A client, a tax-exempt organization, operates a summer camp for children. The camp primarily offers educational programs and recreational activities consistent with its exempt purpose. To cover some costs, the organization also offers a week-long 'adventure photography' workshop to adults, which is open to the public and charges market rates. This workshop is staffed by professional photographers and is not related to the camp's educational programs for children. Is the income from the adventure photography workshop subject to Unrelated Business Income Tax (UBIT)?
- AYes, but only if the workshop is held off-site from the main camp facilities.
- BNo, because the income is used to support the organization's exempt purpose of operating the summer camp.
- CNo, because operating a summer camp is generally an exempt function.
- DYes, because the workshop is a regularly carried-on trade or business not substantially related to the organization's exempt purpose.
Show answer & explanationAnswer & explanation
Correct answer: D. Yes, because the workshop is a regularly carried-on trade or business not substantially related to the organization's exempt purpose.
The adventure photography workshop meets the three criteria for UBIT: it's a trade or business (charging market rates, open to public, professional staff), it's regularly carried on (a week-long offering), and it's not substantially related to the organization's exempt purpose (educational children's camp). The use of the income does not change the nature of the activity itself.
Why the other options are wrong
- A. This is incorrect. The location of the activity is not the determining factor for UBIT; the nature of the activity is.
- B. This is incorrect. The use of income does not determine if an activity is unrelated business income.
- C. This is incorrect. While the summer camp itself is exempt, the workshop is a separate activity.
UBIT - Substantially Related Activity
An activity is 'substantially related' to an exempt purpose only if it contributes importantly to the accomplishment of that purpose. If not, it may be subject to UBIT.
- Connection must be substantial, not incidental.
- Must contribute importantly to exempt purpose.
- Size and scale of activity are considered.
- Use of income does not make an activity related.
Memory trick: Substantially related means 'important contribution', not just a tiny connection.