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1040x 2010

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1040x 2010

1040x 2010 2. 1040x 2010   Accounting Methods Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Accounting MethodsCash Method Accrual Method Farm Inventory Cash Versus Accrual Method Special Methods of Accounting Combination Method Changes in Methods of Accounting Introduction You must use an accounting method that clearly shows your income and expenses. 1040x 2010 You must also figure your taxable income and file an income tax return for an annual accounting period called a tax year. 1040x 2010 This chapter discusses accounting methods. 1040x 2010 For information on accounting periods, see Publication 538, Accounting Periods and Methods, and the Instructions for Form 1128, Application To Adopt, Change, or Retain a Tax Year. 1040x 2010 Topics - This chapter discusses: Cash method Accrual method Farm inventory Special methods of accounting Changes in methods of accounting Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 535 Business Expenses Form (and Instructions) 1128 Application To Adopt, Change, or Retain a Tax Year 3115 Application for Change in Accounting Method See chapter 16 for information about getting publications and forms. 1040x 2010 Accounting Methods An accounting method is a set of rules used to determine when and how your income and expenses are reported on your tax return. 1040x 2010 Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. 1040x 2010 A material item is one that affects the proper time for inclusion of income or allowance of a deduction. 1040x 2010 An item considered material for financial statement purposes is generally also considered material for income tax purposes. 1040x 2010 See Publication 538 for more information. 1040x 2010 You generally choose an accounting method for your farm business when you file your first income tax return that includes a Schedule F (Form 1040), Profit or Loss From Farming. 1040x 2010 If you later want to change your accounting method, you generally must get IRS approval. 1040x 2010 How to obtain IRS approval is discussed later under Changes in Methods of Accounting . 1040x 2010 Types of accounting methods. 1040x 2010   Generally, you can use any of the following accounting methods. 1040x 2010 Each method is discussed in detail below. 1040x 2010 Cash method. 1040x 2010 Accrual method. 1040x 2010 Special methods of accounting for certain items of income and expenses. 1040x 2010 Combination (hybrid) method using elements of two or more of the above. 1040x 2010 Business and other items. 1040x 2010   You can account for business and personal items using different accounting methods. 1040x 2010 For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. 1040x 2010 Two or more businesses. 1040x 2010   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. 1040x 2010 Generally, no business is separate and distinct unless a complete and separate set of books and records is maintained for each business. 1040x 2010 Cash Method Most farmers use the cash method because they find it easier to keep records using the cash method. 1040x 2010 However, certain farm corporations and partnerships and all tax shelters must use an accrual method of accounting. 1040x 2010 See Accrual Method Required , later. 1040x 2010 Income Under the cash method, include in your gross income all items of income you actually or constructively received during the tax year. 1040x 2010 Items of income include money received as well as property or services received. 1040x 2010 If you receive property or services, you must include the fair market value (FMV) of the property or services in income. 1040x 2010 See chapter 3 for information on how to report farm income on your income tax return. 1040x 2010 Constructive receipt. 1040x 2010   Income is constructively received when an amount is credited to your account or made available to you without restriction. 1040x 2010 You do not need to have possession of the income for it to be treated as income for the tax year. 1040x 2010 If you authorize someone to be your agent and receive income for you, you are considered to have received the income when your agent receives it. 1040x 2010 Income is not constructively received if your receipt of the income is subject to substantial restrictions or limitations. 1040x 2010 Direct payments and counter-cyclical payments. 1040x 2010   If you received direct payments or counter-cyclical payments under Subtitle A or C of the Farm Security and Rural Investment Act of 2002, you will not be considered to have constructively received a payment merely because you had the option to receive it in the year before it is required to be paid. 1040x 2010 Delaying receipt of income. 1040x 2010   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. 1040x 2010 You must report the income in the year the money or property is received or made available to you without restriction. 1040x 2010 Example. 1040x 2010 Frances Jones, a farmer, was entitled to receive a $10,000 payment on a grain contract in December 2013. 1040x 2010 She was told in December that her payment was available. 1040x 2010 She requested not to be paid until January 2014. 1040x 2010 However, she must still include this payment in her 2013 income because it was made available to her in 2013. 1040x 2010 Debts paid by another person or canceled. 1040x 2010   If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. 1040x 2010 If you receive income in this way, you constructively receive the income when the debt is canceled or paid. 1040x 2010 See Cancellation of Debt in chapter 3. 1040x 2010 Deferred payment contract. 1040x 2010   If you sell an item under a deferred payment contract that calls for payment in a future year, there is no constructive receipt in the year of sale. 1040x 2010 However, if the sales contract states that you have the right to the proceeds of the sale from the buyer at any time after delivery of the item, then you must include the sales price in income in the year of the sale, regardless of when you actually receive payment. 1040x 2010 Example. 1040x 2010 You are a farmer who uses the cash method and a calendar tax year. 1040x 2010 You sell grain in December 2013 under a bona fide arm's-length contract that calls for payment in 2014. 1040x 2010 You include the proceeds from the sale in your 2014 gross income since that is the year payment is received. 1040x 2010 However, if the contract states that you have the right to the proceeds from the buyer at any time after the grain is delivered, you must include the sales price in your 2013 income, regardless of when you actually receive payment. 1040x 2010 Repayment of income. 1040x 2010   If you include an amount in income and in a later year you have to repay all or part of it, then you can usually deduct the repayment in the year repaid. 1040x 2010 If the repayment is more than $3,000, a special rule applies. 1040x 2010 For details, see Repayments in chapter 11 of Publication 535, Business Expenses. 1040x 2010 Expenses Under the cash method, generally you deduct expenses in the tax year you pay them. 1040x 2010 This includes business expenses for which you contest liability. 1040x 2010 However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained under Uniform Capitalization Rules in chapter 6. 1040x 2010 See chapter 4 for information on how to deduct farm business expenses on your income tax return. 1040x 2010 Prepayment. 1040x 2010   Generally, you cannot deduct expenses paid in advance. 1040x 2010 This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. 1040x 2010 Example. 1040x 2010 On November 1, 2013, you signed and paid $3,600 for a 3-year (36-month) insurance contract for equipment. 1040x 2010 In 2013, you are allowed to deduct only $200 (2/36 x $3,600) of the cost of the policy that is attributable to 2013. 1040x 2010 In 2014, you'll be able to deduct $1,200 (12/36 x $3,600); in 2015, you'll be able to deduct $1,200 (12/36 x $3,600); and in 2016 you'll be able to deduct the remaining balance of $1,000. 1040x 2010 An exception applies if the expense qualifies for the 12-month rule. 1040x 2010 See Publication 538 for more information and examples. 1040x 2010 See chapter 4 for special rules for prepaid farm supplies and prepaid livestock feed. 1040x 2010 Accrual Method Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. 1040x 2010 The purpose of an accrual method of accounting is to correctly match income and expenses. 1040x 2010 Certain businesses engaged in farming must use an accrual method of accounting for its farm business and for sales and purchases of inventory items. 1040x 2010 See Accrual Method Required and Farm Inventory , later. 1040x 2010 Income Generally, you include an amount in income for the tax year in which all events that fix your right to receive the income have occurred, and you can determine the amount with reasonable accuracy. 1040x 2010 Under this rule, include an amount in income on the earliest of the following dates. 1040x 2010 When you receive payment. 1040x 2010 When the income amount is due to you. 1040x 2010 When you earn the income. 1040x 2010 When title passes. 1040x 2010 If you use an accrual method of accounting, complete Part III of Schedule F (Form 1040) to report your income. 1040x 2010 Inventory. 1040x 2010   If you keep an inventory, generally you must use an accrual method of accounting to determine your gross income. 1040x 2010 An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. 1040x 2010 See Publication 538 for more information. 1040x 2010 Also see Farm Inventory , later, for more information on items that must be included in inventory by farmers and inventory valuation methods for farmers. 1040x 2010 Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both of the following apply. 1040x 2010 The all-events test has been met. 1040x 2010 This test is met when: All events have occurred that fix the fact that you have a liability, and The amount of the liability can be determined with reasonable accuracy. 1040x 2010 Economic performance has occurred. 1040x 2010 Economic performance. 1040x 2010   Generally, you cannot deduct or capitalize a business expense until economic performance occurs. 1040x 2010 If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. 1040x 2010 If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. 1040x 2010 Example. 1040x 2010 Jane, who is a farmer, uses a calendar tax year and an accrual method of accounting. 1040x 2010 She entered into a contract with ABC Farm Consulting in 2012. 1040x 2010 The contract stated that Jane pay ABC Farm Consulting $2,000 in December 2012. 1040x 2010 It further stipulates that ABC Farm Consulting will develop a plan for integrating her farm with a larger farm operation based in a neighboring state by March 1, 2013. 1040x 2010 Jane paid ABC Farm Consulting $2,000 in December 2012. 1040x 2010 Integration of operations according to the plan began in May 2013 and they completed the integration in December 2013. 1040x 2010 Economic performance for Jane's liability in the contract occurs as the services are provided. 1040x 2010 Jane incurs the $2,000 cost in 2013. 1040x 2010 An exception to the economic performance rule allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. 1040x 2010 For more information, see Economic Performance in Publication 538. 1040x 2010 Special rule for related persons. 1040x 2010   Business expenses and interest owed to a related person who uses the cash method of accounting are not deductible until you make the payment and the corresponding amount is includible in the related person's gross income. 1040x 2010 Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. 1040x 2010 For more information, see Internal Revenue Code section 267. 1040x 2010 Accrual Method Required Generally, the following businesses, if engaged in farming, must use an accrual method of accounting. 1040x 2010 A corporation (other than a family corporation) that had gross receipts of more than $1,000,000 for any tax year beginning after 1975. 1040x 2010 A family corporation that had gross receipts of more than $25,000,000 for any tax year beginning after 1985. 1040x 2010 A partnership with a corporation as a partner, if that corporation meets the requirements of (1) or (2) above. 1040x 2010 A tax shelter. 1040x 2010 Note. 1040x 2010 Items (1), (2), and (3) above do not apply to an S corporation or a business operating a nursery or sod farm, or the raising or harvesting of trees (other than fruit and nut trees). 1040x 2010 Family corporation. 1040x 2010   A family corporation is generally a corporation that meets one of the following ownership requirements. 1040x 2010 Members of the same family own at least 50% of the total combined voting power of all classes of stock entitled to vote and at least 50% of the total shares of all other classes of stock of the corporation. 1040x 2010 Members of two families have owned, directly or indirectly, since October 4, 1976, at least 65% of the total combined voting power of all classes of voting stock and at least 65% of the total shares of all other classes of the corporation's stock. 1040x 2010 Members of three families have owned, directly or indirectly, since October 4, 1976, at least 50% of the total combined voting power of all classes of voting stock and at least 50% of the total shares of all other classes of the corporation's stock. 1040x 2010 For more information on family corporations, see Internal Revenue Code section 447. 1040x 2010 Tax shelter. 1040x 2010   A tax shelter is a partnership, noncorporate enterprise, or S corporation that meets either of the following tests. 1040x 2010 Its principal purpose is the avoidance or evasion of federal income tax. 1040x 2010 It is a farming syndicate. 1040x 2010 A farming syndicate is an entity that meets either of the following tests. 1040x 2010 Interests in the activity have been offered for sale in an offering required to be registered with a federal or state agency with the authority to regulate the offering of securities for sale. 1040x 2010 More than 35% of the losses during the tax year are allocable to limited partners or limited entrepreneurs. 1040x 2010   A “limited partner” is one whose personal liability for partnership debts is limited to the money or other property the partner contributed or is required to contribute to the partnership. 1040x 2010   A “limited entrepreneur” is one who has an interest in an enterprise other than as a limited partner and does not actively participate in the management of the enterprise. 1040x 2010 Farm Inventory If you are required to keep an inventory, you should keep a complete record of your inventory as part of your farm records. 1040x 2010 This record should show the actual count or measurement of the inventory. 1040x 2010 It should also show all factors that enter into its valuation, including quality and weight, if applicable. 1040x 2010 Hatchery business. 1040x 2010   If you are in the hatchery business, and use an accrual method of accounting, you must include in inventory eggs in the process of incubation. 1040x 2010 Products held for sale. 1040x 2010   All harvested and purchased farm products held for sale or for feed or seed, such as grain, hay, silage, concentrates, cotton, tobacco, etc. 1040x 2010 , must be included in inventory. 1040x 2010 Supplies. 1040x 2010   Supplies acquired for sale or that become a physical part of items held for sale must be included in inventory. 1040x 2010 Deduct the cost of supplies in the year used or consumed in operations. 1040x 2010 Do not include incidental supplies in inventory as these are deductible in the year of purchase. 1040x 2010 Livestock. 1040x 2010   Livestock held primarily for sale must be included in inventory. 1040x 2010 Livestock held for draft, breeding, or dairy purposes can either be depreciated or included in inventory. 1040x 2010 See also Unit-livestock-price method , later. 1040x 2010 If you are in the business of breeding and raising chinchillas, mink, foxes, or other fur-bearing animals, these animals are livestock for inventory purposes. 1040x 2010 Growing crops. 1040x 2010   Generally, growing crops are not required to be included in inventory. 1040x 2010 However, if the crop has a preproductive period of more than 2 years, you may have to capitalize (or include in inventory) costs associated with the crop. 1040x 2010 See Uniform capitalization rules below. 1040x 2010 Also see Uniform Capitalization Rules in  chapter 6. 1040x 2010 Items to include in inventory. 1040x 2010   Your inventory should include all items held for sale, or for use as feed, seed, etc. 1040x 2010 , whether raised or purchased, that are unsold at the end of the year. 1040x 2010 Uniform capitalization rules. 1040x 2010   The following applies if you are required to use an accrual method of accounting. 1040x 2010 The uniform capitalization rules apply to all costs of raising a plant, even if the preproductive period of raising a plant is 2 years or less. 1040x 2010 The costs of animals are subject to the uniform capitalization rules. 1040x 2010 Inventory valuation methods. 1040x 2010   The following methods, described below, are those generally available for valuing inventory. 1040x 2010 The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. 1040x 2010 Cost. 1040x 2010 Lower of cost or market. 1040x 2010 Farm-price method. 1040x 2010 Unit-livestock-price method. 1040x 2010 Cost and lower of cost or market methods. 1040x 2010   See Publication 538 for information on these valuation methods. 1040x 2010 If you value your livestock inventory at cost or the lower of cost or market, you do not need IRS approval to change to the unit-livestock-price method. 1040x 2010 However, if you value your livestock inventory using the farm-price method, then you must obtain permission from the IRS to change to the unit-livestock-price method. 1040x 2010 Farm-price method. 1040x 2010   Under this method, each item, whether raised or purchased, is valued at its market price less the direct cost of disposition. 1040x 2010 Market price is the current price at the nearest market in the quantities you usually sell. 1040x 2010 Cost of disposition includes broker's commissions, freight, hauling to market, and other marketing costs. 1040x 2010 If you use this method, you must use it for your entire inventory, except that livestock can be inventoried under the unit-livestock-price method. 1040x 2010 Unit-livestock-price method. 1040x 2010   This method recognizes the difficulty of establishing the exact costs of producing and raising each animal. 1040x 2010 You group or classify livestock according to type and age and use a standard unit price for each animal within a class or group. 1040x 2010 The unit price you assign should reasonably approximate the normal costs incurred in producing the animals in such classes. 1040x 2010 Unit prices and classifications are subject to approval by the IRS on examination of your return. 1040x 2010 You must annually reevaluate your unit livestock prices and adjust the prices upward or downward to reflect increases or decreases in the costs of raising livestock. 1040x 2010 IRS approval is not required for these adjustments. 1040x 2010 Any other changes in unit prices or classifications do require IRS approval. 1040x 2010   If you use this method, include all raised livestock in inventory, regardless of whether they are held for sale or for draft, breeding, sport, or dairy purposes. 1040x 2010 This method accounts only for the increase in cost of raising an animal to maturity. 1040x 2010 It does not provide for any decrease in the animal's market value after it reaches maturity. 1040x 2010 Also, if you raise cattle, you are not required to inventory hay you grow to feed your herd. 1040x 2010   Do not include sold or lost animals in the year-end inventory. 1040x 2010 If your records do not show which animals were sold or lost, treat the first animals acquired as sold or lost. 1040x 2010 The animals on hand at the end of the year are considered those most recently acquired. 1040x 2010   You must include in inventory all livestock purchased primarily for sale. 1040x 2010 You can choose either to include in inventory or depreciate livestock purchased for draft, breeding, sport or dairy purposes. 1040x 2010 However, you must be consistent from year to year, regardless of the method you have chosen. 1040x 2010 You cannot change your method without obtaining approval from the IRS. 1040x 2010   You must include in inventory animals purchased after maturity or capitalize them at their purchase price. 1040x 2010 If the animals are not mature at purchase, increase the cost at the end of each tax year according to the established unit price. 1040x 2010 However, in the year of purchase, do not increase the cost of any animal purchased during the last 6 months of the year. 1040x 2010 This “no increase” rule does not apply to tax shelters which must make an adjustment for any animal purchased during the year. 1040x 2010 It also does not apply to taxpayers that must make an adjustment to reasonably reflect the particular period in the year in which animals are purchased, if necessary to avoid significant distortions in income. 1040x 2010 Uniform capitalization rules. 1040x 2010   A farmer can determine costs required to be allocated under the uniform capitalization rules by using the farm-price or unit-livestock-price inventory method. 1040x 2010 This applies to any plant or animal, even if the farmer does not hold or treat the plant or animal as inventory property. 1040x 2010 Cash Versus Accrual Method The following examples compare the cash and accrual methods of accounting. 1040x 2010 Example 1. 1040x 2010 You are a farmer who uses an accrual method of accounting. 1040x 2010 You keep your books on the calendar year basis. 1040x 2010 You sell grain in December 2013 but you are not paid until January 2014. 1040x 2010 Because the accrual method was used and 2013 was the tax year in which the grain was sold, you must both include the sales proceeds and deduct the costs incurred in producing the grain on your 2013 tax return. 1040x 2010 Example 2. 1040x 2010 Assume the same facts as in Example 1 except that you use the cash method and there was no constructive receipt of the sales proceeds in 2013. 1040x 2010 Under this method, you include the sales proceeds in income for 2014, the year you receive payment. 1040x 2010 Deduct the costs of producing the grain in the year you pay for them. 1040x 2010 Special Methods of Accounting There are special methods of accounting for certain items of income and expense. 1040x 2010 Crop method. 1040x 2010   If you do not harvest and dispose of your crop in the same tax year that you plant it, you can, with IRS approval, use the crop method of accounting. 1040x 2010 You cannot use the crop method for any tax return, including your first tax return, unless you receive approval from the IRS. 1040x 2010 Under this method, you deduct the entire cost of producing the crop, including the expense of seed or young plants, in the year you realize income from the crop. 1040x 2010    See chapter 4 for details on deducting the costs of operating a farm. 1040x 2010 Also see Regulations section 1. 1040x 2010 162-12. 1040x 2010 Other special methods. 1040x 2010   Other special methods of accounting apply to the following items. 1040x 2010 Amortization, see chapter 7. 1040x 2010 Casualties, see chapter 11. 1040x 2010 Condemnations, see chapter 11. 1040x 2010 Depletion, see chapter 7. 1040x 2010 Depreciation, see chapter 7. 1040x 2010 Farm business expenses, see chapter 4. 1040x 2010 Farm income, see chapter 3. 1040x 2010 Installment sales, see chapter 10. 1040x 2010 Soil and water conservation expenses, see chapter 5. 1040x 2010 Thefts, see chapter 11. 1040x 2010 Combination Method Generally, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. 1040x 2010 However, the following restrictions apply. 1040x 2010 If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. 1040x 2010 If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. 1040x 2010 Changes in Methods of Accounting A change in your method of accounting includes a change in: Your overall method, such as from the cash method to an accrual method, and Your treatment of any material item, such as a change in your method of valuing inventory (for example, a change from the farm-price method to the unit-livestock-price method, discussed earlier). 1040x 2010 Generally, once you have set up your accounting method, you must receive approval from the IRS before you can change to another method of accounting. 1040x 2010 You may also have to pay a fee. 1040x 2010 To obtain approval, you must generally file Form 3115. 1040x 2010 There are instances when you can obtain automatic consent to change certain methods of accounting. 1040x 2010 See the List of Automatic Accounting Method Changes located in the Instructions for Form 3115. 1040x 2010 For more information on changes in methods of accounting, see Form 3115 and the Instructions for Form 3115. 1040x 2010 Also see Publication 538. 1040x 2010 Prev  Up  Next   Home   More Online Publications
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Understanding Your CP279 Notice

CP279 is the notice of acceptance to the parent corporation of a Qualified Subchapter S Subsidiary (QSub) from Form 8869, Qualified Subchapter S Subsidiary Election.


What you need to do

  • Retain this notice in your permanent records.
  • Notify IRS of necessary changes via Form 8822-B, Change of Address or Responsible Party – Business.

You may want to

Supply your subsidiary corporation with a copy of this notice.


Answers to Common Questions

Q. How do I report the activity of my subsidiary?

A. Subsidiary information should be reported on Form 851, Affiliations Schedule, and other necessary schedules.

 

Page Last Reviewed or Updated: 12-Feb-2014

Printable samples of this notice (PDF)

 

 

How to get help

  • Call the 1-800 number listed on the top right corner of your notice.
  • Authorize someone (e.g., accountant) to contact the IRS on your behalf using Form 2848.
  • See if you qualify for help from a Low Income Taxpayer Clinic.
     

The 1040x 2010

1040x 2010 3. 1040x 2010   Unrelated Trade or Business Table of Contents Selling of products of exempt functions. 1040x 2010 Dual use of assets or facilities. 1040x 2010 Exploitation of exempt functions. 1040x 2010 ExamplesExceptions. 1040x 2010 Excluded Trade or Business ActivitiesQualified sponsorship payment. 1040x 2010 Advertising. 1040x 2010 Exception for contingent payments. 1040x 2010 Exception for periodicals. 1040x 2010 Exception for conventions and trade shows. 1040x 2010 Legal definition. 1040x 2010 Legal where played. 1040x 2010 No for-profit games where played. 1040x 2010 Unrelated business income. 1040x 2010   Unrelated business income is the income from a trade or business regularly conducted by an exempt organization and not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity. 1040x 2010   Certain trade or business activities are not treated as an unrelated trade or business. 1040x 2010 See Excluded Trade or Business Activities, later. 1040x 2010 Trade or business. 1040x 2010   The term “trade or business” generally includes any activity conducted for the production of income from selling goods or performing services. 1040x 2010 An activity does not lose its identity as a trade or business merely because it is conducted within a larger group of similar activities that may or may not be related to the exempt purposes of the organization. 1040x 2010   For example, the regular sale of pharmaceutical supplies to the general public by a hospital pharmacy does not lose its identity as a trade or business, even though the pharmacy also furnishes supplies to the hospital and patients of the hospital in accordance with its exempt purpose. 1040x 2010 Similarly, soliciting, selling, and publishing commercial advertising is a trade or business even though the advertising is published in an exempt organization's periodical that contains editorial matter related to the organization's exempt purpose. 1040x 2010 Regularly conducted. 1040x 2010   Business activities of an exempt organization ordinarily are considered regularly conducted if they show a frequency and continuity, and are pursued in a manner similar to comparable commercial activities of nonexempt organizations. 1040x 2010   For example, a hospital auxiliary's operation of a sandwich stand for 2 weeks at a state fair would not be the regular conduct of a trade or business. 1040x 2010 The stand would not compete with similar facilities that a nonexempt organization would ordinarily operate year-round. 1040x 2010 However, operating a commercial parking lot every Saturday, year-round, would be the regular conduct of a trade or business. 1040x 2010 Not substantially related. 1040x 2010    A business activity is not substantially related to an organization's exempt purpose if it does not contribute importantly to accomplishing that purpose (other than through the production of funds). 1040x 2010 Whether an activity contributes importantly depends in each case on the facts involved. 1040x 2010   In determining whether activities contribute importantly to the accomplishment of an exempt purpose, the size and extent of the activities involved must be considered in relation to the nature and extent of the exempt function that they intend to serve. 1040x 2010 For example, to the extent an activity is conducted on a scale larger than is reasonably necessary to perform an exempt purpose, it does not contribute importantly to the accomplishment of the exempt purpose. 1040x 2010 The part of the activity that is more than needed to accomplish the exempt purpose is an unrelated trade or business. 1040x 2010   Also in determining whether activities contribute importantly to the accomplishment of an exempt purpose, the following principles apply. 1040x 2010 Selling of products of exempt functions. 1040x 2010   Ordinarily, selling products that result from the performance of exempt functions is not an unrelated trade or business if the product is sold in substantially the same state it is in when the exempt functions are completed. 1040x 2010 Thus, for an exempt organization engaged in rehabilitating handicapped persons (its exempt function), selling articles made by these persons as part of their rehabilitation training is not an unrelated trade or business. 1040x 2010   However, if a completed product resulting from an exempt function is used or exploited in further business activity beyond what is reasonably appropriate or necessary to dispose of it as is, the activity is an unrelated trade or business. 1040x 2010 For example, if an exempt organization maintains an experimental dairy herd for scientific purposes, the sale of milk and cream produced in the ordinary course of operation of the project is not an unrelated trade or business. 1040x 2010 But if the organization uses the milk and cream in the further manufacture of food items such as ice cream, pastries, etc. 1040x 2010 , the sale of these products is an unrelated trade or business unless the manufacturing activities themselves contribute importantly to the accomplishment of an exempt purpose of the organization. 1040x 2010 Dual use of assets or facilities. 1040x 2010   If an asset or facility necessary to the conduct of exempt functions is also used in commercial activities, its use for exempt functions does not, by itself, make the commercial activities a related trade or business. 1040x 2010 The test, as discussed earlier, is whether the activities contribute importantly to the accomplishment of exempt purposes. 1040x 2010   For example, a museum has a theater auditorium designed for showing educational films in connection with its program of public education in the arts and sciences. 1040x 2010 The theater is a principal feature of the museum and operates continuously while the museum is open to the public. 1040x 2010 If the organization also operates the theater as a motion picture theater for the public when the museum is closed, the activity is an unrelated trade or business. 1040x 2010   For information on allocating expenses for the dual use of assets or facilities, see Deductions in chapter 4. 1040x 2010 Exploitation of exempt functions. 1040x 2010   Exempt activities sometimes create goodwill or other intangibles that can be exploited in a commercial way. 1040x 2010 When an organization exploits such an intangible in commercial activities, the fact that the income depends in part upon an exempt function of the organization does not make the commercial activities a related trade or business. 1040x 2010 Unless the commercial exploitation contributes importantly to the accomplishment of the exempt purpose, the commercial activities are an unrelated trade or business. 1040x 2010   For the treatment of expenses attributable to the exploitation of exempt activities, see Deductions in chapter 4. 1040x 2010 Examples The following are examples of activities that were determined to be (or not to be) unrelated trades or businesses using the definitions and principles just discussed. 1040x 2010 Sales commissions. 1040x 2010   An agricultural organization, whose exempt purposes are to promote better conditions for cattle breeders and to improve the breed generally, engages in an unrelated trade or business when it regularly sells cattle for its members on a commission basis. 1040x 2010 Artists' facilities. 1040x 2010   An organization whose exempt purpose is to stimulate and foster public interest in the fine arts by promoting art exhibits, sponsoring cultural events, and furnishing information about fine arts leases studio apartments to artist tenants and operates a dining hall primarily for these tenants. 1040x 2010 These two activities do not contribute importantly to accomplishing the organization's exempt purpose. 1040x 2010 Therefore, they are unrelated trades or businesses. 1040x 2010 Membership list sales. 1040x 2010   An exempt educational organization regularly sells membership mailing lists to business firms. 1040x 2010 This activity does not contribute importantly to the accomplishment of the organization's exempt purpose and therefore is an unrelated trade or business. 1040x 2010 Also see Exchange or rental of member lists under Excluded Trade or Business Activities, later. 1040x 2010 Hospital facilities. 1040x 2010   An exempt hospital leases its adjacent office building and furnishes certain office services to a hospital-based medical group for a fee. 1040x 2010 The group provides all diagnostic and therapeutic procedures to the hospital's patients and operates the hospital's emergency room on a 24-hour basis. 1040x 2010 The leasing activity is substantially related to the hospital's exempt purpose and is not an unrelated trade or business. 1040x 2010   The hospital also operates a gift shop patronized by patients, visitors making purchases for patients, and employees; a cafeteria and coffee shop primarily for employees and medical staff; and a parking lot for patients and visitors only. 1040x 2010 These activities are also substantially related to the hospital's exempt purpose and do not constitute unrelated trades or businesses. 1040x 2010 Book publishing. 1040x 2010   An exempt organization engages primarily in activities that further its exempt purposes. 1040x 2010 It also owns the publication rights to a book that does not relate to any of its exempt purposes. 1040x 2010 The organization exploits the book in a commercial manner by arranging for printing, distribution, publicity, and advertising in connection with the sale of the book. 1040x 2010 These activities constitute a trade or business regularly conducted. 1040x 2010 Because exploiting the book is unrelated to the organization's exempt purposes (except for the use of the book's profits), the income is unrelated business income. 1040x 2010   However, if the organization transfers publication rights to a commercial publisher in return for royalties, the royalty income received will not be unrelated business income. 1040x 2010 See Royalties under Exclusions in chapter 4. 1040x 2010 School handicraft shop. 1040x 2010   An exempt vocational school operates a handicraft shop that sells articles made by students in their regular courses of instruction. 1040x 2010 The students are paid a percentage of the sales price. 1040x 2010 In addition, the shop sells products made by local residents who make articles at home according to the shop's specifications. 1040x 2010 The shop manager periodically inspects the articles during their manufacture to ensure that they meet desired standards of style and quality. 1040x 2010 Although many local participants are former students of the school, any qualified person may participate in the program. 1040x 2010 The sale of articles made by students does not constitute an unrelated trade or business, but the sale of products made by local residents is an unrelated trade or business and is subject to unrelated business income tax. 1040x 2010 School facilities. 1040x 2010   An exempt school has tennis courts and dressing rooms that it uses during the regular school year in its educational program. 1040x 2010 During the summer, the school operates a tennis club open to the general public. 1040x 2010 Employees of the school run the club, including collecting membership fees and scheduling court time. 1040x 2010   Another exempt school leases the same type of facilities to an unrelated individual who runs a tennis club for the summer. 1040x 2010 The lease is for a fixed fee that does not depend on the income or profits derived from the leased property. 1040x 2010   In both situations, the exempt purpose is the advancement of education. 1040x 2010 Furnishing tennis facilities in the manner described does not further that exempt purpose. 1040x 2010 These activities are unrelated trades or businesses. 1040x 2010 However, in the second situation the income derived from the leasing of the property is excluded from unrelated business taxable income as rent from real property. 1040x 2010 See Rents under Exclusions in chapter 4. 1040x 2010 Services provided with lease. 1040x 2010   An exempt university leases its football stadium during several months of the year to a professional football team for a fixed fee. 1040x 2010 Under the lease agreement, the university furnishes heat, light, and water and is responsible for all ground maintenance. 1040x 2010 It also provides dressing room, linen, and stadium security services for the professional team. 1040x 2010   Leasing of the stadium is an unrelated trade or business. 1040x 2010 In addition, the substantial services furnished for the convenience of the lessee go beyond those usually provided with the rental of space for occupancy only. 1040x 2010 Therefore, the income from this lease is rent from real property and unrelated business taxable income. 1040x 2010 Broadcasting rights. 1040x 2010   An exempt collegiate athletic conference conducts an annual competitive athletic game between its conference champion and another collegiate team. 1040x 2010 Income is derived from admission charges and the sale of exclusive broadcasting rights to a national radio and television network. 1040x 2010 An athletic program is considered an integral part of the educational process of a university. 1040x 2010   The educational purposes served by intercollegiate athletics are identical whether conducted directly by individual universities or by their regional athletic conference. 1040x 2010 Also, the educational purposes served by exhibiting a game before an audience that is physically present and exhibiting the game on television or radio before a much larger audience are substantially similar. 1040x 2010 Therefore, the sale of the broadcasting rights contributes importantly to the accomplishment of the organization's exempt purpose and is not an unrelated trade or business. 1040x 2010   In a similar situation, an exempt organization was created as a national governing body for amateur athletes to foster interest in amateur sports and to encourage widespread public participation. 1040x 2010 The organization receives income each year from the sale of exclusive broadcasting rights to an independent producer, who contracts with a commercial network to broadcast many of the athletic events sponsored, supervised, and regulated by the organization. 1040x 2010   The broadcasting of these events promotes the various amateur sports, fosters widespread public interest in the benefits of the organization's nationwide amateur program, and encourages public participation. 1040x 2010 The sale of the rights and the broadcasting of the events contribute importantly to the organization's exempt purpose. 1040x 2010 Therefore, the sale of the exclusive broadcasting rights is not an unrelated trade or business. 1040x 2010 Yearbook advertising. 1040x 2010   An exempt organization receives income from the sale of advertising in its annual yearbook. 1040x 2010 The organization hires an independent commercial firm, under a contract covering a full calendar year, to conduct an intensive advertising solicitation campaign in the organization's name. 1040x 2010 This firm is paid a percentage of the gross advertising receipts for selling the advertising, collecting from advertisers, and printing the yearbook. 1040x 2010 This advertising activity is an unrelated trade or business. 1040x 2010 Pet boarding and grooming services. 1040x 2010   An exempt organization, organized and operated for the prevention of cruelty to animals, receives unrelated business income from providing pet boarding and grooming services for the general public. 1040x 2010 These activities do not contribute importantly to its purpose of preventing cruelty to animals. 1040x 2010 Museum eating facilities. 1040x 2010   An exempt art museum operates a dining room, a cafeteria, and a snack bar for use by the museum staff, employees, and visitors. 1040x 2010 Eating facilities in the museum help to attract visitors and allow them to spend more time viewing the museum's exhibits without having to seek outside restaurants at mealtime. 1040x 2010 The eating facilities also allow the museum staff and employees to remain in the museum throughout the day. 1040x 2010 Thus, the museum's operation of the eating facilities contributes importantly to the accomplishment of its exempt purposes and is not unrelated trade or business. 1040x 2010 Halfway house workshop. 1040x 2010   A halfway house organized to provide room, board, therapy, and counseling for persons discharged from alcoholic treatment centers also operates a furniture shop to provide full-time employment for its residents. 1040x 2010 The profits are applied to the operating costs of the halfway house. 1040x 2010 The income from this venture is not unrelated trade or business income because the furniture shop contributes importantly to the organization's purpose of aiding its residents' transition from treatment to a normal and productive life. 1040x 2010 Travel tour programs. 1040x 2010   Travel tour activities that are a trade or business are an unrelated trade or business if the activities are not substantially related to the purpose for which tax exemption was granted to the organization. 1040x 2010 Example 1. 1040x 2010 A tax-exempt university alumni association provides a travel tour program for its members and their families. 1040x 2010 The organization works with various travel agencies and schedules approximately ten tours a year to various places around the world. 1040x 2010 It mails out promotional material and accepts reservations for fees paid by the travel agencies on a per-person basis. 1040x 2010 The organization provides an employee for each tour as a tour leader. 1040x 2010 There is no formal educational program conducted with these tours, and they do not differ from regular commercially operated tours. 1040x 2010 By providing travel tours to its members, the organization is engaging in a regularly conducted trade or business. 1040x 2010 Even if the tours it offers support the university, financially and otherwise, and encourage alumni to do the same, they do not contribute importantly to the organization's exempt purpose of promoting education. 1040x 2010 Therefore, the sale of the travel tours is an unrelated trade or business. 1040x 2010 Example 2. 1040x 2010 A tax-exempt organization formed for the purpose of educating individuals about the geography and the culture of the United States provides study tours to national parks and other locations within the United States. 1040x 2010 These tours are conducted by teachers and others certified by the state board of education. 1040x 2010 The tours are primarily designed for students enrolled in degree programs at state educational institutions but are open to all who agree to participate in the required study program associated with the tour taken. 1040x 2010 A tour's study program consists of instruction on subjects related to the location being visited on the tour. 1040x 2010 Each tour group brings along a library of material related to the subjects being studied on the tour. 1040x 2010 During the tour, 5 or 6 hours per day are devoted to organized study, preparation of reports, lectures, instruction, and recitation by the students. 1040x 2010 Examinations are given at the end of each tour. 1040x 2010 The state board of education awards academic credit for tour participation. 1040x 2010 Because these tours are substantially related to the organization's exempt purpose, they are not an unrelated trade or business. 1040x 2010 Insurance programs. 1040x 2010   An organization that acts as a group insurance policyholder for its members and collects a fee for performing administrative services is normally carrying on an unrelated trade or business. 1040x 2010 Exceptions. 1040x 2010   Organizations whose exempt activities may include the provision of insurance benefits, such as fraternal beneficiary societies, voluntary employees beneficiary associations, and labor organizations, are generally exceptions to this rule. 1040x 2010 Magazine publishing. 1040x 2010   An association of credit unions with tax-exempt status as a business league publishes a consumer-oriented magazine four times a year and makes it available to member credit unions for purchase. 1040x 2010   By selling a magazine to its members as a promotional device, the organization furnishes its members with a regular commercial service they can use in their own operations. 1040x 2010 This service does not promote the improvement of business conditions of one or more lines of business, which is the exempt purpose of a business league. 1040x 2010   Since the activity does not contribute importantly to the organization's exempt function, it is an unrelated trade or business. 1040x 2010 Directory of members. 1040x 2010   A business league publishes an annual directory that contains a list of all its members, their addresses, and their area of expertise. 1040x 2010 Each member has the same amount of space in the directory, and its format does not emphasize the relative importance or reputation of any member. 1040x 2010 The directory contains no commercial advertisement and is sold only to the organization's members. 1040x 2010   The directory facilitates communication among the members and encourages the exchange of ideas and expertise. 1040x 2010 Because the directory lists the members in a similar noncommercial format without advertising and is not distributed to the public, its sale does not confer private commercial benefits on the members. 1040x 2010 The sale of the directory does contribute importantly to the organization's exempt purpose and is not an unrelated trade or business. 1040x 2010 This directory differs from the publication discussed next because of its noncommercial characteristics. 1040x 2010 Sales of advertising space. 1040x 2010   A national association of law enforcement officials publishes a monthly journal that contains articles and other editorial material of professional interest to its members. 1040x 2010 The journal is distributed without charge, mainly to the organization's members. 1040x 2010   The organization sells advertising space in the journal either for conventional advertising or to merely identify the purchaser without a commercial message. 1040x 2010 Some of the noncommercial advertising identifies the purchaser in a separate space, and some consists of listings of 60 or more purchasers per page. 1040x 2010 A business firm identified in a separate space is further identified in an Index of Advertisers. 1040x 2010   The organization solicits advertising by personal contacts. 1040x 2010 Advertising from large firms is solicited by contacting their chief executive officer or community relations officer rather than their advertising manager. 1040x 2010 The organization also solicits advertising in form letters appealing for corporate and personal contributions. 1040x 2010   An exempt organization's sale of advertising placed for the purchaser's commercial benefit is a commercial activity. 1040x 2010 Goodwill derived by the purchaser from being identified as a patron of the organization is usually considered a form of commercial benefit. 1040x 2010 Therefore, advertising in an exempt organization's publication is generally presumed to be placed for the purchaser's commercial benefit, even if it has no commercial message. 1040x 2010 However, this presumption is not conclusive if the purchaser's patronage would be difficult to justify commercially in view of the facts and circumstances. 1040x 2010 In that case, other factors should also be considered in determining whether a commercial benefit can be expected. 1040x 2010 Those other factors include: The normal manner in which the publication is circulated; The territorial scope of the circulation; The extent to which its readers, promoters, or the like could reasonably be expected to further, either directly or indirectly, the commercial interest of the advertisers; The eligibility of the publishing organization to receive tax-deductible contributions; and The commercial or noncommercial methods used to solicit the advertisers. 1040x 2010   In this situation, the purchaser of a separate advertising space without a commercial message can nevertheless expect a commercial benefit from the goodwill derived from being identified in that manner as a patron of the organization. 1040x 2010 However, the purchaser of a listing cannot expect more than an inconsequential benefit. 1040x 2010 Therefore, the sale of separate spaces, but not the listings, is an unrelated trade or business. 1040x 2010 Publishing legal notices. 1040x 2010   A bar association publishes a legal journal containing opinions of the county court, articles of professional interest to lawyers, advertisements for products and services used by the legal profession, and legal notices. 1040x 2010 The legal notices are published to satisfy state laws requiring publication of notices in connection with legal proceedings, such as the administration of estates and actions to quiet title to real property. 1040x 2010 The state designated the bar association's journal as the place to publish the required notices. 1040x 2010   The publication of ordinary commercial advertising does not advance the exempt purposes of the association even when published in a periodical that contains material related to exempt purposes. 1040x 2010 Although the advertising is directed specifically to members of the legal profession, it is still commercial in nature and does not contribute importantly to the exempt purposes of the association. 1040x 2010 Therefore, the advertising income is unrelated trade or business income. 1040x 2010   On the other hand, the publication of legal notices is distinguishable from ordinary commercial advertising in that its purpose is to inform the general public of significant legal events rather than to stimulate demand for the products or services of an advertiser. 1040x 2010 This promotes the common interests of the legal profession and contributes importantly to the association's exempt purposes. 1040x 2010 Therefore, the publishing of legal notices does not constitute an unrelated trade or business. 1040x 2010 Museum greeting card sales. 1040x 2010    An art museum that exhibits modern art sells greeting cards that display printed reproductions of selected works from other art collections. 1040x 2010 Each card is imprinted with the name of the artist, the title or subject matter of the work, the date or period of its creation, if known, and the museum's name. 1040x 2010 The cards contain appropriate greetings and are personalized on request. 1040x 2010   The organization sells the cards in the shop it operates in the museum and sells them at quantity discounts to retail stores. 1040x 2010 It also sells them by mail order through a catalog that is advertised in magazines and other publications throughout the year. 1040x 2010 As a result, a large number of cards are sold at a significant profit. 1040x 2010   The museum is exempt as an educational organization on the basis of its ownership, maintenance, and exhibition for public viewing of works of art. 1040x 2010 The sale of greeting cards with printed reproductions of artworks contributes importantly to the achievement of the museum's exempt educational purposes by enhancing public awareness, interest, and appreciation of art. 1040x 2010 The cards may encourage more people to visit the museum itself to share in its educational programs. 1040x 2010 The fact that the cards are promoted and sold in a commercial manner at a profit and in competition with commercial greeting card publishers does not alter the fact that the activity is related to the museum's exempt purpose. 1040x 2010 Therefore, these sales activities are not an unrelated trade or business. 1040x 2010 Museum shop. 1040x 2010   An art museum maintained and operated for the exhibition of American folk art operates a shop in the museum that sells: Reproductions of works in the museum's own collection and reproductions of artistic works from the collections of other art museums (prints suitable for framing, postcards, greeting cards, and slides); Metal, wood, and ceramic copies of American folk art objects from its own collection and similar copies of art objects from other collections of artworks; Instructional literature and scientific books and souvenir items concerning the history and development of art and, in particular, of American folk art; and Scientific books and souvenir items of the city in which the museum is located. 1040x 2010   The shop also rents originals or reproductions of paintings contained in its collection. 1040x 2010 All of its reproductions are imprinted with the name of the artist, the title or subject matter of the work from which it is reproduced, and the museum's name. 1040x 2010   Each line of merchandise must be considered separately to determine if sales are related to the exempt purpose. 1040x 2010   The sale and rental of reproductions and copies of works from the museum's own collection and reproductions of artistic works not owned by the museum contribute importantly to the achievement of the museum's exempt educational purpose by making works of art familiar to a broader segment of the public, thereby enhancing the public's understanding and appreciation of art. 1040x 2010 The same is true for the sale of literature relating to art. 1040x 2010 Therefore, these sales activities are not an unrelated trade or business. 1040x 2010   On the other hand, the sale of scientific books and souvenir items of the city where the museum is located has no causal relationship to art or to artistic endeavor and, therefore, does not contribute importantly to the accomplishment of the museum's exempt educational purposes. 1040x 2010 The fact that selling some of these items could, under different circumstances, be held related to the exempt educational purpose of some other exempt educational organization does not change this conclusion. 1040x 2010 Additionally, the sale of these items does not lose its identity as a trade or business merely because the museum also sells articles which do contribute importantly to the accomplishment of its exempt function. 1040x 2010 Therefore, these sales are an unrelated trade or business. 1040x 2010 Business league's parking and bus services. 1040x 2010   A business league, whose purpose is to retain and stimulate trade in a downtown area that has inadequate parking facilities, operates a fringe parking lot and shuttle bus service. 1040x 2010 It also operates, as an insubstantial part of its activities, a park and shop plan. 1040x 2010   The fringe parking lot and shuttle bus service operate in a manner that does not favor any individual or group of downtown merchants. 1040x 2010 The merchants cannot offer free or discount parking or bus fares to their customers. 1040x 2010   The park and shop plan allows customers of particular merchants to park free at certain parking lots in the area. 1040x 2010 Merchants participating in this plan buy parking stamps, which they distribute to their customers to use to pay for parking. 1040x 2010   Operating the fringe parking lot and shuttle bus service provides easy and convenient access to the downtown area and, therefore, stimulates and improves business conditions in the downtown area generally. 1040x 2010 That activity contributes importantly to the organization's accomplishing its exempt purpose and is not an unrelated trade or business. 1040x 2010   The park and shop plan encourages customers to use a limited number of participating member merchants in order to obtain free parking. 1040x 2010 This provides a particular service to individual members of the organization and does not further its exempt purpose. 1040x 2010 Therefore, operating the park and shop plan is an unrelated trade or business. 1040x 2010 Youth residence. 1040x 2010   An exempt organization, whose purpose is to provide for the welfare of young people, rents rooms primarily to people under age 25. 1040x 2010 The residence units are operated on, and as a part of, the premises in which the organization carries on the social, recreational, and guidance programs for which it was recognized as exempt. 1040x 2010 The facilities are under the management and supervision of trained career professionals who provide residents with personal counseling, physical education programs, and group recreational activities. 1040x 2010 The rentals are not an unrelated trade or business because renting the rooms is substantially related to the organization's exempt purpose. 1040x 2010 Health club program. 1040x 2010   An exempt charitable organization's purpose is to provide for the welfare of young people. 1040x 2010 The organization conducts charitable activities and maintains facilities that will contribute to the physical, social, mental, and spiritual health of young people at minimum or no cost to them. 1040x 2010 Nominal annual dues are charged for membership in the organization and use of the facilities. 1040x 2010   In addition, the organization organized a health club program that its members could join for an annual fee in addition to the annual dues. 1040x 2010 The annual fee is comparable to fees charged by similar local commercial health clubs and is sufficiently high to restrict participation in the program to a limited number of members of the community. 1040x 2010   The health club program is in addition to the general physical fitness program of the organization. 1040x 2010 Operating this program does not contribute importantly to the organization's accomplishing its exempt purpose and, therefore, is an unrelated trade or business. 1040x 2010 Miniature golf course. 1040x 2010   An exempt youth welfare organization operates a miniature golf course that is open to the general public. 1040x 2010 The course, which is managed by salaried employees, is substantially similar to commercial courses. 1040x 2010 The admission fees charged are comparable to fees of commercial facilities and are designed to return a profit. 1040x 2010   The operation of the miniature golf course in a commercial manner does not contribute importantly to the accomplishment of the organization's exempt purpose and, therefore, is an unrelated trade or business. 1040x 2010 Sales of hearing aids. 1040x 2010   A tax-exempt hospital, whose primary activity is rehabilitation, sells hearing aids to patients. 1040x 2010 This activity is an essential part of the hospital's program to test and evaluate patients with hearing deficiencies and contributes importantly to its exempt purpose. 1040x 2010 It is not an unrelated trade or business. 1040x 2010 Nonpatient laboratory testing. 1040x 2010   Nonpatient laboratory testing performed by a tax-exempt teaching hospital on specimens needed for the conduct of its teaching activities is not an unrelated trade or business. 1040x 2010 However, laboratory testing performed by a tax-exempt non-teaching hospital on referred specimens from private office patients of staff physicians is an unrelated trade or business if these services are otherwise available in the community. 1040x 2010 Selling endorsements. 1040x 2010   An exempt scientific organization enjoys an excellent reputation in the field of biological research. 1040x 2010 It exploits this reputation regularly by selling endorsements of laboratory equipment to manufacturers. 1040x 2010 Endorsing laboratory equipment does not contribute importantly to the accomplishment of any purpose for which exemption is granted to the organization. 1040x 2010 Accordingly, the sale of endorsements is an unrelated trade or business. 1040x 2010 Sponsoring entertainment events. 1040x 2010   An exempt university has a regular faculty and a regularly enrolled student body. 1040x 2010 During the school year, the university sponsors the appearance of professional theater companies and symphony orchestras that present drama and musical performances for the students and faculty members. 1040x 2010 Members of the general public also are admitted. 1040x 2010 The university advertises these performances and supervises advance ticket sales at various places, including such university facilities as the cafeteria and the university bookstore. 1040x 2010 Although the presentation of the performances makes use of an intangible generated by the university's exempt educational functions—the presence of the student body and faculty—such drama and music events contribute importantly to the overall educational and cultural functions of the university. 1040x 2010 Therefore, the activity is not an unrelated trade or business. 1040x 2010 Excluded Trade or Business Activities The following activities are specifically excluded from the definition of unrelated trade or business. 1040x 2010 Volunteer workforce. 1040x 2010   Any trade or business in which substantially all the work is performed for the organization without compensation is not an unrelated trade or business. 1040x 2010 Example 1. 1040x 2010 A retail store operated by an exempt orphanage where unpaid volunteers perform substantially all the work in carrying on the business is not an unrelated trade or business. 1040x 2010 Example 2. 1040x 2010 A volunteer fire company conducts weekly public dances. 1040x 2010 Holding public dances and charging admission on a regular basis may, given the facts and circumstances of a particular case, be considered an unrelated trade or business. 1040x 2010 However, because the work at the dances is performed by unpaid volunteers, the activity is not an unrelated trade or business. 1040x 2010 Convenience of members. 1040x 2010   A trade or business conducted by a 501(c)(3) organization or by a governmental college or university primarily for the convenience of its members, students, patients, officers, or employees is not an unrelated trade or business. 1040x 2010 For example, a laundry operated by a college for the purpose of laundering dormitory linens and students' clothing is not an unrelated trade or business. 1040x 2010 Qualified sponsorship activities. 1040x 2010   Soliciting and receiving qualified sponsorship payments is not an unrelated trade or business, and the payments are not subject to unrelated business income tax. 1040x 2010 Qualified sponsorship payment. 1040x 2010   This is any payment made by a person engaged in a trade or business for which the person will receive no substantial benefit other than the use or acknowledgment of the business name, logo, or product lines in connection with the organization's activities. 1040x 2010 “Use or acknowledgment” does not include advertising the sponsor's products or services. 1040x 2010 The organization's activities include all its activities, whether or not related to its exempt purposes. 1040x 2010   For example, if, in return for receiving a sponsorship payment, an organization promises to use the sponsor's name or logo in acknowledging the sponsor's support for an educational or fundraising event, the payment is a qualified sponsorship payment and is not subject to the unrelated business income tax. 1040x 2010   Providing facilities, services, or other privileges (for example, complimentary tickets, pro-am playing spots in golf tournaments, or receptions for major donors) to a sponsor or the sponsor's designees in connection with a sponsorship payment does not affect whether the payment is a qualified sponsorship payment. 1040x 2010 Instead, providing these goods or services is treated as a separate transaction in determining whether the organization has unrelated business income from the event. 1040x 2010 Generally, if the services or facilities are not a substantial benefit or if providing them is a related business activity, the payments will not be subject to the unrelated business income tax. 1040x 2010   Similarly, the sponsor's receipt of a license to use an intangible asset (for example, a trademark, logo, or designation) of the organization is treated as separate from the qualified sponsorship transaction in determining whether the organization has unrelated business taxable income. 1040x 2010   If part of a payment would be a qualified sponsorship payment if paid separately, that part is treated as a separate payment. 1040x 2010 For example, if a sponsorship payment entitles the sponsor to both product advertising and the use or acknowledgment of the sponsor's name or logo by the organization, then the unrelated business income tax does not apply to the part of the payment that is more than the fair market value of the product advertising. 1040x 2010 Advertising. 1040x 2010   A payment is not a qualified sponsorship payment if, in return, the organization advertises the sponsor's products or services. 1040x 2010 For information on the treatment of payments for advertising, see Exploitation of Exempt Activity—Advertising Sales in chapter 4. 1040x 2010   Advertising includes: Messages containing qualitative or comparative language, price information, or other indications of savings or value; Endorsements; and Inducements to purchase, sell, or use the products or services. 1040x 2010   The use of promotional logos or slogans that are an established part of the sponsor's identity is not, by itself, advertising. 1040x 2010 In addition, mere distribution or display of a sponsor's product by the organization to the public at a sponsored event, whether for free or for remuneration, is considered use or acknowledgment of the product rather than advertising. 1040x 2010 Exception for contingent payments. 1040x 2010   A payment is not a qualified sponsorship payment if its amount is contingent, by contract or otherwise, upon the level of attendance at one or more events, broadcast ratings, or other factors indicating the degree of public exposure to one or more events. 1040x 2010 However, the fact that a sponsorship payment is contingent upon an event actually taking place or being broadcast does not, by itself, affect whether a payment qualifies. 1040x 2010 Exception for periodicals. 1040x 2010   A payment is not a qualified sponsorship payment if it entitles the payer to the use or acknowledgment of the business name, logo, or product lines in the organization's periodical. 1040x 2010 For this purpose, a periodical is any regularly scheduled and printed material (for example, a monthly journal) published by or on behalf of the organization. 1040x 2010 It does not include material that is related to and primarily distributed in connection with a specific event conducted by the organization (for example, a program or brochure distributed at a sponsored event). 1040x 2010   The treatment of payments that entitle the payer to the depiction of the payer's name, logo, or products lines in an organization's periodical is determined under the rules that apply to advertising activities. 1040x 2010 See Sales of advertising space under Examples, earlier in this chapter. 1040x 2010 Also see Exploitation of Exempt Activity—Advertising Sales in chapter 4. 1040x 2010 Exception for conventions and trade shows. 1040x 2010   A payment is not a qualified sponsorship payment if it is made in connection with any qualified convention or trade show activity. 1040x 2010 The exclusion of qualified convention or trade show activities from the definition of unrelated trade or business is explained later under Convention or trade show activity. 1040x 2010 Selling donated merchandise. 1040x 2010   A trade or business that consists of selling merchandise, substantially all of which the organization received as gifts or contributions, is not an unrelated trade or business. 1040x 2010 For example, a thrift shop operated by a tax-exempt organization that sells donated clothes and books to the general public, with the proceeds going to the exempt organization, is not an unrelated trade or business. 1040x 2010 Employee association sales. 1040x 2010   The sale of certain items by a local association of employees described in section 501(c)(4), organized before May 17, 1969, is not an unrelated trade or business if the items are sold for the convenience of the association's members at their usual place of employment. 1040x 2010 This exclusion applies only to the sale of work-related clothes and equipment and items normally sold through vending machines, food dispensing facilities, or by snack bars. 1040x 2010 Bingo games. 1040x 2010   Certain bingo games are not included in the term “unrelated trade or business. 1040x 2010 ” To qualify for this exclusion, the bingo game must meet the following requirements. 1040x 2010 It meets the legal definition of bingo. 1040x 2010 It is legal where it is played. 1040x 2010 It is played in a jurisdiction where bingo games are not regularly conducted by for-profit organizations. 1040x 2010 Legal definition. 1040x 2010   For a game to meet the legal definition of bingo, wagers must be placed, winners must be determined, and prizes or other property must be distributed in the presence of all persons placing wagers in that game. 1040x 2010   A wagering game that does not meet the legal definition of bingo does not qualify for the exclusion, regardless of its name. 1040x 2010 For example, “instant bingo,” in which a player buys a pre-packaged bingo card with pull-tabs that the player removes to determine if he or she is a winner, does not qualify. 1040x 2010 Legal where played. 1040x 2010   This exclusion applies only if bingo is legal under the laws of the jurisdiction where it is conducted. 1040x 2010 The fact that a jurisdiction's law that prohibits bingo is rarely enforced or is widely disregarded does not make the conduct of bingo legal for this purpose. 1040x 2010 No for-profit games where played. 1040x 2010   This exclusion applies only if for-profit organizations cannot regularly conduct bingo games in any part of the same jurisdiction. 1040x 2010 Jurisdiction is normally the entire state; however, in certain situations, local jurisdiction will control. 1040x 2010 Example. 1040x 2010 Tax-exempt organizations X and Y are organized under the laws of state N, which has a law that permits exempt organizations to conduct bingo games. 1040x 2010 In addition, for-profit organizations are permitted to conduct bingo games in city S, a resort community located in county R. 1040x 2010 Several for-profit organizations conduct nightly games. 1040x 2010 Y conducts weekly bingo games in city S, while X conducts weekly games in county R. 1040x 2010 Since state law confines the for-profit organizations to city S, local jurisdiction controls. 1040x 2010 Y's bingo games conducted in city S are an unrelated trade or business. 1040x 2010 However, X's bingo games conducted in county R outside of city S are not an unrelated trade or business. 1040x 2010 Gambling activities other than bingo. 1040x 2010   Any game of chance conducted by an exempt organization in North Dakota is not an unrelated trade or business if conducting the game does not violate any state or local law. 1040x 2010 Pole rentals. 1040x 2010   The term unrelated trade or business does not include qualified pole rentals by a mutual or cooperative telephone or electric company described in section 501(c)(12). 1040x 2010 A qualified pole rental is the rental of a pole (or other structure used to support wires) if the pole (or other structure) is used: By the telephone or electric company to support one or more wires that the company uses in providing telephone or electric services to its members, and According to the rental, to support one or more wires (in addition to the wires described in 1 ) for use in connection with the transmission by wire of electricity or of telephone or other communications. 1040x 2010 For this purpose, the term rental includes any sale of the right to use the pole (or other structure). 1040x 2010 Distribution of low cost articles. 1040x 2010   The term unrelated trade or business does not include activities relating to the distribution of low cost articles incidental to soliciting charitable contributions. 1040x 2010 This applies to organizations described in section 501 that are eligible to receive charitable contributions. 1040x 2010   A distribution is considered incidental to the solicitation of a charitable contribution if: The recipient did not request the distribution, The distribution is made without the express consent of the recipient, and The article is accompanied by a request for a charitable contribution to the organization and a statement that the recipient may keep the low cost article regardless of whether a contribution is made. 1040x 2010   An article is considered low cost if the cost of an item (or the aggregate costs if more than one item) distributed to a single recipient in a tax year is not more than $5, indexed annually for inflation. 1040x 2010 The maximum cost of a low cost article is $9. 1040x 2010 70 for 2011. 1040x 2010 The cost of an article is the cost to the organization that distributes the item or on whose behalf it is distributed. 1040x 2010 Exchange or rental of member lists. 1040x 2010   The exchange or rental of member or donor lists between organizations described in section 501 that are eligible to receive charitable contributions is not included in the term unrelated trade or business. 1040x 2010 Hospital services. 1040x 2010   The providing of certain services at or below cost by an exempt hospital to other exempt hospitals that have facilities for 100 or fewer inpatients is not an unrelated trade or business. 1040x 2010 This exclusion applies only to services described in section 501(e)(1)(A). 1040x 2010 Public entertainment activity. 1040x 2010   An unrelated trade or business does not include a qualified public entertainment activity. 1040x 2010 A public entertainment activity is one traditionally conducted at a fair or exposition promoting agriculture and education, including any activity whose purpose is designed to attract the public to fairs or expositions or to promote the breeding of animals or the development of products or equipment. 1040x 2010   A qualified public entertainment activity is one conducted by a qualifying organization: In conjunction with an international, national, state, regional, or local fair or exposition; In accordance with state law that permits the activity to be operated or conducted solely by such an organization or by an agency, instrumentality, or political subdivision of the state; or In accordance with state law that permits an organization to be granted a license to conduct an activity for not more than 20 days on paying the state a lower percentage of the revenue from the activity than the state charges nonqualifying organizations that hold similar activities. 1040x 2010   For these purposes, a qualifying organization is an organization described in section 501(c)(3), 501(c)(4), or 501(c)(5) that regularly conducts an agricultural and educational fair or exposition as one of its substantial exempt purposes. 1040x 2010 Its conducting qualified public entertainment activities will not affect determination of its exempt status. 1040x 2010 Convention or trade show activity. 1040x 2010   An unrelated trade or business does not include qualified convention or trade show activities conducted at a convention, annual meeting, or trade show. 1040x 2010   A qualified convention or trade show activity is any activity of a kind traditionally conducted by a qualifying organization in conjunction with an international, national, state, regional, or local convention, annual meeting, or show if: One of the purposes of the organization in sponsoring the activity is promoting and stimulating interest in, and demand for, the products and services of that industry or educating the persons in attendance regarding new products and services or new rules and regulations affecting the industry; and The show is designed to achieve its purpose through the character of the exhibits and the extent of the industry products that are displayed. 1040x 2010   For these purposes, a qualifying organization is one described in section 501(c)(3), 501(c)(4), 501(c)(5), or 501(c)(6). 1040x 2010 The organization must regularly conduct, as one of its substantial exempt purposes, a qualified convention or trade show activity. 1040x 2010   The rental of display space to exhibitors (including exhibitors who are suppliers) at a qualified convention or trade show is not an unrelated trade or business even if the exhibitors who rent the space are permitted to sell or solicit orders. 1040x 2010 For this purpose, a supplier's exhibit is one in which the exhibitor displays goods or services that are supplied to, rather than by, members of the qualifying organization in the conduct of these members' own trades or businesses. 1040x 2010    Certain Internet activities conducted by a trade association described in section 501(c)(6) will be considered qualified convention and trade show activity if conducted on a special supplementary section of the association's website in conjunction with a trade show conducted by the association. 1040x 2010 The trade show itself must be a qualified convention and trade show activity. 1040x 2010 The supplementary section of the website must be ancillary to, and serve to augment and enhance, the trade show, as when it makes available the same information available at the trade show and is available only during a time period that coincides with the time period that the trade show is in operation. 1040x 2010 Conversely, Internet activities that are not conducted in conjunction with a qualified convention and trade show activity and that do not augment and enhance the trade show cannot themselves be qualified convention and trade show activity. 1040x 2010 Prev  Up  Next   Home   More Online Publications