The IRS has apparently increased its focus on unrelated business taxable income (“UBTI”) of tax-exempt organizations. At a conference last month, IRS officials indicated they are looking closely at UBTI in all contexts with respect to exempt organizations, including conducting a long-term study on college and university treatment of UBTI.
The comments serve as a reminder that the source of an exempt organization’s income—rather than the use of the funds by the organization—determines whether that income is treated as UBTI. Peter Lorenzetti, an IRS exempt organizations manager, cited two recent cases in which organizations became so involved in unrelated activities that they devoted very little time to their exempt purposes. He noted that this behavior not only results in taxable income, but also jeopardizes an organization’s exempt status, stating “sometimes organizations think the activity wasn’t [UBTI] because they are using the money to help carry out their exempt purposes.”
According to IRS studies, only a small amount of UBTI is reported by exempt organizations. Lorenzetti said the IRS is considering why “year after year after year” the unrelated business activities of some organizations generate losses, leading IRS officials to conclude some organizations are incorrectly offsetting taxable business revenues with expenses that are not properly related to the UBTI activity.
Due to the IRS’s increased focus on UBTI, exempt organizations should continue to carefully monitor the extent of their unrelated business activity. Exempt organizations should ensure that they are correctly (i) reporting their UBTI based on the source of their income and (ii) using properly related expenses to offset UBTI.