CPA Exam — REG (Regulation)Federal Taxation of EntitiesMedium
A client, a tax-exempt organization, operates a publishing house that produces and sells books related to its exempt educational mission. The prices charged for the books are set to cover costs and generate a modest surplus which is used to further the organization's educational programs. Is the income from the sale of these books subject to Unrelated Business Income Tax (UBIT)?
- ANo, because all income of tax-exempt organizations is exempt from UBIT.
- BYes, because selling books is a trade or business.
- CYes, because the organization generates a surplus from the sales.
- DNo, because the activity is substantially related to its exempt educational purpose.
Show answer & explanationAnswer & explanation
Correct answer: D. No, because the activity is substantially related to its exempt educational purpose.
Income from an activity that is substantially related to the organization's exempt purpose is not subject to UBIT. Producing and selling books directly related to an educational mission is integral to that mission, even if it generates a surplus. The key is the 'substantial relatedness' to the exempt purpose.
Why the other options are wrong
- A. This is incorrect; not all income of tax-exempt organizations is exempt from UBIT. Only income from activities substantially related to their exempt purpose is exempt.
- B. While it is a trade or business, its substantial relatedness to the exempt purpose exempts it from UBIT.
- C. Generating a surplus does not automatically trigger UBIT if the activity is substantially related to the exempt purpose.
UBIT - Substantially Related Activity
An activity is not subject to Unrelated Business Income Tax (UBIT) if it is substantially related to the exercise or performance of the organization's exempt purpose. This means the activity contributes importantly to the accomplishment of that purpose.
- Substantially related activities are exempt from UBIT.
- Contribution must be important to the exempt purpose.
- Profit motive alone does not determine relatedness.
- Sales of products derived from exempt activities can be related.
Memory trick: UBIT: Related Mission, No Tax Collision!