Tax Exempt Organization

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According to Minnich, the Act established the unrelated business income tax (UBIT) for tax years beginning after December 31, 1950. It was created to address and limit the unfair competition that tax-exempt organizations had over competing for-profit entities. (“Unrelated Business Income: A History”). The taxation was accomplished by subjecting the unrelated business activities of tax-exempt organizations to the same taxes as the nonexempt businesses with which they compete (McKinnon 2). Since the expansion of the act in 1969, the unrelated business income tax has yet to change, requiring those who qualify as a tax-exempt organization to be taxed on specific income (Minnich). Colleges and universities qualify as organizations that are tax-exempt from specific income that is related to their overall educational mission, however, when income is deviated from the original purpose of the business activity, the income generated is subject to specific tax – unrelated business income
To determine if a business activity is substantially related requires examining the relationship between the activities that generate income and the accomplishment of the organization's exempt purpose. An activity is related to an exempt purpose only when the conduct of business activity has a casual relationship to the achievement of exempt purposes. The casual relationship must be substantial. The activities that generate the income must contribute importantly to accomplishing the organization's exempt purposes to be substantially related ("Substantially Related”). For example, art museums are exempt as “educational” organizations. IRS rulings indicate sales of postcards with art reproductions, books about art and art‐related materials by an art museum are “related” but sales of science books are not, even though sales of science books would ordinarily be considered an educational activity in its broadest sense. In other words, sales of art‐related items further the museum’s charitable purpose because they are related to the specific method the museum uses to advance its overall educational mission: displaying art (Colombo

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