk and cream in the further manufacture
of food items such as ice cream, pastries, etc., the sale of these
products is an unrelated trade or business unless the manufacturing
activities themselves contribute importantly to the accomplishment of
an exempt purpose of the organization.
Dual use of assets or facilities.
If an asset or facility necessary to the conduct of exempt
functions is also used in commercial activities, its use for exempt
functions does not, by itself, make the commercial activities a
related trade or business. The test, as discussed earlier, is whether
the activities contribute importantly to the accomplishment of exempt
For example, a museum has a theater auditorium designed for showing
educational films in connection with its program of public education
in the arts and sciences. The theater is a principal feature of the
museum and operates continuously while the museum is open to the
public. If the organization also operates the theater as a motion
picture theater for the public when the museum is closed, the activity
is an unrelated trade or business.
For information on allocating expenses for the dual use of assets
or facilities, see Deductions in chapter 4.
Exploitation of exempt functions.
Exempt activities sometimes create goodwill or other intangibles
that can be exploited in a commercial way. When an organization
exploits such an intangible in commercial activities, the fact that
the income depends in part upon an exempt function of the organization
does not make the commercial activities a related trade or business.
Unless the commercial exploitation contributes importantly to the
accomplishment of the exempt purpose, the commercial activities are an
unrelated trade or business.
For the treatment of expenses attributable to the exploitation of
exempt activities, see Deductions in chapter 4.
Excluded Trade or Business Activities
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