TheIRSUniversityComplianceProjectReportonUBITIssues:
RoadmapforEnforcement...Reform...orRepeal?
JohnD.Colombo*
OnApril25,2013,theInternalRevenueServicereleaseditslong‐awaitedfinalreport
onitscollegeanduniversitycomplianceproject.1Oneofthemajoremphasesofthis
projectwasinvestigatingcompliancewithunrelatedbusinessincometax(UBIT)rules.
Thefinalreportindicatedsignificantcomplianceproblems,butfranklynothingthat
studentsoftheUBITwouldnothaveexpected.Ultimately,thereportraisesaseriesof
existentialquestionsfortheUBIT,includingwhetherproperenforcementofthecurrent
rulesisevenpossible,andifnot,whethermajorreformorrepealarebettersolutions.
ThoughIhavebeenaconsistentadvocateofmajorreformoftheUBIToverthepastmany
years,myownviewisthatthereportprovidesastrongcaseforsimplyrepealingtheUBIT.
Thispaperaddressesthesequestionsinthreemainparts.First,Ireviewand
summarizeexistingUBITlaw,particularlyasitappliestocollegesanduniversities.While
thisbodyoflawisfamiliartothosewhoworkwithexemptorganizations,itprovidesa
usefulframeworkforthediscussiontofollow.Inextgiveaveryshortsummaryofthe
complianceproject’sparticularfindingswithregardtotheUBIT.Thefinalpartthenturns
totheexistentialquestionsraisedabove:istheUBITevencapableofenforcementinthe
modernuniversitycontext?Ifnot,wouldmajorreformhelp,orhastheUBIToutlivedits
usefulness?
I. A(Brief)SummaryofExistingLaw(withspecialattentiontocollegesand
universities)
A.BasicRules
Sections511‐513oftheInternalRevenueCode(“Code”)togetherimposetaxat
standardcorporatetaxratesonthe“unrelatedbusinessincome”ofanotherwise‐exempt
*AlbertE.Jenner,Jr.Professor,UniversityofIllinoisCollegeofLaw.ThispaperwasdeliveredattheOctober,
2013NationalCenteronPhilanthropyandtheLawannualconference,andIthankmycommentators,Ms.
BonnieBrier,GeneralCounselofNYUandMr.LorrySpitzer,partneratRopes&Gray,andalltheother
participantsfortheirhelpfulcomments.
1InternalRevenueService,CollegeandUniversitiesComplianceProjectFinalReport,availableat
http://www.irs.gov/pub/irs‐tege/CUCP_FinalRpt_042513.pdf(hereafter“FinalReport”).
1 organizationunderSection501.2Thebasicstatutoryrequirementsfortheapplicationof
theUBITare(1)a"tradeorbusiness”asthattermisusedinSection162oftheCode,3(2)
thatis“regularlycarriedon,”4and(3)isnot“substantiallyrelated”totheaccomplishment
oftheorganization’sexemptpurpose.5Thefirsttwooftheserequirementsarerelatively
clear.A“tradeorbusiness”isaprofit‐makingactivitythatinvolvesthesaleofgoodsor
services.6Onequirkofthe“tradeorbusiness”requirement,however,isthatinordertobe
atradeorbusiness,anactivitymustbecarriedonforprofit.7TheIRShasinrecentyears
becomefarmoreaggressiveinusingthe“profitmotive”factortodisqualifymoney‐losing
venturesfromUBITanalysis,therebylimitingsituationsinwhichlossesfromoneactivity
offsetprofitsfromanother,8andindeedappearstobeusingcriteriaunderSection183
(knowncolloquiallyasthe“hobbyloss”rules)todeterminewhetheraprofitmotiveexists.9
2TheoneaspectoftheUBITthatIdonotconsiderinthispaperisdebt‐financedincomeunderSection514;
whilemanycollegesanduniversitiescertainlyusebondfinancingandotherdebttoacquireassets,theIRS
finalreportdidnotfocuson514issuesasbeingofsignificantimportanceinUBITcompliance.Moreover,the
overallstructureofsection514hasbeencritiquedmanytimesinthepast,andthereislittletoaddtothat
discussion.Forasamplingofthesecritiques,see SamuelD.Brunson,RepatriatingTax‐ExemptInvestments:
TaxHavens,BlockerCorporations,andUnrelatedDebt‐FinancedIncome,106Nw.U.L.Rev.225(2012);Emily
Cauble,Harvard,HedgeFunds,andTaxHavens:ReformingtheTaxTreatmentofInvestmentIncomeEarnedby
TaxExemptEntities,29Va.TaxRev.695(2010);MiltonCernyetal.,NewScrutinyofCollegeandUniversity
ExecutiveCompensationandUnrelatedBusinessActivity,37J.C.&U.L.93(2010);RobertJ.Jackson&William
B.Weatherford,DoTax‐ExemptEntitiesHavean"Ace"UpTheirSleeves?(Section514‐‐Debt‐FinancedIncome),
65ExemptOrg.TaxRev.583(2010);SuzanneRossMcDowell,TaxationofUnrelatedDebt‐FinancedIncome,
12N.Y.U.Nat'lCenteronPhilanthropy&L.Conf.§C(2000).Thisarticlealsoavoidsasmuchaspossible
discussionsoftheUBITimplicationsofresearcharrangementsandathleticprograms,whicharethesubject
ofotherpapersatthisconference.
3I.R.C.Section513(a);Treas.Reg.1.513‐1(b).
4I.R.C.Section512(a);Treas.Reg.1.513‐1(c).
5I.R.C.Section513(a);Treas.Reg.1.513‐1(d).
6Treas.Reg.1.513‐1(b).
7See,e.g.,U.S.v.AmericanBarEndowment,477U.S.105,110n.1(1986)(“taxpayer’sprimarypurposefor
engagingintheactivitymustbeforincomeorprofit.”);ProfessionalInsuranceAgentsv.Comm’r,726F.2d
1097,1102(6thCir.1984)(“existenceofagenuineprofitmotiveisthemostimportantcriterionfor...atrade
orbusiness.”).
8SeeFRANCESR.HILLANDDOUGLASM.MANCINO,TAXATIONOFEXEMPTORGANIZATIONS¶22.03at22‐8(2002,supp.
2013);BRUCER.HOPKINS,THELAWOFTAX‐EXEMPTORGANIZATIONS638‐640(10thed.2011).
9Initsoriginalquestionnairetocollegesanduniversitiessentatthebeginningofitscomplianceproject,the
agencyaskedrespondentstoindicate“whetheryourorganizationincurredalossfromtheactivityinatleast
threeoutofthefivepreviousyears(2001–2005).”IRSForm14018,ComplianceQuestionnaireCollegesand
Universities7‐8,availableathttp://www.irs.gov/pub/irs‐tege/sample_cucp_questionnaire.pdf.The“three
outoffiveyear”standardisaninversionofthesafeharborprovidedunderSection183,whichstatesthatan
activitywillbepresumedtobe“for‐profit”ifthetaxpayerhasreportedaprofitinthreeofthepreviousfive
2 “Regularlycarriedon”meansthatthebusinessisconductedwiththesame“frequency
andcontinuity”asafor‐profitanalog.Forexample,for‐profitrestaurantsoperateyear‐
round.Therefore,arestaurantoperatedbyacharityyear‐roundwouldbe“regularly
carriedon,”butafoodboothoperatedfortwoweeksoftheyearatthelocalstatefair
wouldnot.10Ontheotherhand,ifacharityoperatedaChristmas‐treelotinNovemberand
December,thatbusinesslikelywouldbe“regularlycarriedon”becausecommercial
Christmas‐treelotsoperateseasonallyduringthatsameperiod.
ByfarthemostdifficultoftheUBITcriteriatoapplyisthelast.Theregulationsstate
thatinorderforatradeorbusinesstobesubstantiallyrelated,itmustbeara“causal
relationship”totheaccomplishmentoftheorganization’sexemptpurposeand“contribute
importantly”tothatpurpose.11BothIRSrulingsandcasessuggestthatthismeansthatthe
businessmustbetieddirectlytothewayinwhichthecharityspecificallyexecutesits
exemptpurpose,ratherthansimplyrelatedtothatpurposeinsomediffuseway.For
example,artmuseumsareexemptas“educational”organizations.IRSrulingsindicate
salesofpostcardswithartreproductions,booksaboutartandart‐relatedmaterialsbyan
artmuseumare“related”butsalesofsciencebooksarenot,12eventhoughsalesofscience
bookswouldordinarilybeconsideredaneducationalactivityinitsbroadestsense.In
otherwords,salesofart‐relateditemsfurtherthemuseum’scharitablepurposebecause
theyarerelatedtothespecificmethodthemuseumusestoadvanceitsoveralleducational
mission:displayingart.Similarly,inCarleFoundationv.U.S.,13the7thCircuitCourtof
Appealsheldthatpharmacysalesbyanexempthospitalwere“related”whenthesales
weretopatients,butnotwhenthesalesweretothegeneralpublic.Salestopatientsare
years(twooutoftheprevioussevenyearsiftheactivityisbreeding,trainingorracinghorses).I.R.C.Section
183(d).Section183,however,doesnotbyitstermsapplytotheUBITactivitiesofanexemptorganization,
sincethestatuteappliesonlytoindividualsandScorporations.I.R.C.Section183(a).Moreover,failingthe
presumptionunderSection183(d)doesnotmakeanactivity“not‐for‐profit”–rather,itsimplyinvokesa
complexfactsandcircumstancestest,whichmakesclearthatactivitiescanshowlossesformanyyearsand
stillbe“for‐profit”(forexample,arealestatedevelopmentwhichhaslegitimateexpectationsofprofitupon
saleofthelandandbuildingsyearsdowntheroad).SeeTreas.Reg.1.183‐2.
10Treas.Reg.1.513‐1(c)(2).SeeNCAAv.Comm’r,914F.2d1417,1421‐22(10thCir.1990).
11Treas.Reg.1.513‐1(d)(2).
12Rev.Rul.73‐105,1973‐1Cum.Bull.264.
13CarleFound.v.UnitedStates.,611F.2d1192(7thCir.1979).
3 directlyconnectedtotheexecutionofahospital’sexemptpurpose:providingmedicalcare
topatients;salestothegeneralpublicarenot.
Finally,amajoroverlaytothesethreemainrequirementsisthe“fragmentation”rule.
CodifiedinSection513(c),thisrulepermitstheIRSto“fragment”anoverallbusiness
activityintoitsincomeproducing“parts”andtesteachofthosepartsagainsttheUBIT
requirementssetforthabove.Theregulationsdescribethefragmentationruleasfollows:
Activitiesofproducingordistributinggoodsorperformingservicesfrom
whichaparticularamountofgrossincomeisderiveddonotloseidentityas
tradeorbusinessmerelybecausetheyarecarriedonwithinalarger
aggregateofsimilaractivitiesorwithinalargercomplexofotherendeavors
whichmay,ormaynot,berelatedtotheexemptpurposesofthe
organization.14
Whilesaleofadvertisinginotherwise‐exemptpublicationswastheoriginalsourceofthe
fragmentationruleandledtooneofthemorefamousUBITcasesinU.S.v.AmericanCollege
ofPhysicians,15theregulationsoffertwootherspecificexamples(althoughtheServicehas
usedthefragmentationruleinanumberofothercontexts16):hospitalpharmaceutical
salestothegeneralpubliccanbefragmentedfromsalestopatientsandadvertising
activitiescanbefragmentedfrompublicationofanunderlyingmagazineorjournal.17Note
thatthefragmentationcanbebyproduct(e.g.,fragmentingthesaleofsciencebooksbyan
artmuseumfromsalesofartbooks18)orbytheclassofpersonsserved(e.g.,patientsvs.
non‐patients,orintheuniversitycontext,students/faculty/staffvs.thegeneralpublic19).
14Treas.Reg.1.513‐1(b).Seegenerally,HILLANDMANCINO,supranote8,at¶22.02;HOPKINS,supranote8,at
643.
15UnitedStatesv.AmericanCollegeofPhysicians,475U.S.834(1986)(salesofadvertisinginmedicaljournal
notsubstantiallyrelated;advertisingcouldbeseparatelytestedunderUBITbecauseoffragmentationrule).
Foradditionaldiscussionofadvertisingintheuniversitysetting,seethediscussionregardingcorporate
sponsorshippaymentsatnotes37‐48,infra.
16Forexample,theIRShasfragmentedsalesofspecificitemsbymuseumgiftshops,holdingthatinthecase
ofanartmuseum,salesofartreproductions,artpostcards,booksaboutartandsoforthare“related”while
salesofsciencebooksare“unrelated.”Rev.Rul.73‐104,1973‐1C.B.263;Rev.Rul.73‐105,1973‐1C.B.264.
17Treas.Reg.1.513‐1(b).
18Rev.Rul.73‐105,1973‐1C.B.264.
19Tech.Adv.Mem.9645004(useofuniversitygolfcoursebystudentsandstaffisrelated;usebyalumniand
guestsnotrelated).
4 Thusasdetailedbelow,thefragmentationruleprovidestheIRSwithaverypowerfultool
to“sliceanddice”revenuestreamsinvariouswaysforUBITtestingpurposes.
Anumberofcourtprecedents,IRSrulingsandotherIRSguidanceonthesebasicrules
directlyinvolveuniversities.Inoneofthemorefamouspronouncementsonwhethera
tradeorbusinessis“regularlycarriedon,”the10thCircuitinNCAAv.Commissioner20held
thatincomefromsalesofadvertisingintheNCAAmen’sbasketballtournamentsouvenir
programwasnotsubjecttotheUBITbecausethetournament(andhencethesaleof
advertisingfortheprogram)wasconductedoverashortperiodoftimeonceayearand
thusnot“regularlycarriedon.”
Severalotherprecedentsinvolvethe“substantiallyrelated”criterion.TheIRS
regulations,infact,useaperformingartsexampleinillustratingwhenanactivityis
substantiallyrelated,notingthatsalesofticketstothegeneralpublicwouldberelated
activityinthiscasebecausepartofthetrainingforperformingartsstudentsisteaching
performanceinfrontofageneralaudience.21Underasimilartheory,theincomefrom
ticketssoldtothepublicforathleticeventsalsoisconsidered“related.”22Traveltour
programsbyuniversityalumniassociations,ontheotherhand,generallyfailthe
substantiallyrelatedtestwithoutasubstantialformaleducationalprogram,23and
regulationsontraveltouractivitiesfinalizedin2000indicatethattheServicewillusethe
fragmentationruletotestindividualtoursforcompliancewiththe“educationalcontent”
standard.24
20NCAAv.Comm’r,914F.2d1417(10thCir.1990).Myownviewisthatthiscasewaswronglydecided.The
keyquestionin“regularlycarriedon”analysisiswhethertheactivityiscarriedonwiththesametimingand
frequencyasacommercialanalogue.Inthecase,thecourtseemedtoadoptsportsmagazines(e.g.,Sports
Illustrated)asthecommercialcomparison.Onthatstandard,ofcourse,theNCAA’ssouvenirprogramwas
not“regularlycarriedon”becausesportsmagazinesarepublishedmonthly(ormoreoften)throughoutthe
year,ratherthanforashorttimeonceayear.Butthecorrectanalogueisn’tSportsIllustrated–itis
advertisingsoldbytheNBA,NFL,NHL,orMLBforitschampionshiptournaments,allofwhicharesimilarly
heldforashortperiod(well,OK,someofthemdoseemtogoonforever...)onceayear.Alltheprofessional
leagueshavesouvenirprogramsfortheirchampionships,justliketheNCAA.
21Treas.Reg.1.513‐1(b).
22See,e.g.,Rev.Rul.80‐296,1980‐2C.B.195.
23Rev.Rul.78‐43,1978‐1C.B.164.
24Treas.Reg.1.513‐7(a).
5 FacilityusealsohasbeenthesubjectofIRSguidance.Ingeneral,theIRShasheldthat
useofuniversityfacilities,suchasrecreationalfacilities,bystudents,facultyandstaffis
related,butusebythegeneralpublic(includingalumni)isnot.25Whenitcomestoevents
heldinuniversityfacilities,incomefromcommercialacts(asopposedtostudent
productions)generallyisunrelated,unlessthereisastrongconnectionbetweenthe
commercialactandtheuniversity’sexecutionofitseducationalmission.Havingthe
ChicagoSymphonyplayinaperformingartscentermightwellberelatedtotheuniversity’s
fineartseducationalmission;thesameargumentishardertomakeforgeneral
entertainmentactssuchasrockconcerts,professionalsportsgames,andsoforth.26
TheIRSalsohasconsideredtheUBITwithrespecttoprogrammaticeffortsthatdonot
directlyinvolveuniversitystudents,suchassummermusicorathleticcamps.Revenue
fromsuchcampsrunbytheuniversitygenerallyisconsidered“related”becausethecamps
involvedirectinstructiontoimprovetheabilitiesoftheparticipants–aclassiceducational
activity.27 B.KeyExceptions(againwithspecialemphasisonuniversityoperations)
“Riddledwithexceptions”issomethingofanunderstatementincharacterizingthe
UBIT.Whilecatalogingalloftheexceptionslikelywouldtriplethelengthofthisarticle
(andinanyevent,suchcatalogingalreadyhasbeendonemeticulouslybytheleading
treatisesonexemptorganizations28),afewhaveparticularweightinuniversityoperations
andasnotedinPartII.below,werespecificallymentionedbytheIRSinitsfinalcompliance
projectreport.
25See,e.g.,Treas.Reg.1.513‐1(d)(4)(iii)(dual‐usefacilitiesingeneral);Rev.Rul.79‐98,1978‐1C.B.167
(incomefromgeneralpublic’suseofskifacilitiesownedbyexemptschoolandotherwiseusedforphysical
educationclasseswasUBIT);TAM9645004(useofuniversitygolfcoursebystudentsandstaffisrelated;use
byalumniandguestsnotrelated).
26See,e.g.,GCM39863(revenuefromusingmultipurposefacilityforrockconcerts,professionalbasketball
gamesandsimilareventsaimedatgeneralpublicaudiencenotrelated);seealsoTAM9147008
27Rev.Rul.77‐365,
28E.g.,HILLANDMANCINO,supranote8;HOPKINS,supranote8.
6 1.The“Convenience”Exception
I.R.C.Section513(a)(2)providesanexceptionfromtheUBITforanactivitycarriedon
“primarilyfortheconvenienceofmembers,students,patients,officersoremployees.”29
Whetheraparticularactivitymeetstheconvenienceexceptionis,ofcourse,afacts‐and‐
circumstancesinquiry,andvirtuallynoguidanceexistsregardingthelinebetween
“convenience”andnot–makingthisareaanespeciallyripeoneforanexpansive
interpretationbyaffectedtaxpayers.30Theconvenienceexceptionloomsespeciallylarge
intheuniversitycontext,helpingtoshieldfromtaxationeverythingfromsalesof
toothpastetostudentsbyauniversitybookstoretoincomefromparkinggarages.Income
fromthegeneralpublic(oralumni)fromthesesources,however,generallywouldbe
fragmentedandsubjecttotheUBIT.
Theuniversitybookstoreisaprimeexampleoftheinteractionbetweenthe
fragmentationrule,the“substantiallyrelated”ruleandtheconvenienceexception.IRS
examinationguidelinesforuniversitiespublishedin1994state:
Thesaletostudents,officersandemployeesofbooks,supplies,andother
itemsthatarenecessaryforcoursesattheinstitutionisanactivity
substantiallyrelatedtotheinstitution'seducationalpurposes.Thus,thesale
ofbooksthatarerequiredorrecommendedforcoursesattheinstitutionand
generalschoolsuppliessuchasnotebooks,paper,pencils,typewriters,and
athleticwearnecessaryforparticipationintheinstitution'sathleticand
physicaleducationprograms,doesnotconstituteunrelatedtradeor
business.Similarly,educationalpurposesareservedbytheavailabilityof
othermaterialsthatfurthertheintellectuallifeofthecampuscommunity.In
general,thesaletostudents,officers,andemployeesofaninstitutionof
books,tapes,records,compactdiscs,andcomputerhardwareandsoftware
(whetherornotrequiredforcourses)isconsideredanactivitysubstantially
relatedtoeducationalpurposes.31
Thustheguidelinesfirstfragment“relatedactivity”sales(booksandeducationalsupplies)
fromsalesofotheritems.Theguidelines,however,thenlistitemsthatmayqualifyforthe
29I.R.C.Section513(a)(2).Theexceptionislimitedto501(c)(3)organizationsandpublicuniversitieswhich
aresubjecttotheUBITbyvirtueofSection511.
30SeeHILLANDMANCINO,supranote8,at¶22.03[2](“littleguidanceexistsastowhatconstitutesa
convenience‐typeactivity.”);HOPKINS,supranote8,at707.
31INTERNALREVENUESERVICE,I.R.S.COLLEGEANDUNIVERSITYEXAMINATIONGUILDELINES,1994‐27I.R.B.36at
342.(13)(1994)availableathttp://www.federaltaxissues.com/docs/IRS‐announce‐94‐112.pdf(hereafter,
“GUIDELINES”).
7 “convenience”exceptionwhensoldtostudentsoremployees:“Exceptedmerchandisemay
includetoiletarticles(suchastoothpaste),wearingapparelornoveltyitemsbearingthe
institution'sinsignia,andotheritemssuchascandy,cigarettes,newspapersandmagazines,
greetingcards,photographicfilm,cameras,radios,andtelevisionsetsorother
appliances.”32Inasubsequentsentence,however,theguidelinesinvokethefragmentation
ruleagaintodeclarethatsalestoalumnidonotqualifyfortheconvenienceexceptionand
“thesaleofmultiplecomputers,inasingleyear,toasinglestudentorthesaleofa
computertosomeonewhoisnotastudent,officeroremployeeoftheinstitutionmayresult
inunrelatedbusinessincome.”33
Theconvenienceexceptionandfragmentationrulesalsoplayprominentrolesinother
universityoperations.Revenuefromvendingmachinesoncampusgenerallywouldbe
excludedpertheconvenienceexception,34aswouldrevenuegeneratedbyon‐campus
parkingforstudents,facultyandstaff.35Concessionsalesatuniversityathleticevents
shouldalsobeexempt,analogoustoamuseumoperatingacafeteriafortheconvenienceof
staffandvisitors.36
2. AdvertisingandtheCorporateSponsorshipException
Asnotedabove,advertisingplayedakeyroleinshapingthemodernUBIT.In1967,the
IRSpromulgatedTreasuryRegulationSection1.513‐1(b),37forthefirsttimetakingthe
positionthatanoverall“tradeorbusiness”–suchaspublishing‐couldbebrokenintoits
componentrevenuestreams–suchasthesaleofadvertising.Thoughtheregulationwas
32Id.(myonlyreaction:“televisionsetsorotherappliances”–really?VisionsoftheuniversityBestBuystore
danceinmyhead...).Compare,however,Rev.Rul.81‐62,1981‐1C.B.355,wheretheIRSruledthatsalesof
heavyappliancesbyexemptseniorcitizenscenterwasunrelated.
33GUIDELINES,supranote31,at342.(13)(5).
34SeeRev.Rul.81‐19,1981‐1C.B.353(“Thegoodsandservicesdispensedbythevendingmachinesare
necessaryfortheday‐to‐daylivingonthecampusofstudents,faculty,andstaff.Iftheuniversityoperatedthe
vendingfacilities,theincomewouldnotbesubjecttothetaxonunrelatedbusinessincomebecausethe
activitywouldbecarriedonfortheconvenienceofitsstudentsandemployeeswithinthemeaningofsection
513(a)(2)oftheCode.”).
35SeeRev.Rul.69‐269,1969‐1C.B.160(parkingrevenuegeneratedbypatientsandvisitors“substantially
related”tomissionofexempthospital).
36See,e.g.,PLR8623081,1986PLRLEXIS3919(March17,1986)(concessionsalesatrelatedeventnot
subjecttoUBIT);Rev.Rul.74‐399,1974‐2C.B.172(museumcafeteria).
37Foranexcellentrecitationofthehistoryofthefragmentationrule,seeUnitedStatesv.AmericanCollegeof
Physicians,475U.S.834(1986).
8 heavilycriticized,Congresscodifieditssubstanceinthe1969TaxReformActasnew
Section513(c).38In1986,however,theU.S.SupremeCourtintheAmericanCollegeof
Physicianscaseruledthatwhilethefragmentationapproachwasvalid,itdidnotcreatea
perserulethatadvertisingincomewassubjecttotheUBIT;rather,aswithanyother
revenuesource,suchincomewouldbetestedaccordingtothe“substantiallyrelated”
rule.39WhiletheCourtheldthatundertheparticularfactsofthecasebeforeitthe
advertisingwasnotsubstantiallyrelated,thegeneralvalidationofthefragmentation
approachandtheseeminglyhighbarsetinthecasefor“relatedness”40resultedintheIRS
subjectingnearlyalladvertisingincometotheUBIT–untiltheIRStouchedthe“thirdrail”
ofuniversityexemptactivities:collegefootball.
InTechnicalAdviceMemorandum9147007,41theIRSruledthatincomereceivedfrom
corporationspayingto“sponsor”twocollegefootballbowlgameswouldbesubjecttothe
UBIT.AccordingtotheIRS,the“sponsorship”arrangementprovidedreturnbenefitstothe
sponsoringcorporation(prominentdisplayofthecorporatenameandlogoonthevenue’s
field,scoreboard,playeruniforms,andrelatedprintmaterials)thatwentwellbeyond
simple“donorrecognition”thattheServicetraditionallyignoredasa“quidproquo”and
wasmoreakintopaymentsforadvertising–whichpayments,whenfragmentedfromthe
overalltradeorbusinessofconductingthefootballgame,wouldbesubjecttotheUBIT.
Thereactionwaspredictablycrazy,andeventhoughtheIRSvoluntarilybackedaway
fromthebroadimplicationsofitsposition,in1997CongressenactedSection513(i),
38Pub.L.No.91‐172,83Stat.487(1969).
39UnitedStatesv.AmericanCollegeofPhysicians,475U.S.834(1986).TheCourtheldinthisparticularcase
thattheadvertisinginquestionwasnotsubstantiallyrelated.
40Id.at848‐49(“Yetthestatutoryandregulatoryscheme,evenifnotcreatingaperseruleagainsttax
exemption,isclearlyantagonistictotheconceptofaperseruleforexemptionofadvertisingrevenue.”).The
Courtwentontosuggestthatinorderforadvertisingtomeetthe“substantiallyrelated”test,itwouldhaveto
systematicallypresentinformationspecificallyrelatedtotheeditorialcontentofthepublication.This
suggeststhat,forexample,ifanissueofACP’smagazinefocusedontreatmentofhypertensionlimitedall
advertisingtohypertensiontreatments,suchadvertisingconceivablycouldmeetthe“comprehensiveor
systematicpresentation”requiredtoconnecttheadvertisingtotheexecutionofACP’sexemptpurpose.
41Tech.Adv.Mem.9147007,1991PLRLEXIS1778(August16,1991).Agoodsuccinctsummaryofthe
“CottonBowl”ruling,asitbecameknown,isinJAMESJ.FISHMANANDSTEVENSCHWARZ,TAXATIONOFNONPROFIT
ORGANIZATIONS397(3ded.2010).SeealsoRichardL.Kaplan,IntercollegiateAthleticsandtheUnrelated
BusinessIncomeTax,80Colum.L.Rev.1430(1980).
9 specificallyexempting“corporatesponsorship”paymentsfromtheUBIT.TheIRSfinalized
regulationsforthenewstatutein2002asTreasuryRegulation1.513‐4.
Whilethedetailsoftheoperationofthecorporatesponsorshipexceptioncouldfilla
book,42thekeyforpurposesofthispaperisthattheprovisionattemptstodrawaline
betweenpaymentsthatare“advertising”andpaymentsthataremerely“sponsorship.”The
latterareexemptfromtheUBIT,butrecallthattheformerarenotautomaticallytaxable.In
general,ifaparticulararrangementinvolvesacorporationmakingpaymentsandreceiving
onlytherighttodisplaythecorporatename,logoorproductlines,thepaymentswill
qualifyas“sponsorship”paymentsandnotadvertising.43Hencethecombinationofthe
regularUBITrules,thefragmentationruleandthecorporatesponsorshipexceptioncreates
amatrixoffourpossibleoutcomes:aparticularpaymentmaybe(1)advertisingthatisnot
regularlycarriedon(e.g.,theNCAAcasediscussedabove)andhencenotsubjecttothe
UBIT;(2)advertisingthatisregularlycarriedon,butmeetstherequirementsofthe
AmericanCollegeofPhysicianscasefor“substantiallyrelated”andthusisnotsubjecttothe
UBIT;(3)advertisingthatisregularlycarriedonbutisnotsubstantiallyrelatedandhence
subjecttotheUBITand(4)paymentsthatareclassifiedascorporatesponsorship
payments,whichalsoarenotsubjecttotheUBITpertheexpressstatutorylanguagein
Section513(i).
Universitiesappeartohaveallfouroftheseoutcomes.TheIRShaslongheldthat
revenuefromsalesofadvertisinginastudentnewspaperis“substantiallyrelated”to
trainingstudentsinthevariousdifferentaspectsofrunninganewspaperandhencenot
subjecttotheUBIT.44Ontheotherhand,a1955rulingfoundthatadvertisingincomefrom
aradiostationownedbyauniversityandoperatedinparttotrainstudentsinradiowas
notsubstantiallyrelated,becausethebulkofthestation’soperationswerecommercialin
natureandnotforstudent‐trainingpurposes.45Thetaxtreatmentofsalesofadvertisingin
programsforstudentartsproductionsandathleticeventsprobablyhingesonwhether
42ForadditionaldetailontheworkingsofSection513(i),seeHILLANDMANCINO,supranote8,at¶22.11[7];
HOPKINS,supranote8,at714‐718.
43Treas.Reg.1.513‐4(c)(2)(iv).
441.513‐1(d)(iv)Example5.
45Rev.Rul.55‐656,1955‐2C.B.266.
10 thesesalesare“regularlycarriedon”undertherationaleoftheNCAAcasediscussedabove,
althoughguidanceislackinganduniversitiesseemtotakedifferingviewpointsonthe
matter.46Universitiesseemtoagree,however,thatadvertisingrevenuefromunrelated
eventsforthegeneralpublicisnotrelatedandsubjecttotheUBIT.47Corporate
sponsorshippayments,ofcourse,abound,rangingfrompaymentsfornamingastadiumor
otheruniversitybuildingtocorporatelogosonscoreboardstonamedscholarships,faculty
chairsandotheracademicsupport.48
3. TheInvestmentIncomeException
Section512(b)(1)exemptsfromthecalculationofunrelatedbusinesstaxableincome
all“dividends,interest...andannuities....”Thisexceptionisinterpretivelyrelatively
straightforward,49andofspecialinteresttouniversitiesonlybecausesomeuniversity
46IhavenotuncoveredanyspecificIRSrulingaboutthis.Severaluniversitieshaveon‐line“manuals”
addressingUBITissues;theseseemtotakedifferentapproachestotheUBITaspectsofprogramadvertising
foruniversityevents.TheUniversityofTennessee’sguidelines,forexample,suggestthatsuchadvertisingis
notsubjecttotheUBIT.SeeTheUniversityofTennessee,OfficeoftheController,UnrelatedBusinessIncome
Tax:ADeterminationandReportingGuide1(2012)(hereafterTennesseeUBITGuide)availableat
http://controller.tennessee.edu/tax/UUbitdetguide%20web%207‐12‐2012(justin).doc.Asimilarguide
fromtheUniversityofIllinois,however,suggeststhatprogramadvertisingwillbeconsideredunrelated
incomeunlesstheadvertisingmeetsthedefinitionof“sponsorship”payments.UniversityofIllinois,Business
andFinancialPoliciesandProcedures,Section18.13“AdvertisingActivities”availableat
http://www.obfs.uillinois.edu/cms/one.aspx?portalId=909965&pageId=913985
47TennesseeUBITGuideatid.
48Corporatesponsorshipsappeartohavebecomebigbusinessatnearlyeveryuniversity.Aquickperusalof
thewebwillbringupanynumberofslick“corporatesponsorshipopportunity”pagesatnearlyall
universities,fromthesmall,privateCatholicMiscordiaUniversity,
http://www.misericordia.edu/misericordia_pg.cfm?page_id=1078&subcat_id=114to(ofcourse)thelarge
stateUniversityofTexas,http://www.texassports.com/sponsorship/tex‐corporate‐sponsors.html.
AproblemintheFischmanandScwarzcasebookraisestheintriguingquestionwhetherexclusive“pouring
rights”arrangementswithsoftdrinkcompanieswouldconstitutequalifiedsponsorshippayments.See
FISHMANANDSCHWARZ,supranote41,at410,problem1(c).Theanswerwouldappeartobe“no”–seeTreas.
Reg.1.513‐4(f),Example6(exclusivepouringrightsisa“substantialreturnbenefit”andvalueistaxable).
49Theremaybesomelingeringinterpretiveissueswithrespecttohighlyadvancedfinancialinstruments,the
designofwhichoftenoutstripstheIRS’sabilitytorespondtomarketinnovation.Theregulationsunder
Section512(b)(1),however,arefairlyexpansive,includinginthepassiveincomeexception“incomefrom
notionalprincipalcontracts”and“othersubstantiallysimilarincomefromordinaryandroutineinvestments.”
Treas.Reg.1.512(b)‐1(a)(1).Forthoseseekingadditionaldetailontheapplicationofthe512(b)(1)
exceptiontoadvancedfinancialinstrumentssuchasswaps,derivativesandsoforth,seeHILLANDMANCINO,
supranote8,at¶23.02[5].
11 endowmentsexceedtheGDPofmanycountries50–andhenceweshouldnotoverlookits
importancetotheoveralluniversityUBITpicture.
4. RealEstateRents
ThefourthmajorUBITexceptionwithamajorimpactonuniversitiesistheexclusionof
realestaterentalincomeinSection512(b)(3).Thissectionexcludesfromthecalculation
ofunrelatedbusinessincome“allrentsfromrealproperty”unlesstherentisbasedona
percentageofthenetincomeorprofitofthelessee.51Iftheleasearrangementincludes
personalpropertyalongwiththerealproperty,thepersonalpropertyrentsgenerallyare
notexcludedunlesstheamountsattributabletothepersonalpropertyare“incidental”–
whichtheregulationsdefineas10%ofthetotalrent.52
Thedefinitionof“realproperty”forpurposesofthisexclusionisquitebroadand
includesanythingdefinedasrealpropertyunderSection1245(a)(3)(C)andSection
1250(C).53Accordingly,inadditiontoland,thedefinitionincludesstructuresandother
“fixtures”typicallydefinedasrealpropertyunderstatelaw.TheIRShasheld,forexample,
thataleaseofapipelinesystemthatincludedright‐of‐wayinterestsinlandandassociated
buildingsandfixturesis“realproperty,”54asareinterestsinrooftopsitesfor
telecommunicationsantennas55andamicrowavetransmissiontowersystem.56
50IhatecontinuallytopickonHarvard,butinthiscase,theshoefits.See,e.g.,KatyHopkins,10Collegeswith
LargestFinancialEndowments,U.S.NewsandWorldReport(Nov.27,2012)availableat
http://www.usnews.com/education/best‐colleges/the‐short‐list‐college/articles/2012/11/27/10‐colleges‐
with‐largest‐financial‐endowments.
51I.R.C.Section512(b)(3)(A)and(B)(ii).
52Treas.Reg.1.512(b)‐1(c)(2).Iftheamountofrentattributabletopersonalpropertyismorethan10%,the
rentattributabletopersonalpropertyisnotexcluded;iftherentattributabletopersonalpropertyismore
than50%ofthetotalrent,thennoneoftherentalisexcludedunder512(b)(3).Ofcourse,lossofthe
exclusionunder512(b)(3)doesnotautomaticallymeanthattherentalincomewillbetaxable;onewould
applytherestofthenormalUBITteststosuchincome(tradeorbusiness,regularlycarriedon,substantially
related)todeterminetaxability.
53Treas.Reg.1.512(b)‐1(c)(3)(i).
54Rev.Rul.67‐218,1967‐2C.B.213.
55PLR200041024,2000PLRLEXIS1336(July18,2000)(rooftopsite,airrights,andpermanentplatform
consideredrealestateforREITpurposes).
56Rev.Rul.75‐424,1975‐2C.B.270(thebuildinghousingtransmittingequipment,theheatingandair
conditioningsystem,thetransmittingandreceivingtowers,andthefencearerealestateassetsforpurposes
oftheREITrules,buttheantennae,waveguides,transmitting,receiving,andmultiplexequipment,andthe
prewiredmodularracksarenot).
12 Therentalperioddoesnothavetobelong‐terminorderforpaymentstobeconsidered
rentfromrealestate.Infact,theIRShasheldthatrevenuereceivedbyanorganizationfor
rentingameetinghallforasingleafternoonoreveningwouldqualify.57
Thereisonekeylimitationtotherealestaterentalexception,however.TheIRShas
steadfastlyheldthatrevenuefromrentingspaceforoccupancywherethelandlord
providesservicesfortheconvenienceoftherenterisnot“rentfromrealestate”under
Section512(b)(3).58Thusrentingparkingspacesinagarageorlotorhotelroomsdoesnot
constituterentfromrealproperty,butrathera“service”fortheconvenienceofthe
customer.59Services“customarilyrenderedinconnectionwiththerentalofroomsor
otherspaceforoccupancyonly”arepermitted,however.60Hence,“thefurnishingofheat
andlight,thecleaningofpublicentrances,exits,stairways,andlobbies,thecollectionof
trash,etc.,arenotconsideredasservicesrenderedtotheoccupant.”61Intheuniversity
context,theIRShasheldthatthe“servicesfortheconvenienceoftherenter”limitation
meansthat,forexample,aleaseofafootballstadiumtoaproteamforpracticesorgames
wouldnotbeexemptrentalincome(andalsonot“substantiallyrelated”)wherethe
universityinquestionprovided“extensivegroundsandplayingfieldmaintenance,dressing
57Rev.Rul.69‐178,1969‐1C.B.178.SeealsoPLR200222030(March3,2002)(rentalofclassroomspacefor
meetingsexemptrealestaterental).
58Treas.Reg.1.512(b)‐1(c)(5).
59Id.(“Forpurposesofthisparagraph,paymentsfortheuseoroccupancyofroomsandotherspacewhere
servicesarealsorenderedtotheoccupant,suchasfortheuseoroccupancyofroomsorotherquartersin
hotels,boardinghouses,orapartmenthousesfurnishinghotelservices,orintouristcampsortouristhomes,
motorcourtsormotels,orfortheuseoroccupancyofspaceinparkinglots,warehouses,orstoragegarages,
doesnotconstituterentfromrealproperty.”).Onemightarguethatatleastinsomecases,parkingspaces
mightnotinvolveanyassociatedservicesandthereforebeexcludablerent.Priorto1990,theIRSapparently
hadsimilarthoughtsandhadwaffledsomeonwhetherparkingrevenuecouldeverbeconsideredrentfrom
realestate,butin1990theIRSissuedGen.Couns.Mem.39825(Aug.17,1990)concludingthatparking
revenuewasneverexcludableasrent.Seealso,OceanPinesAssoc.,Inc.,v.Comm’r.,135T.C.276(2010)
(incomefromparkingfeesnotexcludablerentfromrealestate).Seegenerally,KPMG,CanIParkHere?The
TaxCourtWeighsinontheUBTIControversy(Nov.1,2010)availableat
http://www.kpmginstitutes.com/taxwatch/insights/2010/pdf/wnit‐110110‐ubti‐controversy.pdf.
Notethatsimplybecausecertainincomedoesnotautomaticallyqualifyforexclusionasrentfromreal
propertydoesnotnecessarilymeantheincomewillbetaxedundertheUBIT.Ifaparticularrevenuestream
were“substantiallyrelated”orqualifiedforsomeotherexclusion,theincomewouldstillbeexemptfrom
taxation.Forexample,parkingfeesforparkingbystudents,facultyandstaffshouldbeexcludedfromthe
UBITaseither“substantiallyrelated”orunderthe“convenience”exception.Seetextatnotes34‐36,supra.
60Id.
61Id.
13 roomlinens,andstadiumanddressingrooms,pursuanttothelease.”62Thereisapotential
workaroundforthe“servicesfortheconvenienceoftherenter”limitation,however.If
suchservicesareprovidedbyanindependentthirdparty,andnottheexempt
organization/landlord,thenpaymentsfor“spacealone”shouldqualifyasexemptrental
income.63
Universitiesappearveryconsciousofboththerealestaterentalexceptionandthe
“customaryservices”limitation(andtheirworkarounds).InternaluniversityUBITguides
invariablynotethatspacerentalsaccompaniedby“convenience”servicesresultinUBTI.64
UniversityofTennesseeUBITguidenotesinitssectiononfacilitiesrentalsectionthat“to
shieldUniversity’sincomefromUBI,rentershouldcontractwithoutsidevendortosupply
service.”65Inanyevent,therealestaterentexceptionwill,withproperplanning,shieldthe
largestpercentageofanyleasepaymentsforfacilitiesfromtheUBIT.
5.Royalties
Thefinalmajorexceptionaffectinguniversitiesistheexceptionforroyalties.The
majorissuewithroyaltypaymentsinsomewaysmirrorstheissuewithspacerental
payments:thequestionofassociatedservices.Ingeneral,“royalties”aredefinedas
paymentsfortheuseofproperty,usuallyanintangiblesuchasatrademark,logo,copyright
orpatent,orfortheexploitationofmineralsornaturalresourceslikeoil,gas,orminerals.66
Paymentsforservices,however,arenotroyalties,andmuchofthetensioninthisareahas
beenoverthedividinglinebetweenpaymentsforservicesandpaymentsforroyalties.
62Rev.Rul.80‐298,1980‐2C.B.197.Seealso,Rev.Rul.76‐402,1976‐2C.B.177(leaseoftenniscourtsalong
withfurnisheddormitoryrooms,linens,maidservice,meals,anddiningfacilitiestoanindividualforuseby
theindividualinconductingasummertenniscampnotexemptrealestaterental).
63See,e.g.,InternalRevenueService,TaxGuideforChurchesandReligiousOrganizations17,availableat
http://www.irs.gov/pub/irs‐pdf/p1828.pdf(“Ifthechurchentersintoaleasewithathirdpartywho
operatesthechurch’sparkinglotandpaysrenttothechurch,suchpaymentswouldnotbesubjecttotax,as
theywouldconstituterentfromrealproperty”).
64E.g.,UniversityofCalifornia,UnrelatedBusinessIncomeTaxStatusandDeterminationGuide9,availableat
http://tax.ucmerced.edu/Data/Sites/5/media/taxtraining/ubit‐taxdeterminationguide.pdf;Universityof
Texas,UnrelatedBusinessIncomeReviewGuidelines4,availableat
http://www.utexas.edu/business/accounting/pubs/ubit_guidlines.pdf.
65TennesseeUBITGuide,supranote46,at5.
66Seegenerally,HILLANDMANCINO,supranote8,at¶23.03;HOPKINS,supranote8,at697‐98;SierraClub,Inc.
v.Comm’r.,86F.3d1526,1531(9thCir.1996).
14 PerhapsthemostfamouscaseillustratingtheseissuesisSierraClubv.Commissioner,
decidedbythe9thCircuitinthe1990s.67Thecaseinvolvedthequestionwhetherpayments
receivedbytheClubforuseofitsmailinglistandforan“affinitycard”arrangementwitha
bankcreditcardissuerconstitutedroyalties.TheIRSarguedthatthepaymentswerenot
royaltiesbecauseeacharrangementinvolved“active”participationbytheClub,incontrast
totheusual“passive”natureofroyaltyincome.Thecourt,however,rejectedthe
“passivity”argumentandrestatedtherulethatthekeyissueiswhetherthepaymentswere
fortheuseofpropertyor(atleastpartly)fortheservicesprovidedbytheClubaspartof
theunderlyingarrangement(e.g.,updatingthemailinglist;“advertising”theaffinitycard
arrangementtomembers).Inthecaseofthemailinglists,alltheadministrationofthelist
andmarketingwasdonebythirdpartiesunderacommissionarrangementwiththeClub;
theClubitselfperformednoserviceswithrespecttomaintainingormarketingthelists.
Accordingly,thecourtfoundthatthepaymentstheClubreceivedforuseofthelistswere
royalties–paymentssolelyforexploitationoftheClub’spropertyrightsinthelists.68
Withrespecttotheaffinitycardarrangement,thecourtremandedonthegroundsthat
theagreementsbetweentheClubandthebankwereunclear,andtheTaxCourtshouldnot
havegrantedsummaryjudgmentinfavoroftheClub.69Onremand,however,theTax
CourtfoundinfavoroftheClub,notingthatitwasthebank,nottheClub,thatperformed
themarketingandsolicitationservices.70
TheresultofSierraClubandsubsequentsimilarcasesisthatthe“royalty”exceptionhas
beenenlargedbeyondthetraditionalpayments(e.g.,copyrights,patents,mineral
exploitation)tovirtuallyanypaymentthatcanbecastasoneforexploitationofan
underlyingpropertyright,atleastaslongastherecipientissmartenoughtopawnoffany
relatedservicestosomethird‐partyservicingentity.Intheuniversitycontext,thismeans
thatrevenuefrommailinglists,affinitycardarrangements,andincomefromlicensing
marksforsports‐relatedsouvenirsshouldallbeexempt.
67SierraClub,Inc.v.Comm’r.,86F.3d1526(9thCir.1996).
68Id.at1536.
69Id.at1537.
70SierraClub,Inc.v.Comm’r,T.C.Memo1999‐86(March23,1999).
15 C.AllocatingExpenses
ThefinalpieceoftheUBITsieveconsistsoftherulesforallocatingexpensesbetween
charitable,relatedandunrelatedactivitiesfor“dualuse”facilitiesoremployees.Again,
whiletheserulesarenotspecifictouniversities,theyplayanimportantroleinuniversity
UBITreportingiffornootherreasonthanthefactthatuniversitiesarelarge,complex
organizationswithsignificantoverhead.
Theallocationruleitselfissimple:inadditiontoexpensesattributablesolelytothe
conductoftheunrelatedbusiness,anexemptorganizationmayalsodeductanallocable
shareofthecosts(includingdepreciationandoverhead)of“dualuse”facilitiesor
personnel,whichcostsmustbeallocatedbetweentheexemptandnon‐exemptactivitieson
a“reasonablebasis.”71Theregulationssuggestthatallocationonthebasisofrelativetime
spentontheexemptandnon‐exemptactivitieswouldbereasonable,72butcaselawreveals
thatwhatis“reasonable”isoftenintheeyeofthebeholder.Thevagariesofthe
“reasonable”standardarewell‐illustratedbyacasethatappropriatelyinvolvesa
university:RensselaerPolytechnicInstitutev.Commissioner.73
Thefactsofthecasearestraightforwardandreplicatedacrossnearlyeverycollegeand
university.Rensselaerownedanarenausedforbothstudentathleticsandother
educationalprogramsandforpublicshows(e.g.,commercialiceshows)subjecttothe
UBIT.Inallocating“dualuse”expenses(expensessolelyattributabletotheUBITuseswere
notanissue),Rensselaerdivideditscostsintotwomaincategories:variablecosts(those
thatareincurredasaresultofactuallyusingthefacility,suchasheatingforanevent,but
cannotbepreciselyallocatedtoanyspecificevent)and“fixedexpenses”suchas
depreciationandoverhead.Rensselaerallocatedboththevariablecostsandfixedcostsin
proportiontotheactualuseofthefieldhouseforexemptandunrelatedfunctions.Thatis,
ittookthetotalnumberofhoursofuseforbothexemptandunrelatedactivities,and
dividedthetotalnumberofhoursbytheunrelated‐usehourstogettheallocation
71I.R.C.Section512(a)(1);Treas.Reg.1.512(a)‐1(c).
72Id.
73732F.2d1058(2dCir.1984).
16 fraction.74WhiletheIRSultimatelyagreedwiththeallocationofthe“variable”costs,it
objectedtotheallocationofthefixedcostsinthismanner,arguingthatthissystemineffect
allocatedaportionofthecostsfor“unused”timetounrelatedactivities;75costsof“unused”
time,accordingtotheService,couldneverbe“directlyconnected”tounrelateduses.The
court,however,disagreed,findingthatthisallocationwas“reasonable.”76
TheresultofcasessuchasRensselaeristhatuniversitiesenjoyfavorableexpense
allocationrulesfordual‐usefacilitiesandpersonnel,whicharelikelytobethevast
majorityofcases.Universitiestypicallydonotbuildfacilitiessolelyforunrelated
commercialuse;accordingly,nearlyanyactivitythatproducesunrelatedincomewillhave
associated“dualuse”depreciationandpersonneloverhead.
II.TheIRSFinalComplianceProjectReportUBITFindings
Thecollegeanduniversitycomplianceprojectresultedinauditsof34institutions(two
thirdsofwhichwerelargeinstitutionswithover15,000students),reviewingUBITreturns
mostlyfortheyears2006‐2008.77Initsfinalreportonthecomplianceproject,theIRS
detailedthemajorUBITcomplianceissuesitfound.Themajoradjustmentsresultedfrom
threeareas.First,theIRSdisallowedlossesfromcertainactivitiesthatitfoundwerenot
conductedwithaprofitmotive,andthereforedidnotmeetthe“tradeorbusiness”
requirementforUBIT.78Becausetheselosseshadbeenusedtooffsetincomefromother
unrelatedactivities,suchdisallowances“couldamounttomorethan$60millionin
assessedtaxes.”79Second,theIRSreclassifiedexpensesthathadbeenallocatedto
unrelatedactivitiesundertheexpenseallocationrulesdiscussedabove.80Third,theIRS
74Forexample,ifthefieldhousewereusedatotalof100hours,75forexemptactivitiesand25forunrelated
activities,25%ofthevariableandfixedcostswouldbeallocatedtotheunrelateduse.
75Thiskindofallocationhastheeffectofallocatingexpensesofunusedtimeinthesameproportionas“used”
time.Intheexampleinthefootnoteabove,costsofunusedtimegetallocatedinthesameproportion(75/25)
as“used”time.Thealternativemethodwouldbetoconstructafractioninwhichtotalavailabletimeisthe
denominator,andtimeusedforunrelatedactivitiesisthenumerator,resultinginamuchsmallerexpense
allocationtotheunrelatedactivity.
76Id.
77FinalReport,supranote1,at9‐10.
78Seetextatnotes7‐9,supra.
79Finalreportsupranote1,at2,12‐13.
80Id.
17 reclassifiedcertainactivitiesas“unrelated.”81Mostoftheadjustmentsinvolveddiscrete
areasofuniversityoperations,includingadvertising,facilityrentals,anduseoffitnessand
recreationcenters,arenasandgolfcourses.82Theneteffectsoftheseadjustmentswereto
increaseunrelatedincome(note,income,nottaxrevenue)bysome$90million.83
III.WhereDoWeGoFromHere:Enforcement,ReformorRepeal?
TheUBITsectionofthefinalcomplianceprojectreportraisessomeinteresting
questionsregardingthefutureoftheUBIT.ThereislittlequestiontheIRSfoundsignificant
complianceissues:theagencydisallowedlossesonactivitiesin70%oftheexamined
returns,reallocatedexpensesin60%,andreclassifiedactivitiesas“unrelated”in40%.84
Giventhattwo‐thirdsoftheauditswereoflargeinstitutionswithwhatwecanassumeare
sophisticatedlegalandtaxaccountingstaffs,85onewonderswhetherthesefindingsarethe
resultofintentionalexploitationofambiguitiesinthelaw,ignorance,orboth.Alarger
question,however,iswhattodoaboutit.ShouldtheIRScommitmoreresourcestoUBIT
enforcement?Ordoesthereportsupportamoreradicalapproachtothefutureofthe
UBIT?
A.TheFutilityofEnforcement
TheUBITsectionofthefinalreportiswritteninamannerthatalmostseemstobea
billboardadvertisementforincreasingenforcementefforts.“$90Millionincreasesin
UBTI!”“$60millioninpotentialtaxesrecovered!”bulletpointsheadlinetheexecutive
summary.86AnyonewithevenapassingknowledgeoftheUBIT(ortheabilitytodosimple
math),however,wouldquicklyconcludethatthenotionofinvestingmoreresourcesin
enforcementisinsane.
81Id.
82Id.at14.
83Id.at2.
84Id.at12‐13.Ofcourse,thesewereauditadjustments;oneassumestheseadjustmentswouldbesubjectto
administrativeappealwithintheIRSandultimatelylitigationiftheamountsinvolvedweresignificant.
Accordingly,wedonotreallyknowwhetheralltheseadjustmentswillholdup;perhapswhenallissaidand
donewewillfindmoreaccuratecompliancethanthereportwouldindicate.
85Infact,theIRSfoundthat57%of990Tswerereviewedbyoutsideaccountants,andabout20%ofthe
auditedinstitutionssoughtoutsideadviceontheclassificationofactivitiesundertheUBIT(theIRSdisagreed
withoutsideopinionssome40%ofthetime).Id.at14.
86Id.at2.
18 First,thereisthe“simplemath”part.TheServiceconducted34in‐depthaudits,
utilizinguntoldperson‐hoursofenforcementtime,inordertoget...what?Evenifall$90
millionoftheUBTIincreaseendedupintaxesatthemaximumcorporaterateandall$60
millionofthe“potentialtaxes”wererecovered(bothhighlyunlikelyevents87),thenet
revenueresultingfromtheeffortwouldbe$96million,orabout$32millionperaudityear.
That’snotevenaroundingerrorinthefederalbudget;$32million,infact,islessthan
threeten‐thousandthsofonepercentoftaxcollectionsforthe2011year.88Inother
words,themassiveauditofcollegesanduniversitiesproducedatmostthesamerevenueas
raisingtaxratesby.0003%.Fromapurerevenueperspective,therefore,investing
significantadditionalresourcesinUBITenforcementisunlikelytobecost‐effective.
Ofcourse,enforcementhasbenefitsotherthansimplyrevenuecollection.Regular,
high‐profileenforcementactionsserveaswarningstoothertaxpayerstouptheirown
compliancelevels.TheUBIT,however,suffersfromalmostuniquestatutoryambiguitythat
almostnolevelofenforcementislikelytoresolve.First,thereistheinherentinabilityof
anyonetodefinethecoreconceptof“substantiallyrelated.”TheIRS’sownregulationson
thisarenearlyinscrutable,tellingusonlythat
Tradeorbusinessisrelatedtoexemptpurposes,intherelevantsense,onlywhere
theconductofthebusinessactivitieshascausalrelationshiptotheachievementof
exemptpurposes(otherthanthroughtheproductionofincome);anditis
substantiallyrelated,forpurposesofsection513,onlyifthecausalrelationshipisa
substantialone.89
Theuniversitysetting,moreover,illustratesperfectlytheinherentproblems.
“Advertising”(leavingaloneforthemomentthedefinitionaldividebetweenadvertising
and“corporatesponsorship”)isoneactivitythattheIRShasrelentlesslypursuedasalmost
perseunrelated,exceptiftheadvertisingisinauniversitystudentnewspaper,whenitis
87AtleastpartofthepotentialtaxrevenuefromtheIRSauditadjustmentsmightbeoffsetbyaccumulated
lossesfromotherUBITactivities,astheIRSrecognizesinitsreport.Moreover,asnote84,supra,indicates,
theseauditadjustmentsmightnotstandupinadministrativeappealorcourtscrutiny.Thenotionthatthe
IRSadjustmentsmightproduce$90millionintaxrevenueisveryhighlyoptimistic,ifnotdownrightfanciful.
88Thetotalofpersonalandbusinessincometaxcollectionsin2011wasapproximately$1.6trilliondollars
($1,600,000,000,000).InternalRevenueService,InternalRevenueServiceDataBook2011at3(2011)
availableathttp://www.irs.gov/pub/irs‐soi/11databk.pdf.
89Treas.Reg.1.513‐1(d)(2).
19 consideredrelated.90Sellingticketstothegeneralpublicforeventsconductedon
universitygroundsisunrelatediftheeventisTheIceCapadesorCirquedeSoleil,butnotif
theeventistheChicagoSymphonyOrchestra,ItzhakPerlmanoraUniversityofMichigan
footballgameattendedby100,000ofyourclosestfriends.91NowondertheIRSdisagreed
withoutsideopinionson“relatedness”40%ofthetime:whatiftheUniversityoffersice
skatingcourses?DoesthatmakeTheIceCapadesrelated?92
Overlaytheimpossibilityofdefining“related”withthemajorexceptionsandexpense
allocationrulesdiscussedinPartIofthisarticle,andtheproblemscompound.The
“convenience”exceptionisessentiallyopen‐ended–asFrancesHillandDougMancino
note,thereisverylittleinterpretivematerialconcerningwhenanitemis“forthe
convenience”ofstudents/employees.93Whatwedoknowisthatintheright
circumstances,sellingTVsetsandotherappliancesisprotectedbythe“convenience”
exception;94whatifauniversityweretoleasemotorscootersforstudenttransportation?
Cars?Wealsoknowthatuniversitiescanturnclearlyunrelatedadvertisingintonon‐
taxablerevenuethroughthealchemyofthecorporatesponsorshipexclusion;andifthe
institutioncarefullyavoidsrelatedpersonalservices,rentingastadiumforarockconcert
becomesexemptrealestaterental.Othercommentatorshaveeloquentlystatedthefutility
of“enforcement”withrespecttoexpenseallocationaslongasthestandardisallocationin
any“reasonablemanner.”95
901.513‐1(d)(iv)Example5.
91Seetextatnotes21‐24,supra(generalpublicticketsforfootballandperformingartsconcerts
“substantiallyrelated”toeducationalmissionofuniversity,butnot“commercialiceshows”).
92Atthe2008NationalCenteronPhilanthropyandtheLawannualconferenceatNYU,IofferedwhatIhoped
wasasomewhatamusingcommentaryonthedifficultiesofdefining“relatedness”withtheexampleofNYU
buyingandoperatingGeneralMotorsasatrainingactivityforitsbusinessandlawstudents(thiswaspre‐GM
bankruptcy;maybeNYUshouldhaveboughtGM–itsstudentsmightwellhavedoneabetterjobrunningGM
thanitsownmanagement).ThoughatthetimeIintendedthisexampletobe“outthere,”lookingbackonitI
wonderifmycommentarymighthavebeenmoreaccuratethanIthought.
93HILLANDMANCINO,supranote8,at¶22.03[2].
94Seetextatnotes32‐33,supra.
95See,e.g.,JosephJ.CordesandBurtonA.Weisbrod,DifferentialTaxationofNonprofitsandthe
CommercializationofNonprofitRevenuesinTOPROFITORNOTTOPROFIT:THECOMMERCIALTRANSFORMATIONOF
THENONPROFITSECTOR(BurtonWeisbrod,ed.1998)(hereafterTOPROFITORNOTTOPROFIT)at83,97‐100
(commentingonhowcurrentexpenseallocationrulespermit“strategic”expenseallocationsbyexempt
organizationstoreduceanytaxdueundertheUBIT;RobertJ.Yetman,Tax‐MotivatedExpenseAllocationsby
20 EventheIRS’smostsuccessfulattackofusingprofitmotivetodisallowlossesfrom
perenniallossactivitiesmaybeahollowvictory.Thestrategyreliesinlargepartona
combinationoftheprofitmotiverequirementofatradeorbusinessandthespecialUBIT
provisionpermittingfragmentingofrevenuestreamsforseparateUBITanalysis.Ifthese
lossactivitiesarestrategicallypairedwithrevenue‐producersinaseparatefor‐profit
subsidiary(which,ifthepairingisreallygood,willproduceexactly$1ofoverallprofit
everyyear),thedisallowancestrategymaydisappear:thereisno“fragmentation”analogto
thetradeorbusinessdefinitionforregularfor‐profitcorporateenterprises,96andlong‐
standingexemptiondoctrinetellsusthatafor‐profitsubsidiarywillbeanalyzedfortax
purposesasaninsulatedstand‐aloneentity.97
Forallthesereasons,committingadditionalresourcestoenforcementofexistingUBIT
ruleswouldseemprettymuchuseless.Thisobservation,inturn,raisestheultimate
question:shouldweleave“wellenoughalone”withrespecttotheUBIT,orshouldwe
embarkonsomemoreradicalreformationorevencompleterepeal?
B. ReformorRepeal:IdentifyingPolicyConcernswithBusinessActivitybyCharities
ReformingtheUBITisanalmostperennialsubject.Congresshasheldmultiplehearings
onthetopicoverthepast25years,98andyetmostlynothinghappens,withreformslimited
NonprofitOrganizations,76Acct.Rev.297(suggestingthatnonprofithospitalsandeducationalinstitutions,in
particular,engagein“creative”expenseallocationtoreducedunrelatedbusinesstaxableincome).
96Thegeneralrulethatatradeorbusinessmustbea“for‐profit”activitycertainlyappliestoCcorporations,
butthereisnoauthorityfortheIRSto“fragment”theoperationsofanoverallbusinessinaregular
corporationinordertoapplyaloss‐disallowancestrategy.TherearemyriadexamplesofCcorporationsthat
showtaxlossesformany,manyyears,rackinguphugenetoperatinglosscarryforwards,withoutIRS
interference(GeneralMotors,GeneralElectricaretwothatcomeimmediatelytomind).
97The“corporateseparate‐identity”ruleresultedfromMolinePropertiesv.Comm’r,319U.S.436(1943)
wheretheSupremeCourtheldthatthetaxsystemmustrespecttheseparateidentityofacorporateentity
formedforavalidbusinessreason.TheIRSthenappliedthecorporateseparate‐identitydoctrineinthetax
exemptionsphereinGCM39326(Jan.17,1985)andPLR8706012(Oct.31,1986)holdingthatactivitiesofa
for‐profitsubsidiarywouldnotbeimputedtoanexemptparent,evenwheretheentireboardofthe
subsidiarywasmadeupofdirectorsandemployeesoftheexemptparent.Seegenerally,JohnD.Colombo,
CommercialActivityandCharitableTaxExemption,44William&MaryL.Rev.489,514‐516(2002).
MythankstoBonnieBrier,NYU’sGeneralCounsel,forpointingoutthattheseparatecorporationstrategy
maybelimitedbyexemptbondfinancingrequirements,whichinturnlimittheabilitytoconductunrelated
businessactivitiesinbond‐financedfacilities.Still,onesuspectsthatsomecreativereorganizationcouldbe
employedtominimizetheeffectoftheIRS’s“hobbyloss”strategy.
98Themostextensiveoftherecenthearingswerethe“Pickle”hearingsconductedbytheOversight
SubcommitteeoftheHouseWaysandMeansCommitteein1987and1988.Forcommentaryonthe
proposalsdiscussedatthetime,seeEllenP.Aprill,LessonsfromtheUBITDebate,43TaxNotes1105(1989);
21 toahandfulof“aroundtheedges”changes.99Asidefrompoliticalinertia,whichcertainly
playsamajorroleinmaintainingthestatusquo,anothermajorstumblingblockto
consideringreformoftheUBITisthat,likeexemptionitself,wehavenoclearly‐agreed
uponrationaleforwhytheUBITexists.Withoutsucharationale,thediscussionof
systematicreformisuseless.Thissectionofthepaper,therefore,discusseswhatmightbe
plausiblepolicyconcernsfortheUBIT,andthensuggestshowthoserationalesmight
underlayreformefforts.100
1.“UnfairCompetition”
Unfaircompetition,inparticular,wasamajorthemethatledtotheenactmentofthe
UBITin1950.101Butweshouldrecognizeadifferencebetween“unwanted”competition
and“unfair”competition.Anytimeacharitycompetesinthemarketplacewithafor‐profit
provider,suchcompetitionmightbeunwanted;smallbusinesses,inparticular,oftenare
themostvocaladherentstothenotionthatanycompetitionbyanexemptorganizationis
necessarilybad.102Theissueisnotcompetitionperse,however;rather,“unfair”
competitionpresupposesthattheexemptorganizationissomehowunfairlyusingthe
economicbenefitsofexemptiontosubsidizeitscommercialactivities.Anexamplewould
beasortof“predatorypricing”inwhichanexemptorganizationpricesitsproductbelow
A.L.Spitzer,ReformoftheUBIT:AnOpenLettertoCongress,40TaxNotes195(1989).TheOversight
SubcommitteehaditseyesontheUBITagainasrecentlyasJuly25,2012(testimonyandtranscriptavailable
athttp://waysandmeans.house.gov/calendar/eventsingle.aspx?EventID=303617)
99Forexample,inthePensionProtectionActof2006,Pub.L.No.109‐280,120Stat.780,Congressamended
Section512(b)(13)(whichrequiredcertainpaymentsfromcontrolledsubsidiariestobeincludedinUBTI
eveniftheywerepaymentsotherwiseexempt,suchasinterest)topermitsuchpaymentstobeexcludedif
theywereatfairmarketvalue.ForanexplanationofSection512(b)(13),seeHILLANDMANCINO,supranote8,
at23.09.
100MuchofthematerialthatfollowsinthissectionisadaptedorcopiedfromJohnD.Colombo,Commercial
ActivityandCharitableTaxExemption,44WM.&MARYL.REV.487(2002)andJohnD.Colombo,Reforming
InternalRevenueCodeProvisionsonCommercialActivitybyCharities,76FORDHAML.REV.667(2007).
101See,e.g.,H.Rep.No.2319,81stCong.,2dSess.36(1950);S.Rep.No.2375,81stCong.,2dSess.,28(1950);
HarveyP.Dale,“AbouttheUBIT...”NYUEIGHTEENTHCONFERENCEONTAXPLANNINGFOR501(C)(3)ORGANIZATIONS,
Chapter9atpage9‐7(1990);HenryHansmann,UnfairCompetitionandtheUnrelatedBusinessIncomeTax,75
VA.L.REV.605,613(1989);DonaldL.Sharpe,UnfairBusinessCompetitionandtheTaxonIncomeDestinedfor
Charity:Forty‐SixYearsLater,3FLA.TAXREV.367,385‐86(1996);EthanG.Stone,AdheringtotheOldLine:
UncoveringtheHistoryandPoliticalFunctionoftheUnrelatedBusinessIncomeTax,54EMORYL.J.1475,1488‐
90(2005).
102SeeHansmann,supranote101,at605;Sharpe,supranote101,at450‐51.
22 itscompetitorsbecauseitdoesnothavetorecoupthecostsoftaxation.103Lessevil‐
sounding,butstillofsignificantconcern,isthepossibilitythatanexemptorganizationwill
unfairlyexpandmarketsharebyusingitstaxsavingstore‐investinitscommercialactivity,
thusexpandingtheactivitywithasourceofmoney(taxexemption)unavailabletofor‐
profitcompetitors(whomustpaytaxes).104
If“unfair”competitionisdefinedinthesetraditionalterms(e.g.,predatorypricingor
subsidizedmarketexpansion),thenthereisasignificantquestionwhetherunfair
competitionisavalidpolicyconcernatall.Infact,legalacademicsandeconomistswho
haveexaminedtheissuehavereachedanalmostremarkableconsensusthat“unfair”
competitionintheformofpredatorypricingorpredatorymarketexpansionsimplyisnota
seriouspolicyconcern.105Asthesecommentatorshaveobserved,ifoneassumesthat
exemptorganizationsengageindirectcommercialactivitiesinordertocapturethe
financialpremiumdiscussedabovetocross‐subsidizecharitableactivities,thenthereisno
incentiveforexemptorganizationstocutpricesinordertomaximizemarketshare‐infact,
justtheoppositeistrue.106Similarly,thereislittleincentivefortheseorganizationsto
subsidizetheexpansionofcommercialactivitieswiththetaxsavingsincurredby
exemption;presumably,thesefundsalsowouldbeearmarkedforexpenditureon
charitableactivities.107Thuseventhough“unfaircompetition”hasbeencitedasaprimary
rationaleforenactingtheUBIT,itinfactmaynotbeaveryseriouspolicyconcernin
practice.108
103SeeHansmann,supranote101,at610.
104SeeSharpe,supranote101,at385‐89.
105SeeBorisI.Bittker&GeorgeW.Radhert,TheExemptionofNonprofitOrganizationsfromFederalIncome
Taxation,85YALEL.J.299,316‐26(1976);Hansmann,supranote101,at613;WilliamA.Klein,Income
TaxationandLegalEntities,20UCLAL.REV.13,61‐68(1972);SusanRose‐Ackerman,UnfairCompetitionand
CorporateIncomeTaxation,34STAN.L.REV.1017(1982);RichardSteinberg,“Unfair”Competitionby
NonprofitsandTaxPolicy,44NAT’LTAXJ.351,(1991).
106SeeHansmann,supranote101,at610‐12;Klein,supranote105at62;Rose‐Ackerman,supranote105,at
1024(“Nonprofitfirmsengageintax‐exemptbusinessactivitytoprovidefundstosubsidizetheirprimary
activities.Thereforetheywanttomaximizeexpectedprofits.”);Steinberg,supranote105,atn.7.
107Seethesourcescitedinnote105,supra.
108Notethattheremaybeeconomicdistortionsresultingfromhavingexemptcharitiesenteramarket
previouslypopulatedonlybyfor‐profitfirms,andthatbecausesuchexemptcharitiesdonotpayincome
taxes,theymightfindentryintoaparticularmarketcost‐effectiveeveniffor‐profitfirmsdonot.Thismarket
entrycouldresultindepressedpricesasaresultofoversupplyandcouldresultinbankruptciesoffor‐profit
23 That“unfaircompetition”isnot,infact,aseriousjustificationfortheUBITalsois
evidencebythelegislativehistoryandthestatuteitself.Thestatutetaxes“unrelated”
businessactivities,not“unfairlycompeting”ones.Infact,whetherabusinessactivity
competesatallwithafor‐profitisirrelevanttoadeterminationoftaxability.109Moreover,
therelated/unrelatedtestleavesaverylargeswathof“related”activitiesexemptfromtax,
eveniftheydocompete(fairlyornot)withfor‐profitproviders.110Hospitals,forexample,
cansellpharmaceuticalsandmedicalequipmenttooutpatientsfullycapableofpatronizing
afor‐profitpharmacywithoutrunningafouloftheUBIT.111Abitoftaxplanning,moreover,
cangoalongwayinconvertingwhatmightlooklikeanunrelatedactivityintoarelated
one.Totakeafancifulhypothetical,onesuspectsthatifNewYorkUniversity’slawschool
implementedclinicallegaleducationofferingsrelatingtobeingcorporatelegalcounseland
directlyoperatedMuellerMacaroniasaclinicalorexternshipplacementvehiclefor
students,suchabusinesswouldnolongerbe“unrelated”undertheUBIT.112
AnexhaustivereviewofthelegislativehistorybyEthanStone,moreover,confirmsthat
“unfaircompetition”wasnot,infact,ananimatingrationaleforthepassageoftheUBITin
1950.113StonenotesthatthehistoryleadingtothepassageoftheUBITwasnotableforthe
factthatcomplaintsofunfaircompetitionbyfor‐profitbusinesseswereessentiallyabsent
firmsthatwouldnotoccurintheabsenceofsuchentry.Seegenerally,Rose‐Ackerman,supranote105,at
1026‐30;Steinberg,supranote105,at356.Iviewthisissueasaneconomicefficiencyargument,however,
andnotatraditional“unfaircompetition”complaintsincethereisnopredatorypricingormarketexpansion
involvedinthesecases.
109Dale,supranote105,atpp.9‐11to9‐12.
110Hansmann,supranote101,at628‐29;Sharpe,supranote101,at427‐450.
111SeeRev.Rul.78‐435,1978‐2C.B.181(salesofhearingaidstooutpatientsnotunrelatedbusiness);see
generally,DOUGLASM.MANCINO,TAXATIONOFHOSPITALSANDHEALTHCAREORGANIZATIONS,atpages15‐37to15‐38
(2013);THOMASK.HYATT&BRUCER.HOPKINS,THELAWOFTAX‐EXEMPTHEALTHCAREORGANIZATIONS447‐49(2ded.
2001).
112CompareTreas.Reg.Section1.513‐1(d)(4)(admissionchargesforperformancesbystudentsof
performingartsschoolnotunrelatedbusinessincome);Priv.Ltr.Rul.7840072,1978PRLLEXIS2452(July
1978)(operationbycollegeofprofessionalrepertorytheateropentogeneralpublicnotunrelatedincome).
Asnotedearlierinthispaper,afewyearsagoIusedtheexampleofNYUbuyingandoperatingGeneral
MotorsasavehiclefortraininglawyersandMBAs.MysuggestioncamebeforeGM’sbankruptcy;itmaywell
havebeenthecasethatNYU’sstudentswouldhavedonebetteratrunningGMthanitsownboard‐elected
management.Theregulationsdoindicatethatafactorindeterminingrelatednesswillbewhetherthe
activityislargerthanitneedstobetoaccomplishitsrelatedpurpose.Treas.Reg.1.513‐1(d)(3).Ifthe
purposeofauniversityMBAand/orlawprogramistotrainstudentsintheoperationofalargeinternational
businessenterprise,thenhowlargeistoolarge?
113Stone,supranote101.
24 (Stone’s“dogthatdidn’tbark”)andthatCongressandTreasurybothignoredthesalient
pointthatifunfaircompetitionisthekeyconcern,itisaconcernofatleastsomepassive
income(dividends,interest,realestaterentsandroyalties)aswell.114
Inshort,thelegislativehistoryprovideslittleornosupportforthenotionthat“unfair
competition”wasamotivatingfactorinthepassageoftheUBIT.Moreimportantlyforthe
purposesofthispaper,thereislittleevidencetosuggestthat“unfaircompetition”inits
classicsenseshouldbeanappropriateregulatoryconcern.
2. ProtectingtheCorporateTaxBase
Like“unfaircompetition,”protectingthecorporatetaxbasewascertainlyanuttered
rationaleatthetimeofenactingtheUBIT.115Thetaxbaseprotectionrationalehas(at
least)twostrands.Thefirststrandistheobservationthatwithoutsomethinglikethe
UBIT,charitiescouldearnpremiumratesofreturnoninvestedcapitalbypurchasingand
runningabusinessdirectly,ratherthanpurchasingstockasapassiveinvestor.The
existenceofthecorporatetaxmeansthatincorporatecommercialenterprises,taxesare
paidtwiceonanequityinvestment:onceattheentitylevelatthecorporatetaxrate
(currentlyamaximumof35%)andthenagainasincomefromthecorporatebusinessis
distributedtoshareholders(atacurrentmaximumrateof20%).Ontheotherhand,
incomefromproprietorshipsor“pass‐through”entitiessuchaspartnershipsistaxedonly
once‐attheindividualtaxrate.Similarly,becauseinterestpaymentsaredeductible
businessexpensesunderCodeSection163,thereisnocorporate‐leveltaxontheearnings
acorporationusestopayinterest;thusaninvestor’sreturnoncorporatedebteffectivelyis
taxedonlyonce,attheindividuallevel.Thedouble‐taxationonequityinvestmentinherent
inthecorporateformmeansthatthemaximumtaxrateonadollarinvestedasequityina
corporateenterpriseisroughly48%,asopposedtotheroughly40%rateapplicableto
single‐taxedinvestments.Inorderforcorporateequitytobeanattractiveinvestment,
therefore,adollarinvestedincorporateequitymustearnahigherrateofreturnpre‐tax
114Id.at1495‐1512.
115H.R.Rep.No.2319,81stCong.,2dSess.39(1950).SeeStone,supranote101at1491,n.55andsources
citedtherein(sufficeittosaythatnearlyeveryarticlewrittenabouttheUBIThasnotedthisrationale);Dale,
supranote101,atpage9‐5;Sharpe,supranote101,at393.
25 thanadollarinvestedinasimilar‐risksingle‐taxenterpriseorincorporatebonds,sothat
after‐taxreturnsaresimilar.116
Iftherewerenocorporate‐leveltax,thenacharitableenterprisewouldhaveno
financialincentivetoengageindirectcommercialactivitiesoverpassiveinvestments
(otherthaninacase,discussedfurtherbelow,wherethecharityhasexcesscapacityfrom
capitalalreadyexpendedtopursuetheircharitablemission–forexample,anempty
footballstadium,orexcesssupercomputertime),becausecapitalmarketspresumably
wouldequalizeinvestmentreturnsonallcapital.117Buttheexistenceofthecorporate‐
leveltaxmeansthatanonprofitorganizationcan“capture”apremiumfinancialreturn
(essentiallytheamountthecapitalmarketsrequiretoequalizereturnsoncapitalin
corporateandunincorporatedbusinessesorbetweencorporateequityanddebt)ifitcan
conductabusinessdirectlyandavoidthecorporatetaxthatotherwisewouldbepaid.118
Exemptcharitiespresumablywouldseeksuchpremiumreturnsinordertoenhancethe
revenueavailabletospendontheircharitablemission.Asaresult,oursystemcurrently
canprovideasubstantialincentiveforanexemptorganizationtooperateacommercial
116Assume,forexample,thatonecanearn$10ona$100investment(10%)pre‐taxoneitheranequity
investmentinacorporation(e.g.,stock)orinaproprietorship.Atthemaximumtaxratescurrentlyineffect,
the$10pre‐taxreturnontheproprietorshipresultsinapproximatelya$6(6%)returnafter‐taxonthat
investment(the$10pre‐taxreturnlessthe$4personalincometaxdueatourapproximately‐40%rate).But
inthecorporateinvestment,the$10pre‐taxreturnisfirstreducedto$6.50bythecorporateleveltax;the
shareholderthenowesanother20%personalincometaxonthis$6.50(thecurrentmaximumrateon
dividends),reducingthepre‐taxreturnto$5.20.Thusthe10%pre‐taxreturninthedouble‐taxcorporate
worldendsupasa5.2%return(andthisexampleillustratesthattheeffectivetaxrateonearningsrelatingto
corporateequityisroughly48%).Corporatebusinesses,therefore,presumablymustearnapremiumreturn
onequitytoattractinvestors‐inmyexample,thecorporateinvestmentwouldneedtoreturnroughly$11.54
(11.54%)inordertoproducethesameafter‐taxreturnastheproprietorship.
BecauseinterestpaymentsaredeductionsfromtaxableincomeunderI.R.C.§163,noentity‐leveltaxispaid
ontheincomeearnedtomakeaninterestpaymenttoacorporatebond‐holder.Thatis,acorporationthat
earns$10andpaysittoaninvestorasinteresthasa$10deductionunder§163,andthereforehaszero
taxableincomeandnotaxliability.Thusacorporatebond,likeanequityinvestmentinaproprietorshipor
partnership,isasingle‐taxedinvestmentanddoesnotsufferfromthedoubletaxappliedtocorporateequity
investments.
117SeeCordesandWeisbrod,supranote95,at88‐90.
118Id.SeealsoHansmann,supranote101,at610(“Themorecompellingview...isthatthecorporate
incometaxdoesaffectthecostofcapitalatthemarginandthat,everythingelsebeingequal,tax‐exempt
corporationshavehigherratesofreturnoninvestmentthanthoseoftaxablefirms.”).Asnotedbelow,
ProfessorMichaelKnollopinedina2007articlethatthepremiumreturntoexemptcharitiesistheresultof
corporateequityinvestors“devaluing”assetspurchasedwithequityinC‐corporationformbecauseofthe
investor‐leveltaxondividends,notbecauseofthecorporate‐leveltax.MichaelS.Knoll,TheUBIT:Leveling
anUnevenPlayingFieldorTiltingaLevelOne?76FORDHAML.REV.857(2007).
26 enterprisedirectly,asopposedtosimplybeingapassiveinvestor,ifthedirectcommercial
activitywouldescapethecorporate‐leveltaxintheexemptorganization’shands.
Thereissomeevidencethatthiskindofactivitywasoccurringpriortotheenactmentof
theUBIT.AlthoughMuellerMacaroniisthefamousexampleofacharity(NYU)directly
operatingacorporatebusiness,119commentatorsoftenfailtonotethatNYUwasnotjustin
themacaronibusiness:it“alsoownedaleathercompany,apistonringfactory,anda
chinawaremanufacturingoperation.Othercollegesanduniversitiesownedenterprises
manufacturingautomobileparts,cottongins,andfoodproducts,andoperatedanairport,a
streetrailway,ahydroelectricplant,andaradiostation.”120
Thesecondtax‐baseprotectionrationalewastoavoidcharitiesbeingusedas
accommodationpartnersintax‐sheltertransactions,especiallyleasebacksandbootstrap
acquisitions.121Again,anecdotalevidenceofcharitiesbeingusedinthesetransactions
aboundedatthetimeoftheenactmentoftheUBIT,butasHarveyDaleandothershave
observed,therewasnothingspecialaboutcharities’participationperse–thepromotersof
thesetransactionsweresimplylookingfortax‐indifferentaccommodationpartiestohelp
convertnondeductiblecapitalexpendituresintodeductibleleasepaymentsorordinary
incomeintocapitalgains.122
Unliketheunfaircompetitionrationale,therefore,thereissomereasontoatleast
considertaxbaseprotectionasaviableregulatoryrationale.Onlyoneofthetax‐base
protectionprongs,however(thatdealingwithavoidanceofcorporateincometaxtocreate
premiumreturns),isspecificallyapplicabletocharities;thetax‐shelterissuesaremore
universalconcerns,andasEthanStonehasnoted,theUBITarguablydidlittleto
specificallyaddresstheseproblems.123
119MuellerMacaronipresumablyledRep.JohnDingelltoutterhisfamouscommentduringtheUBITfloor
debatesthatifsomethingwasn’tdoneabouttheissue“allthenoodlesproducedinthiscountrywillbe
producedbycorporationsheldorcreatedbyuniversities.”HearingsBeforetheHouseCommitteeOnWays
andMeans,81stCong.,2dSess.,579‐80(1950).SeeFISHMAN&SCHWARZ,supranote41,at362.
120Rose‐Ackermann,supranote105,at1017n.2(1982).
121Stone,supranote101,at513‐518.
122Stone,supranote101,at519.SeeDale,supranote101,at9‐13to9‐22(callingforconsiderationofhow
organizationsthatare“exempt”fromtaxforreasonsotherthanSection501fitintotheUBITrationales).
123Id.
27 3.ManagerialDiversion
“Managerialdiversion”referstotheconcernthatcertainbusinessactivitybynonprofits
isinherentlybadbecauseitdivertstheattentionofmanagersandresourcesawayfromthe
corecharitablemissionandcorecharitableoutputs.TheNationalGeographicSociety’s
restructuringintheearly2000’smayhaveresultedingreateremphasisonprofitable
activitiessuchascabletelevisionpartnershipsanddocumentaryfilmsattheexpenseof
fieldresearch,forexample.124Aschoolthatmakesadecisiontosellitsservicesintheform
oftuitionchargesrunstheriskofpricingitstargetaudienceoutofthemarket;museums
andzooswithadmissionfeesmaydothesame.125Anothersimilarconcernisthat
commercialactivitywilldisplacecorevaluesof“altruism,pluralismandcommunity,”126
andthatcharitieswillturntoanewsetofmanagerswho“maybeequallylikelyasfor‐
profitmanagerstocheattheconsumerordonorwithrespecttooutputcharacteristicsthat
arenotreadilyobservable.Ineffect,truenonprofitsmaybeturnedinto‘for‐profitsin
disguise’asaresultofthemanagerialselectionprocess....”127BrianGallenicely
summarizedthevariousissuessurroundingmanagerialdiversioninasomewhatdifferent
context(politicalactivitybycharities),andreferstoproblemsofcombiningcharitable
activitieswithnon‐charitableonesineconomictermsas“diseconomiesofscope”–such
combinationscandramaticallyincreaseagencycostsandreducethe“warmglow”
associatedwithcharity,amongotherthings.128
AnothervariationonthemanagerialdiversionthemeistheargumentmadebyEthan
StonethattheUBITwasenactedlargelytorestrictcharitiestoactivitiesthathistorically
hadbeenconsidered“charitable”–thatis,theUBITwaslargelyapoliticalreactionto
charitiesundertakingactivitiesoutsidetheirtraditionalsphere.129Inthisaccount,the
124BurtonA.Weisbrod,Conclusionsandpublic‐policyissues:Commercialismandtheroadahead,inTOPROFIT
ORNOTTOPROFIT,supranote95,at294.
125Id.at294‐295.
126JanneGallagher,PeddlingProducts:TheNeedtoLimitCommercialBehaviorbyNonprofitOrganizations,12
EXEMPTORG.TAXREV.1007,1014(1995).
127EstelleJames,CommercialismAmongNonprofits:Objectives,OpportunitiesandConstraints,inTOPROFITOR
NOTTOPROFIT,supranote95,at271,281.
128BrianGalle,CharitiesinPolitics:AReappraisal,54WM.&MARYL.REV.1561,1591‐1607(2013).
129Stone,supranote101.
28 UBITplayslargelya“borderpatrol”roletoinsurethatcharitiesdonotstraytoofarfrom
traditionalcharitableactivities,whichcouldresultinlossofpoliticallegitimacyforthe
charitablesector.
Whatevertheunderlyingexplanation,underthediversionrationalecommercialactivity
shouldbeminimizedinordertokeepcharitablemanagers’“eyesontheball”ofproviding
servicescorrespondingtothecorecharitablemission.Thefurtheractivitiesstrayfromthe
corecharitablemission,themorelikelythatsomesetof“badthings”(economic
inefficiency;achangeinthecorevaluesoftheorganizations)willhappen.
4.EconomicEfficiency
ThefinalpolicyconcernIwilldiscussinthisiterationofmythoughtsontheUBIT130is
economicefficiency.Someaspectsofeconomicefficiencyoverlapthemanagerialdiversion
concernnotedabove–thatis,whennonprofitmanagersundertakeactivitiesoutsidetheir
corecharitablemission,efficiencysuffers(BrianGalle’s“diseconomiesofscope”
observationnotedabove).Butanothersetofefficiencyissuescenteraroundwhetheran
exemptcharity’soperationofacommercialactivitycreatesinefficienciesinthecapital
marketsorinthedistributionofgoodsandservicesthatwouldresultviacompetitionby
for‐profitsonlyorthatwouldresultbyexemptnonprofitsiftheyconcentratedtheir
resourcessolelyonproductionofcharitableoutputs.
Asexplainedabove,thebasicsourceofeconomicinefficiencyinexemptcharity/for‐
profitcompetitionisthepotentialforanexemptcharitytoescapethecorporatetaxthat
otherwisewouldbeleviedoncommercialactivitiesincorporateform.Itfollows,therefore,
thateconomistsagreethatthemosteconomicallyefficientsolutionfordealingwith
commercialactivitybynonprofitsissimplytorepealthecorporateincometax(thusending
thedistortionineconomicproductionresultingfromthepossibilityofpremiumfinancial
returnsbynonprofitsthroughexemptionwhileatthesametimeeliminatingalleconomic
130Ihaveinthepastalsodiscussedtwoadditionalconcerns:(1)whatIcall“self‐subsidization”–theabilityof
charitiestofundthemselvesentirelythroughcommercialbusinesseswithoutrelyingondonations–and(2)
thedangersposedtocharitableassetsfrombusinessactivitiesconductedinthesamebusinesscontainer.
TheformerconcernIhavediscussedextensivelyinmy“donative”approachtotaxexemption;becauseIthink
thisself‐subsidizationissuereallyismoreoneofdefiningthescopeofexemptionthanofbusinessactivityby
charities,Ileavethisissuetothatsphere.Seegenerally,JOHND.COLOMBOANDMARKA.HALL,THECHARITABLE
TAXEXEMPTION(WestviewPress1995);seealso,Colombo,CommercialActivity,supranote100at541‐44.As
forthesecondissue,wehaveinsurance.
29 distortionsresultingfromthecorporateincometax).131Facedwiththerealityofthe
corporatetaxandthelikelihoodthatitwillbewithusforquitesometime,however,these
samecommentatorsaredividedonhowcurrentrules(inparticular,theUBIT)affect
economicefficiencyinthecontextoftheexistenceofthetaxandtheexistenceofexemption
forcertaincharities.
Writingin1982,SusanRose‐Ackermanopinedthateconomicefficiencysupported
repealingtheUBIT.132Shereasonedthatinmarketswherecostsofexitwerehigh,for‐
profitfirmscouldbeharmedbyunexpectedcompetitionfromexemptfirmsenteringthe
for‐profitmarketanddrivingpricesdownasaresultofincreasedsupply.133Inthesecases,
thehighcostsofexitwouldprohibitfor‐profitfirmsfromliquidatingtheirinvestmentand
movingtomoreprofitablebusinesses,thusresultinginacertainlevelofeconomicharmto
thefor‐profitinvestors.134Entrybyexemptcharitiesintocommercialbusinesseswasmost
likelywherepremiumfinancialreturnswereavailableasaresultofthecharityescaping
thecorporatetax.135Becauseofthe“related/unrelated”distinctionintheUBIT,these
premiumfinancialreturnswereavailabletoexemptcharitiesonlywhencommercial
activitieswouldpassthe“related”testundertheUBIT(andthuswouldbeexemptfromthe
corporatetax).Asaresult,theexistenceoftheUBITpressuredcharitiestoconfine
commercialactivitiestoparticularsegmentsoftheeconomy,ratherthantospreadthose
activitiesovertheentireeconomy,withtheresultthatspecificfor‐profitfirmsthat
competedin“related”areaswouldsufferdisproportionatefinancialharmunderthe
currentsystem.136RepealingtheUBITwouldpermitcharitiestoenteranycommercial
enterprise,thus“spreading”thepotentialharmacrosstheentireeconomyandpermitting
theeconomytooperatemoreefficiently.
131Steinberg,supranote105,at356.SeeHansmann,supranote101,at618(notingthat“partialintegration”
ofthecorporatetax–essentially,apartialrepealofthetax–forcorporationswhosestockisheldbyexempt
charitieswouldeliminatesomeeconomicinefficiencies);Cordes&Weisbrod,supranote95,at88(notingthat
aneutraltaxoncommercialprofitswouldrenderanexemptcharityindifferenttoinvestingindirect
commercialenterprisesvs.passiveinvestments).
132Rose‐Ackerman,supranote105.
133Id.at1026‐30.
134Id.
135Id.at1027‐28n.32.
136Id.at1038.
30 HenryHansmann,however,arguedthatsometaxoncommercialactivitieswas
necessarytopromoteeconomicefficiency.137Hansmannnotedthatwithoutsuchatax,all
corporateenterpriseswouldbeworthmoreinthehandsofanexemptcharity(whichcould
avoidthecorporatetax)thaninthehandsofprivateinvestors.138Inordertocapturethese
premiumfinancialreturns,therefore,charitieswouldbetemptedtoinvesttheirexcess
capitalinafewdirectly‐operatedcommercialenterprisesratherthantospreadtheir
capitaloverthefinancialmarketsthroughpassiveinvestments.139Thistrendwouldleadto
poordiversificationofinvestments,managerialinefficiency(thediseconomiesofscope
argumentnotedabove)andwouldpressurecharitiestosavecapitaltoinvestinbusinesses
ratherthantospendcapitaloncharitableoutputs.Incontrast,theexistenceoftheUBIT
helpschannelcharitableinvestmentsintothoseareasinwhichthecharityislikelytoenjoy
economiesofscope,thusenhancingefficiency.140EconomistRichardSteinbergagreedthat
“exemptingcommercialactivitiesfromtaxationwhentheyareundertakenbythenonprofit
butnotthefor‐profitsectorisclearlydistortionary”141butasof1991,atleast,believedthat
thestateofeconomicandempiricalresearchoncapitalmarketsandentry/exitissues
madeanyconclusionsabouttheefficiencyeffectsoftheUBITpremature.Morerecently,
MichaelKnollagreedthatwithouttheUBIT,nonprofitswouldenjoyatax‐inducedfinancial
advantageinacquiringassetsheldbyhigh‐brackettaxpayersinacorporateenterprise,
thoughhisanalysisdifferssubstantiallyfromthatofHansmann.142Despitethese
disagreements,itappearsthat,liketheissuesofprotectingthecorporatetaxbaseand
avoidingmanagerialdiversion,economicefficiencyisasignificantconcernasarationale
underlyingtheUBIT,andthebulkofcommentaryseemstoagreethatsomemechanismis
137Hansmann,supranote101.
138Id.at682.
139Id.at614‐15.
140Id.at626‐33.
141Steinberg,supranote105,at356.
142MichaelS.Knoll,TheUBIT:LevelinganUnevenPlayingFieldorTiltingaLevelOne?,76FORDHAML.REV.857
(2007).Knoll’sanalysisisthatthetaxadvantage“arisesbecauseinvestorsareovertaxedonsuch
investments[e.g.,assetsfinancedbyequitycapitalinCcorporationform]andthereforedevaluethem.”Id.at
878.Knoll’sconclusionisthatanequalizingtaxisnecessarybutnotthecorporate‐leveltaxassessedbythe
UBIT–rather,heconcludesthatthetaxrate“shouldbesetastheproductoftheindividualtaxoncorporate
income...andtheshareofsuchassetsfinancedbyequity...”Id.at878‐879.Inotherwords,thedistortion
iscausedbytheinvestor‐leveltaxonequity,notthecorporate‐leveltaxoncorporateprofits.
31 neededtoavoidcharitiesinvestinginbusinessactivitiessimplybecausetaxrulescanoffer
apremiumrateofreturnintheappropriatecircumstances.
C.RelatingPolicyConcernstoTypesofBusinessActivity
Ifonediscards“unfaircompetition”asaviablerationalefortheUBIT,thenthequestion
remainingiswhattodoaboutthethreeremainingpolicyconcerns.Atthisjuncture,
therefore,itmaybehelpfultoexaminethevariouskindsofcommercialactivityundertaken
bycharitiesandconnectthosetothepolicyconcernsofprotectingthecorporatetaxbase,
avoidingexcessivemanagerialdiversion,andpromotingeconomicefficiency.
Inapriorarticle,IdevelopedwhatIcalleda“taxonomyofcommercialactivity,”
classifyingsuchactivityintooneoffivecategories:(1)commercialactivitythatisalsothe
primaryexemptactivity;(2)commercialactivitythatisfunctionallyrelatedtothe
organization’sexemptpurpose(e.g.,“substantiallyrelated”activityundertheUBIT);(3)
“unrelated”commercialactivitythatexploitsexcesscapacity;(4)“unrelated”commercial
activitythatdoesnotexploitexcesscapacitybuttherevenuesfromtheactivityaredirected
tocharitableoutputs,and(5)“unrelated”commercialactivitythatbecomes“empire
building”foritsownsake.143TheType1and5commercialactivitiesmoreproperly
implicatethedefinitionofexemptionitself,ratherthanthetaxability(ornot)of
commercialactivities.TheclassicexampleofType1activityisanonprofithospital,
engagedintheactivityofsellinghealthcareservicesforafee,atpricesvirtuallyidenticalto
for‐profithospitalsinsimilarmarkets.Thereislittledoubtthatnonprofithospitalsare
engagedincommercialactivity;inthiscase,however,thespecificcommercialactivityin
whichtheyareengagedhasbeenapproved(underthecorrectancillaryconditions)144asa
primarycharitableactivity.Low‐incomehousingpartnershipsareanotherexampleofa
charitableorganizationengaginginacommercialenterprise(buildingandrentinghousing)
asitsprimarycharitableactivity.
143Colombo,ReformingInternalRevenueCodeProvisions,supranote100,at682‐87.The“empirebuilding”
concerniswhatledTreasurytoproposeanaggregationrulefordeterminingwhetheraparticularnonprofit
hada“primary”charitablepurposeinthePicklehearingsinthelate1980’s.SeeEvelynBrody,Business
ActivitiesofNonprfitOrganizations:LegalBoundaryProblems,inNONPROFITANDBUSINESS:ANEWWORLDOF
INNOVATIONANDADAPTATION32‐33(JosephJ.CordesandC.EugeneSteuele,eds.2008).
144See,e.g.,IHCHealthPlans,Inc.v.Comm’r,325F.3d1188(2003);JohnD.Colombo,TheFailureof
CommunityBenefit,15HEALTHMATRIX29,30‐37(2005).
32 TheonlyregulatorydecisionfacingType1activityiswhetheritshouldbeexemptor
not.Wehavechoseninsomecircumstancestoprovideexemptionevenwhenan
organizationinengagedinaprimaryactivitythatiscommercial,andthatpolicydecisionis
outsidethescopeoftheUBIT.WithrespecttoType5activity,againthequestionislargely
whethertheorganizationinquestionis“primarily”pursuingacharitablepurposeorhas
insteadevolvedprimarilyintoacommercialorganization.Thisquestioniswithinthe
domainofthe“commerciality”limitationonexemption,whichthoughrelatedtotheUBIT,
performsadifferentfunction:denyingexemption(ornot)ratherthantaxingrevenues
fromactivities.145
Type2,3and4activities,however,donotnecessarilyimplicateunderlyingtax‐exempt
status.Thequestionwiththeseactivitiesishowtheyinteractwiththepolicyconcernsof
protectingthecorporatetaxbase,avoidingmanagerialdiversionandpromotingeconomic
efficiencyandwhetherthereisabetterpathfordealingwiththesepolicyconcernsthanthe
currentUBIT.
Ingeneral,Type2activity(acommercialactivitythatwouldbe“substantiallyrelated”
undercurrentUBITstandards)mightbeaconcernfortax‐baseerosion,butlittleelse.
Sincetheactivitiesarefunctionallyrelatedtotheexemptpurposetheybearlittleriskof
managerialdiversion(afterall,managementisengagingintheseactivitiesasanintegral
partoftheirexemptactivities).Moreover,asHansmannhasnoted,theseactivitiesraise
few,ifany,economicefficiencyproblemssinceonewouldassumetheseactivitiesinvolve
somekindofeconomiesofscope(e.g.,thecapitalassethasalreadybeenpurchasedor
employeesarealreadytrainedtodotheseactivities).146Forexample,onewouldexpect
thatthemusicschoolthatputsonconcertsbyfor‐profitgroupsalreadyhaspersonnel
experiencedinconcertplanningandexecution.
145ForanexampleofaType5situation,seeTech.Adv.Mem.200437040,2004PLRLEXIS612,*25‐*26(June
7,2004).Thismemorandumdealtwithanexemptchurchthatownedafor‐profitsubsidiaryengagedin
extensiveandgrowingcommercialactivities.TheIRScautionedtheexemptparentthatit“cannotbeallowed
tofocusitsenergiesonexpandingitssubsidiary’scommercialbusinessandassets,andneglecttotranslate
thatfinancialsuccessintospecific,definiteandfeasibleplansfortheexpansionofitscharitablereligious
activities.”
146Hansmann,supranote101at626‐28.
33 AsimilarconclusionsurroundsType3activities.Theclassicexamplesherearea
universityrentingitsstadiumfacilitiestoaprofessionalfootballteamforthesummeror
leasingunusedsupercomputertimetofor‐profitresearchgroups.147Inthiskindofcase,
weseeminglyshouldnotpenalizecharitiesforattemptingtogetafinancialreturnon
temporarily“fallow”assets.Theremaybesomeconcernthatwenotencouragecharitiesto
consciously“over‐invest”incapitalfacilitiesorinemployeessimplytousethemin
commercialbusinesses,buttotheextentthatinvestmentsaremadeatalevelnecessaryto
conductcharitableactivities,earningaprofitthroughmaximumutilizationofthat
investmentwouldseemtobeadesirableandefficientoutcome.Moreover,ifthecapital
investmentismadeinthefirstinstancetopursuecharitableactivities,thereislittlereason
tothinkthatthereismuchrisktothecorporatetaxbase(sincetheactivitiesforwhichthe
investmentwasmadelikelywouldnothavebeenundertakenbytheprivatemarket).
Managerialdiversionalsowouldbelimited,becauseifthecapitalassetsusedinthe
commercialactivitywereprimarilymeantforcharitablepurposes,anycommercialactivity
bydefinitionwillbesubordinatetocharitableuse.Forexample,theemptyathletic
stadiumisonlyavailabletorentwhentheuniversity’steamsarenotusingit–generally,
thismeansthesummeronly.Dittofortheunusedsupercomputertime–commercialuse
willbynecessitybesubordinatetoacademicuse.
Type4activitywouldappeartobethemajorconcern.Ontheonehand,itseemsthat
weshouldnotundulyimpedetheabilityofcharitiestodevelopalternativeresourcesto
expandcharitableoutputs.Othercommentatorshavenotedthemodernpressureson
fundingsourcesforcharities;148ifinvestingwiselyincertaincommercialactivities
producesrevenuetoexpandcharitableoutputs,thatseemsasthoughitwouldbea
generallygoodthing.Yettherearesomecountervailingconcerns.Unlikecategory2or3
activities,thoseincategory4arefarmorelikelytoresultinmanagerialdiversion,sincethe
commercialactivityisnotsubordinatetoanycharitableuseoftheunderlyingassets.The
churchthatrunsaStarbuckstosupplementthecollectionplatewillalmostcertainlyneed
toinvestsignificantmanagerialtimeinrunningtheStarbucks,andrunningaStarbucks
147Seeid.at627,628.
148SeeBurtonA.Weisbrod,TheNonprofitMissionandItsFinancing:GrowingLinksBetweenNonprofitsandthe
RestoftheEconomy,inTOPROFITORNOTTOPROFIT,supranote95,at1‐7.
34 would(onehopes)haveverylittleincommonwithrunningachurch.Category4activities
alsoraisethelargestquestionsofprotectingthecorporatetaxbaseandeconomic
efficiency.Theseactivitiesare,infact,atthecoreofHansmann’sconcernthatwithoutthe
UBIT,nonprofitmanagerswouldbeengagedinactivitiesforwhichtheyhavelittle
expertise. D.PotentialResponsestoPolicyConcerns
Theabovediscussionindicatesthattherearethreereasonablepolicyconcernswith
1. DoNothing
charitiesengaginginbusinessactivities(protectingthecorporatetaxbase,managerial
diversionandeconomicefficiency)andthatthesepolicyconcernsaremostacuteinType4
businessactivity:activitiesthatwouldbe“unrelated”inthecurrentstatutoryschemeand
donotinvolveexploitationofexcesscapacityoralready‐developedexpertise.Thenext
questioniswhetherweshould“do”anythingwiththeUBITinlightoftheabovediscussion.
Oneperfectlyreasonableresponseistodonothing.TheUBITitselfalreadyaddresses
eachofthepolicyconcernstosomedegree.Indeed,asnotedabove,HenryHansmann
arguedinfavoroftheUBITinsomethinglikeitspresentformaspromotingeconomic
efficiency.Bygrantingtax‐favoredstatusonlyto“related”activities,theUBITalso
encouragesmanagementnottostraytoofarfromcorecharitableactivities,thereby
addressingthemanagerialdiversionconcern.Finally,historysupportsthenotionthatthe
UBIThashadatleastsomeeffectinprotectingthecorporatetaxbase:NYUnolongerowns
apiston‐ringmanufacturingcompanyalongsideMuellerMacaroni,andindeedappearsto
haveabandoneditsbusinessacquisitionbingeupontheenactmentoftheUBIT.There
certainlyareadvantagestoleavingthingsalone,nottheleastofwhichwouldbe
predictabilityandcertainty:tax‐exemptcharitieshavehadsomesixtyyearstomoreorless
unraveltheUBITrules,andsignificant(ifimperfect)complianceregimeshavebeenbuilt
onthissixtyyears’worthofknowledge.
Nevertheless,theIRScomplianceprojectdoesindicatesignificantcompliance
problems,particularlywiththedividinglinebetweenrelated/unrelatedinareaswhere
universitiesappeartobeengagedinType3activities:“unrelated”usesofalreadyinvested
capital,suchasgolfcourserevenue,alumnitravelprograms,athleticfacilitymemberships
forfaculty,staffandcommunitymembers,androckconcerts,iceshowsandsimilarevents
35 atstadiums.Inaddition,allocationofoverheadexpensesandoffsettinglossesfrom
activitiesthathadneverproducedaprofitwereotherareasofconcern.Clearly,therules
arecomplexandcomplianceisdifficult,soperhapsonecouldimagineimprovement.
Forthepastseveralyears,Ihavefavoreddealingwiththeunderlyingpolicyissuesby
2. A“Commerciality”Tax
expandingtheUBITtocoverallcommercialactivities,relatedornot.Myrationaleforthis
hasbeenasfollows.Taxingallcommercialactivitiesobviouslywouldmorecompletely
protectthecorporatetaxbasethanthecurrentsystem,sincenocommercialactivity(even
ifitis“related”)wouldescapetaxation.Second,taxingallcommercialactivitywould
promoteeconomicefficiency,becausecharitiescouldnotearnapremiumrateofreturnon
aparticularactivitysimplybyclassifyingitas“related”andtherebyavoidingtheincome
taxthatwouldotherwisebedue.Underthisproposedsystem,acharitypresumablywould
choosetoinvestinadirectcommercialactivityonlyiftheafter‐taxrateofreturnitcould
earnwouldbegreaterthanthemarketrateonadiversifiedportfolioofinvestmentassets–
thatis,thecharitywouldhavetomakeadecisionthatitcouldearnapremiumrateof
returnbyefficientoperationofthecommercialenterprise,andnotjustbyavoiding
taxes.149Itislikely,therefore,thatifallcommercialactivityweretaxed,charitieswould
concentrateoncommercialactivitiesforwhichtheyenjoysignificanteconomiesofscope
withrespecttoeithercapitalinvestmentsoremployeesorwhichhadsomeotherkindof
synergywiththeircharitableprograms,whichinturnwouldalsohelpcurbempire‐
buildingtendenciesandavoidmanagerialdiversionissues.150Atthesametime,ifthese
synergiesexist,thereislittlereasontobelievethatacommercialactivitytaxwoulddeter
charitiesfromundertakingactivitiesforwhichtheyhavecleareconomiesofscopeandcan
149SeeHansmann,supranote101,at627.TaxingallcommercialactivityalsoshouldsatisfySusanRose‐
Ackerman’sconcernthatthecurrentsystemdistortseconomicactivitybyencouragingnonprofitstoinvest
moreinrelatedthanunrelatedactivity.Rose‐Ackerman,supranote105.Asnotedabove,Rose‐Ackerman
suggestedgettingridoftheUBITbecauseofthisdistortion,butsubjectingallcommercialactivitytotax
shouldalsoeliminatethisproblem.
150See,e.g.,EvelynBrody,CharitiesinTaxReform:ThreatstoSubsidiesOvertandCovert,66TENN.L.REV.687,
733(1999).CordesandWeisbrod,however,theorizedthatdifferentialtaxationmighthelpefficiencyby
givingcharities“anexcuse”toengageinactivitiesthatwouldtakeadvantageofeconomiesofscopebutmight
otherwisebeforgone“becauseofnonprofits’aversiontoprofit‐makingactivities.”CordesandWeisbrod,
supranote95,at100.
36 earnpremiumreturnsasaresultofexploitingtheirexpertiseorexcesscapacity.Asa
formerprofessoroncetoldme,“untiltaxratesgetto100%,takethemoney.”
A“commercialactivitytax”alsowouldbesimpler.Iamfullycognizantthatatsome
level,acommercialactivitytestreplacesonedefinitionalproblem(whatis“substantially
related”)withanother(whatis“commercial”),butIcontinuetobelievethatdefiningwhen
anactivityiscommercialisinherentlyeasierandsomewhatmoreprecisethandefining
“substantiallyrelated.”151This,inturn,wouldcurbthepossibilitythatcharitiesexploitthe
“substantiallyrelated”testtoacquirecommercialactivitiesthattheyplaceintherelated
categorytoavoidtaxation.Infact,theIRSreportindicatedthatsomeofthisbehavior
exists,giventhatoneofitsmajorauditadjustmentswasreclassifyingactivitiesfrom
“related”to“unrelated.”Thesimplificationwouldextendtoarepealofmanyofthe
exceptionstothecurrentUBIT;sinceIwouldtaxallcommercialactivities,Ialsowould
jettisonthe“convenience”exception,thecorporatesponsorshipexception,theexception
forrealestaterents(traditionallyregardedasa“tradeorbusiness”underSection162,
ratherthananinvestmentactivityunderSection212)andtheexceptionforroyaltyincome
(whichinvolvescommercialexploitationofpropertyrights).Ialsobelievethatan
expandedcommercialactivitytaxwouldreducetheopportunitiesforcreativeexpense
allocations,thoughagainIfreelyadmitthatsomeamountofthiswouldcontinueaslongas
“charitable”overheadisallocableinparttononcharitableactivities.152Ontheothersideof
thecoin,however,Iwouldalsorepealthefragmentationrule;taxationwouldbeonthe
basisofintegratedtradeorbusinessactivities,justasitisinthefor‐profitcorporateworld,
thoughIwouldleaveinplacetheIRS’sabilitytousethecurrentdoctrineofrequiringa
businesstobe“for‐profit”inordertogetapplicablebusinessexpensedeductions.
151See,e.g.,Colombo,CommercialActivity,supranote100,at559‐562.Seealso,Brody,supranote150,at733
(“[E]xtendingthedefinitionof“business”tononprofitactivitiesrelatedtoanorganization’sexemptpurpose
wouldsimplifythelaw,butnotnecessarilyincreasetaxrevenues.”).
152See,e.g.,Brody,supranote150,at703;CordesandWeisbrod,supranote95,at97‐100;Yetman,supranote
95.Thereasonthatabroadercommercialitytaxwouldbesimpleronthisfrontisthatitwouldeliminatethe
gameofclassifyingmoney‐losingactivitiesas“unrelated”andmoney‐makingonesas“related”andthus
requirespreadingoverheadcostsevenlyacrossallcommercialactivities.Nevertheless,“aggressive”
allocationsofoverheadundoubtedlywouldcontinueaslongassuchallocationsarepermittedatall.We
could,ofcourse,banoverheadallocation;theUBIThearingsinthelate1980’sdidconsiderrestricting
allocationofexpensesfor“dualuse”assets.SeeBrody,supra,at703n.58.ProfessorRichSchmalbecknoted
inhisownconferencepresentationthattheIRScouldadopta“marginalcost”ruleforexpenseallocationsvia
newregulations,whichalsowouldseriouslyrestrictcreativeoverheadallocations.
37 Intheuniversitycontext,thisproposalwouldnotmeantaxingtuitionrevenue,atleast
notatthistime.153Itwouldmeantaxingrevenuefromfootball/basketballticketsalesand
TV/radiocontracts,frompublicconcertsscheduledbytheperformingartscenter,from
salesofmembershipsinathleticfacilitiesandfeestousegolfcourses(regardlesswhether
theuseisbyfaculty,stafforstudents),revenuefromjointventureexploitationof
intellectualpropertywithfor‐profitpartnersandsoforth.Whetherthissystemwould
actuallyresultadditionaltaxrevenues(or,viewedfromtheoppositeperspective,a
decreaseinrevenuestotheuniversityaftertaxes)dependsonfactsIdonothave,
particularlytheprofitabilityoftheseactivitiestoindividualuniversities.Mygutreactionis
thatrevenueswouldlargelybeunaffectedbyacommercialactivitytax;athleticprograms,
forexample,arenotoriousmoney‐losers,154anditisunlikelythatsubjectingticketsalesto
acommercialactivitytaxwouldactuallyresultinadditionaltaxrevenueorfromthe
oppositeperspective,anydeclineinrevenuesavailableafter‐taxtotheuniversity.155
Revenue,however,isnotthegoal,andisprobablyafutilepropositionwithanyformof
UBIT;rather,itisfurtheringtheotherpublicpolicyconcernsoutlinedabove.
3.OrHowAboutOutrightRepeal?
ThethirdpossiblereactionwouldbetheoutrightrepealoftheUBIT.Thecasefor
repealisstraightforwardandgiventhefindingsoftheIRScomplianceproject,surprisingly
strong.Thecasestartswiththeobservationabovethattheonlycommercialactivitywe
shouldbeveryconcernedaboutcontrollingthroughsomeUBIT‐likevehicle(asopposedto
153IhavepreviouslyexplainedthatIwoulddefine“commercial”bydeterminingwhethertheactivitywasone
thatcompeteswithfor‐profitfirmsprovidingessentiallythesamegoodorservice.Colombo,Commercial
Activity,supranote100at560‐61.Whiletherearecertainlyafewfor‐profituniversitiesoutthere,Idonot
believethatonecanreasonablyconclude(yet)thateducationservicesofthekindprovidedbyexempt
collegesanduniversitiesarewidelyavailablefromfor‐profitfirms.Id.Thatdaymaycome–forexample,I
wouldconcludejusttheoppositewithrespecttononprofithospitals’revenuesfrompatientservices.Onthe
otherhand,ticketrevenuefromathleticeventsdoesnotdiffersubstantiallyfromticketrevenueearnedby
proteams;indeed,inmanymarketscollegefootball/basketballcompetesdirectlywithproteamsfor
customers,andfansoftendebatewhetherthecollegeorpro“product”ismoreentertaining.See,e.g.,Gregg
Doyel,CollegefootballisbetterthanNFL,andit’snotevenclose,CBSSports.com,availableat
http://www.cbssports.com/collegefootball/story/15274851/college‐football‐is‐better‐than‐nfl‐and‐its‐not‐
even‐close.
154SeeJohnD.Colombo,TheNCAA,TaxExemptionandCollegeAthletics,2010U.Ill.L.Rev.109,143‐145.
155Seealso,Brody,supranote150at733(“...extendingthedefinitionof“business”tononprofitactivities
relatedtoanorganization’sexemptpurposewouldsimplifythelaw,butnotnecessarilyincreasetax
revenues.”)
38 controllingthroughrevocationofexemptionfor,e.g.,Type5activity)istheType4activity:
an“unrelated”activitythatalsodoesnotinvolveexploitationofexcesscapacityorother
economiesofscope.ThatobservationaloneindicatesthattheUBITisunnecessarilybroad,
capturingbothType3andType4activityinitsbounds.Thatoverbreadthcouldbe
justifiedinthesamewayIhavepreviouslyjustifiedanevenbroadercommercialitytax–as
furthersupportingthecorporatetaxbase–butthereislittleotherjustificationintheUBIT
asitexists(asopposedtotheadditionalsimplificationjustificationofabroader
commercialitytax).Thecaseforrepeal,therefore,boilsdowntothis:isthereanyreasonto
assumethatabsenttheUBIT,Type4commercialactivitywouldsuddenlyexplode?Orput
anotherway,canweimaginethatmechanismsotherthantaxlawmightbeserveasa
significantdeterrenttoincreasesinType4activitywithouttheUBIT?
Istarttheanswertothesequestionswiththeobservationthatuniversitiesdonotseem
tobeengagedinmanyType4activitiestoday.Theinterimcomplianceprojectreport156
containsdataonthevariouskindsofUBITactivitiesuniversitiesengagein;virtuallyallof
theseactivitiesinvolvedexploitationofexistingcapital.PerhapstheclosestthingtoaType
4activityreportedwastheoperationofahotel(25%oflargeinstitutionsreported
operatingahotel,asopposedto3%ofsmallinstitutions),157althoughevenhereonecould
arguethatuniversitiesareexploitingeconomiesofscopesincemanyalreadyhave
extensivefood‐serviceand“room‐rental”experiencefromcampusstudentdormitories.
Traveltoursalsoseemedpopular,with35%oflargeinstitutionsreportingsuch
activities.158Twenty‐twopercentoflargeinstitutionsalsoreported“partnership
allocations”whichcouldincludeType4activities,butthereportlackeddetailonthekinds
ofactivitiesoccurringinthesepartnerships.159Thenearly‐universalactivitiesreported
seemedtofallmoreintheType2orType3categories:foodservice(likelyforfaculty,staff
andstudents);facilityandarenarentals;advertisingandparkinglots,forexample.160
156InternalRevenueService,IRSExemptOrganizationsCollegeandUniversitiesComplianceProjectInterim
Report(May7,2010),availableathttp://www.irs.gov/pub/irs‐tege/cucp_interimrpt_052010.pdf
157Id.at30.
158Id.
159Id.
160Id.
39 Ofcourse,onemightconcludethattheabsenceofType4activityisatestamenttothe
effectivenessoftheUBITinchannelingactivitiesintotheType2andType3categories.
TheUBIT,however,hasnotkeptchurchesfromexploitingType4activities(thechurch‐
ownedStarbucksorathleticfacility),161norhasitkeptcharitiesfrominvolvementin
abusivetaxsheltertransactionsthatcaughttheeyeoftheCongressin2005.162Instead,
therearereasonstobelievethatparticularlyintoday’sinternet‐connectedworldwith
publicdisclosureofForms990T,charitieswouldnotrushtoType4activitiesiftheUBIT
wererepealed.First,therearemanypracticallimitstoexemptcharitiestakingover
corporateAmerica.Thelargest,ofcourse,isthenondistributionconstraint163that
effectivelybarsnonprofitsfromaccesstopublicequitymarkets.Withoutthataccess,the
notionthatcharitieswillbeginawholesaletakeoveroffor‐profitbusinessesseemsfar‐
fetched.Beyondcapitalaccess,entrepreneurswillcontinuetoadoptfor‐profitbusiness
formsthatcaneasilyandlegallyaccommodatecashinginontheentrepreneurialprofit;if
thereisseriousmoneytobemade,itlikelywillnotbemadeinnonprofitform.Ifnothing
else,wecansurelycountongoodoldgreedtolimitnonprofitexcursionsintothefor‐profit
world.
Second,thereisthepossibilitythatenhanceddisclosureofcommercialactivity,coupled
withthemodernworldofinternet‐basedcommunicationsthatcankeepdonorsapprisedof
everyfinancialmovemadebyacharity,willhelpcontrolanytendenciesofnonprofit
managerstogoonacorporate‐businessbuyingbinge.Overtwentyyearsago,MarkHall
andItheorizedthata“marketinaltruism”wouldworktocontrolexcessiveunrelated
businessactivityinasystemwhereexemptionwasbasedondonationlevelsbecause
donorswouldadjustdonationsinlightofotherrevenuesourcesandperceivedneed.164
161See,e.g.,ElizabethBernstein,HolyFrappucino!,WallSt.J.,Aug.31,2001atW1.
162See,e.g.,StephanieStrom,OfficialCitesTaxAbuseswithCharities,NewYorkTimes,April6,2005,available
athttp://www.nytimes.com/2005/04/06/national/06charity.html?_r=0.TheTaxIncreasePreventionand
ReconciliationActof2005increasedpenaltiesontax‐exemptorganizationsinvolvedintaxsheltersas
accommodationparties.
163The“nondistributionconstraint”isaphrasecoinedbyHenryHansmanntodescribethefactthat
charitableorganizationscannothaveequityownersthatreceiveadistributionofnetsurplusfromthe
charitableentity.See,e.g.,HenryHansmann,TheRoleofNonprofitEnterprise,89YALEL.J.835.Thisinturn
meansthatcharitiescannotsellstock(equityownershipinterests)orotherwisesolicitequityinvestments.
Capitalformationinacharitableenterpriseislimitedtoretainedearningsanddonations.
164JohnD.ColomboandMarkA.Hall,THECHARITABLETAXEXEMPTION128‐129,175‐179(1995).
40 Empiricalandanecdotalevidencesuggeststhatnonprofitmanagersdo,infact,worryabout
howcommercialactivityimpactsboththe“haloeffect”andtheirowndonorbase.165While
thereislegitimatereasontobelievethat“disclosureoverload”maydesensitizedonorsor
otherimportantconstituenciestocommercialbehaviorbycharities,thereisalsoatleast
anecdotalevidencethatcharitiescareverymuchaboutsuchdisclosuresandtheirpotential
impact.Agoodrecentexampleisthepushbackfromcharitiesregardingdisclosuresof
fundraisingexpensesand“overhead”asapercentageofcharitableexpenditures,reported
intheTampaBayTimes“America’sWorstCharities”investigation.166Farfromshrugging
theirshoulders,thecharitableworldrespondedimmediatelyandvociferously,nodoubt
extremelyworriedabouttheeffectsofthestoryoncharitablegivingoverall(andtospecific
charitieswithhighfundraisingcosts).167Onecertainlycouldconceiveofa“commercial
activitydisclosure”formattachedtotheForm990(iftheUBITisrepealed,ofcourse,Form
990Tgoesaway)thatwouldbepartoftheinternetdisclosuresitessuchasGuidestarand
CharityNavigator.
Accordingly,itispossibletobelievethatmechanismsexternaltotheexistenceofthe
UBITwouldbeatleastaseffectiveatcontrollingType4commercialactivityastheUBIT.
Ofcourse,wewillneverreallyknowuntilwetryit,butrepealistheultimate
simplification.168
165Seegenerally,BurtonA.Weisbrod,ModelingtheNonprofitOrganizationasaMultiproductFirm:A
FrameworkforChoice,inTOPROFITORNOTTOPROFIT,supranote95,at47,55‐59.
166KrisHundleyandKendallTaggart,America’sWorstCharities,TampaBayTimes,June6,2013,availableat
http://www.tampabay.com/topics/specials/worst‐charities1.page.
167NoteventwoweeksaftertheTampaBayTimesstoryran,thechiefexecutivesofBBBWiseGivingAlliance,
CharityNavigatorandGuideStarauthoredanopenlettercriticizingwhattheycalled“TheOverheadMyth”
andlaunchedawebsitecalled“TheOverheadMyth”tocounterthestory.Seehttp://overheadmyth.com;
BBBWiseGivingAlliance,CharityNavigatorandGuideStarJoinForcestoDispeltheCharity“OverheadMyth,”
availableathttp://www.guidestar.org/rxa/news/news‐releases/2013/2013‐06‐17‐overhead‐myth.aspx.
Seealso,NaderSalass,“America’sWorstCharities”ListCriticizedbyTheAssociationOfFundraising
Professionals,TheHuffingtonPost,June17,2013,availableat
http://www.huffingtonpost.com/2013/06/17/americas‐worst‐charities‐list_n_3454652.html.
168ItwouldbepossibletodowhatCongressdidin1986withthecapitalgainsprovisions:leavethestatutory
provisionsintactdespiteatechnical“repeal,”readytobereinstatediftheworldtrulydoescomecrashing
down.Suchastrategy,ofcourse,maysignalthatthe“repeal”isnotreallyarepeal,andthereforeitselfserve
asadeterrenttoadditionalinvestmentincommercialenterprisesbycharities,whichpresumablywouldbe
allforthebetteranyway.
41 IV.Summary
TheIRScollegeanduniversitycomplianceprojectinmyviewofferedfewsurprises
withrespecttotheUBITinitscurrentform.Giventheinherentlackofdefinitioninnearly
alltheoperationalconceptsunderlyingtheUBIT,onewouldexpectcontroversiesin
categorizationofactivitiesasrelatedvs.unrelatedandexpenseallocationstrategies.The
realsurpriseisthatthecomplianceprojectpresents(forme,atleast)asignificantlystrong
caseforrepealingtheUBITentirely,oratleastsuspendingitforatime.Despiteits
obviousprideintheadjustmentsuncoveredbytheaudits,thereportactuallyshowsalmost
conclusivelythatemphasizingenforcementisnotcost‐effective.TheexistenceoftheUBIT,
moreover,hasnotdeterreduniversitiesfrom“commercializing”theiroperationsoverthe
pastfewdecades;yetaccordingtotheIRSreportdata,thatcommercializationremains
largelyconfinedtoareaswhereuniversitieshaveeconomiesofscope.Onemightargue
thattheUBIThaspreventedmoreegregiouscommercialization(e.g.,whatIidentifyabove
at“Type4”activity),butsomeevidenceexiststobelievethatexternalpublicityand
managerialconcernabout“image”haverestrainedcommercialactivityasmuchasormore
thantheUBIT,andthatadisclosureregimecouldbeusedasaneffectivedeterrentto
excessivecommercializationinthefuture.ThoughIcontinuetobelievethatanexpanded
commercialitytaxisthebettertheoreticalroutewhendiscussingsignificantreformofthe
UBIT,ultimatelythequestionofhowmuchcommercialactivityweshouldtolerateinthe
tax‐exemptionregimeisonethatshouldbedealtwithinthecontextofunderlyingexempt
status.Meanwhile,ifanexpandedcommercialitytaxisuntenablepoliticallyandifthe
policyconcernsthatmightdirectlyimplicateaUBIT‐likemechanismmightalsoberesolved
throughexternalconstraintssuchasdisclosureandpublicitythroughtheInternet,thenthe
UBITmaywellbesomethingwhosetimehasgone.
42