IRS provides guidance on level of UBIT.

In Letter Ruling (TAM) 9521004, the IRS provided some guidance as to when excessive unrelated business income will threaten exempt status. The organization in the ruling was exempt under Sec. 501 (c) (3). The organization's exempt purpose was to assist shelters for children by providing funds and running programs. It conducted a reading program and a Saturday outing program, among others. It received donations from the public. The organization also received dues from members and conducted fundraising events, such as dinners and theater parties. The exempt activities were conducted by one full-time and two part-time employees and many volunteers.

In addition to the exempt programs, the organization ran a travel service. This activity provided about half of the organization's gross receipts, but only a small profit. The service booked tours for members of the organization and the general public. It advertised its activities in brochures sent to members. The travel service had one full-time employee.

Under Sec. 501 (c) (3), an organization must operate "exclusively" to carry on exempt activities. Regs. Sec. 1.501 (c) (3)-1 (c) (1) provides that Sec. 501 (c) (3) status is not available if "more than an insubstantial part of [the organization's] activities is not in furtherance of an exempt purpose." Regs. Sec. 1.501 (c) (3)-1 (e) (1) provides that an organization can carry on an unrelated business as long as the organization's primary purpose is not to carry on that business. In deciding on an organization's primary purpose, facts and circumstances control, including "the size and extent of the trade or business and the size and extent of the activities which are in furtherance of one or more exempt purposes."

The Service determined that, despite the high level of receipts from the travel service, the primary purpose of the organization was its exempt activities. Looking at the hours spent by staff and volunteers in conducting the organization's activities, the IRS concluded that the collective time spent on exempt activities greatly outweighed the time devoted to the business. The lack of profit also indicated that the travel business was not the primary purpose.

This TAM will help when trying to determine how much unrelated business income will jeopardize an organization's exempt status. Following the rationale of this ruling, it is the activity level, not the dollar level, that should be the deciding factor.