990-T 1998[325]

Unrelated Business Income Tax Returns, 1998 by Margaret Riley O rganizations classified by the Internal Revenue Service as exempt from Federal income taxation reported a total of $7.6 billion of gross “unrelated business income” (UBI) for Tax Year 1998. While these organizations are generally tax-exempt, they are subject to Federal taxation of income received from commercial and other activities that are not substantially related to their tax-exempt missions. The 46,208 organizations filing a 1998 Form 990-T, Exempt Organization Business Income Tax Return, offset gross UBI with a total of $8.2 billion of deductions, resulting in an overall deficit of $0.6 billion. However, slightly more than half of the filers reported taxable profits (positive net income), which amounted to $1.7 billion. Income is defined as UBI if it is produced from an activity that is conducted on a regular basis and is not directly related to an organization’s tax-exempt mission. The fact that the income may be used for furthering an organization’s exempt purposes does not alter the definition. Any profits from an organization’s unrelated business activities are taxed at regular corporate or trust income tax rates [1]. Organizations reported $505.9 million of unrelated business income tax liability on Tax Year 1998 Forms 990-T. Total tax liability, which is computed as unrelated business income tax, plus other taxes, minus total credits, was $464.3 million [2]. Much of the total amount of additional taxes reported on Form 990-T for 1998 was the “proxy tax,” which was imposed on certain membership dues used for lobbying activities. Figure A shows the computation of total tax liability for 1998. Figure A Computation of Total Tax Reported on Exempt Organization Business Income Tax Returns, Tax Year 1998 [Money amounts are in thousands of dollars] Item Amount Total unrelated business income tax (UBIT)........................................................................... 505,896 Corporate UBIT........................................................................... 261,970 Trust UBIT..................................................................................... 243,926 PLUS: Total additional taxes ¹..................................................................................... 3,486 Alternative minimum tax..................................................................................... 551 Proxy tax ²................................................................................... 2,935 MINUS: Total tax credits..................................................................................... 45,094 Foreign tax credit..................................................................................... 44,251 General business credit..................................................................................... 699 Credit for prior-year minimum tax..................................................................................... 73 Other credits..................................................................................... 71 EQUALS: Total tax..................................................................................... 464,288 ¹ Additional taxes can include "recapture taxes," but none were reported on Form 990-T for 1998. ² Represents the tax for only those organizations that reported gross UBI above the $1,000 filing threshold. The total proxy tax reported on all Forms 990-T was $10.7 million. Some organizations filed Form 990-T only to report the proxy tax and had no unrelated businss income. ProxyTax The proxy tax is required to be reported on Form 990-T and is included in total tax, but it has no connection to the unrelated business income tax or an organization’s involvement in unrelated business activities. The proxy tax, which was effective beginning with Tax Year 1994, is imposed on a taxexempt organization’s nondeductible lobbying and political expenditures when they are financed with Margaret Riley is a statistician with the Special Studies Special Projects Section. This article was prepared under the direction of Michael Alexander, Chief. dues collected from organization members, and the organization either fails to notify the members of their shares of dues that were spent on lobbying and political activities, or the organization fails to state the full amount of allocable dues in the notification. The proxy tax applies only to Internal Revenue Code section 501(c)(4) civic and social welfare organizations, section 501(c)(5) agricultural and labor organizations, and section 501(c)(6) business leagues, chambers of commerce, and real estate boards. (The various types of tax-exempt organizations subject to the unrelated business income tax provisions are described by Internal Revenue Code section in the Appendix to this article.) Organizations that had no unrelated business income (UBI), yet were required to file Form 990-T to report the proxy tax, were not included in the Statistics of Income (SOI) study sample because they did not meet the $1,000 gross UBI filing threshold, which was a criterion for sample selection. As shown in Figure A, the proxy tax reported on returns 187 Unrelated Business Income Tax Returns, 1998 selected for the SOI study was $2.9 million. After taking into account the additional Forms 990-T filed solely to report the proxy tax, the total amount of proxy tax reported for 1998 was $10.7 million. It is estimated that about 64 percent of all organizations reporting proxy tax filed Form 990-T solely for that purpose (no income from unrelated business activities was reported) [3]. SelectedFinancialDataforTaxYears1997and 1998 As shown in column 3 of Figure B, both gross unrelated business income (UBI) and total deductions declined by about 3 percent and 4 percent, respectively, between 1997 and 1998. The primary reason for these decreases is the exclusion from the 1998 statistics of Teachers Insurance and Annuity Association of America (TIAA), which reported relatively large amounts of gross UBI and total deductions on Form 990-T for 1997 [4]. The tax-exempt status of TIAA was terminated, effective for Tax Year 1998, under a provision of the Taxpayer Relief Act of 1997. Beginning with Tax Year 1998, TIAA was no longer subject to file Form 990-T for 1998 and later 188 years because it became a for-profit corporation that was taxed at corporate income tax rates. If the 1997 statistics are adjusted to exclude TIAA, as shown in column 4 of Figure B, the aggregate amounts of gross UBI and total deductions increased by 8 percent and 5 percent, respectively, from 1997 to 1998. The adjusted information presented in Figure B provides a more consistent means for assessing the real change between 1997 and 1998 in aggregate financial data items reported by organizations on Forms 990-T. Of note in Figure B is the 27-percent rise in the amount of unrelated business income tax liability (UBIT) reported on Forms 990-T between 1997 (adjusted) and 1998. This corresponds to a similar increase in taxable profits realized by organizations for 1998. The 140 organizations having taxable profits of $1,000,000 or more, shown in Table 3 at the end of this article, made up less than half of 1 percent of all filers, yet they accounted for over three-fourths of UBIT reported for 1998. Table 4 at the end of this article presents major financial data items reported by tax-exempt trusts and corporations that had taxable profits for 1998. Figure B Selected Financial Data from Exempt Organization Business Income Tax Returns, Tax Years 1997 (Unadjusted and Adjusted) and 1998 [Money amounts are in thousands of dollars] Percentage change, Item 1997 1998 1997 to 1998 (1) (2) (3) -2.9 -3.7 13.0 21.5 10.0 20.9 9.8 (4) 7,020,551 7,767,004 -746,454 1,314,676 2,061,130 397,403 402,816 (5) 7,584,915 8,181,766 -596,853 1,669,753 2,266,605 505,896 464,288 1997 (adjusted) ¹ 1998 Percentage change, 1997 (adjusted) to 1998 (6) 8.0 5.3 20.0 27.0 10.0 27.3 15.3 Gross unrelated business income............................................................. 7,808,558 7,584,915 Total deductions ²............................................................. 8,494,930 Net income (less deficit)............................................................. -686,374 Net income (taxable profit)............................................................. 1,374,757 Deficit...................................................................... 2,061,130 Unrelated business income tax............................................................. 418,431 Total tax............................................................. 422,740 8,181,766 -596,853 1,669,753 2,266,605 505,896 464,288 ¹ The adjusted 1997 data exclude Teachers Insurance and Annuity Association of America (TIAA), which filed a return for 1997, but not for 1998. The tax-exempt status of TIAA, which reported relatively large amounts of unrelated business income and deductions for 1997, was terminated under a provision of the Taxpayer Relief Act of 1997. The termination was effective beginning with Tax Year 1998, at which time TIAA became a for-profit corporation. The adjusted 1997 data are being provided with permission from TIAA. ² Excludes cost of sales and services, which was subtracted from gross receipts from sales and services in computing gross profit from sales and services (GPSS). GPSS is a component of gross unrelated business income (upon which the filing requirement is based). Cost of sales and services can include amounts attributable to depreciation, salaries and wages, and certain other deductible items. Total cost of sales and services was $2.1 billion for 1998. NOTES: Detail may not add to totals because of rounding. See the Explanation of Selected Terms section of this article for definitions of gross unrelated business income, total deductions, net income (less deficit), unrelated business income tax, and total tax. 188 Unrelated Business Income Tax Returns, 1998 The aggregate gross income of organizations that had taxable profits for 1998 was 7 percent higher than the amount reported by organizations with taxable profits for 1997 (based on unpublished adjusted statistics). Total deductions reported by these two groups of organizations decreased by 7 percent between the 2 years. Corporations made up 55 percent of the 24,332 organizations reporting taxable profits on Forms 990-T for 1998, but their shares of gross UBI and total deductions were much higher, at 67 percent and 81 percent, respectively. Tax-exempt corporations collectively reported 51 percent of the total $1.7 billion of taxable profits for 1998, and tax-exempt trusts reported the remainder. Additionally, the respective split of corporate and trust total tax liability was 48 percent and 52 percent. NorthAmericanIndustryClassificationSystem (AC) NIS Beginning with Tax Year 1998, organizations filing Form 990-T were required to report a 6-digit code to classify their primary and secondary (if applicable) unrelated business activities according to the North American Industry Classification System (NAICS). Previously, filers had to classify their unrelated business activities according to the Standard Industrial Classification (SIC) system. The NAICS was developed as a much needed replacement for the older SIC (developed between 1937 and 1939 and updated periodically) because rapidly emerging changes in national and global economies made the SIC less useful for statistical analysis of industrial composition and organization. NAICS was jointly developed by Canada, Mexico, and the United States (participants in the North American Free Trade Agreement, or NAFTA) and was adopted for use in the United States in 1997. Three main reasons for developing NAICS were: (1) to expand coverage of the services sector, which has increasingly played a more important role than manufacturing in the U.S. economy in recent years; (2) to give more attention to industries engaged in advanced technologies; and (3) to reflect the changed structure of the economy due to emerging new industries and changes in consumer preferences. As a common classification system for Canada, Mexico, and the United States, NAICS provides a standard for comparative statistical analyses of industrial sectors within the three countries’ respective econo- mies. On a global level, it also serves as a useful tool to assess current and future trade and investment practices, in addition to understanding the effect of international competition on certain industries. The 1997 U.S. version of NAICS consists of 20 major industrial sectors, with 1,170 industries in the United States [5]. The list of NAICS codes provided with the Form 990-T instructions contains 19 of the 20 major industrial sectors (Public Administration is excluded) and 164 selected industries. In addition, five special codes are provided with the Form 990-T NAICS list that describe specific types of unrelated business activities, which correspond to line-item descriptions in the income statement section of the tax return. These five classifications are “unrelated debt-financed activities, except rental of real estate,” “investment activities of Code section 501(c)(7), (9), or (17) organizations,” “passive income activities with controlled organizations,” “rental of personal property,” and “exploited exempt activities.” For statistical purposes, the first three of these activities are grouped within the Finance and Insurance sector. Rental of personal property is included in the Real Estate and Rental and Leasing sector. The last special activity is treated as an independent category and is not included in any of the NAICS major industrial sectors. The five special types of activities were listed separately because the tax treatment of income received from these activities is governed by special rules that are applied specifically to Form 990-T filers. Each of the five special classifications is defined in the Explanation of Selected Terms section of this article. Table 5 at the end of this article shows selected financial data distributed by primary unrelated business activity or industrial grouping, as classified under NAICS, and including the five special categories. PrimaryUnrelatedBusinessActivity ClassificationsUsingNAICS While the unrelated business income of tax-exempt organizations is a very small part of national income within the U.S. economy (gross UBI was less than 0.1 percent of gross domestic product for 1998), it is nonetheless of interest to certain Governmental statistical and regulatory agencies, tax practitioners, researchers, and tax-exempt organization administrators [6]. Nearly 75 percent of the total $7.6 billion of gross UBI reported for 1998 was associated with filers 189 Unrelated Business Income Tax Returns, 1998 190 having a primary unrelated business activity within one of the service sectors. Twenty-one percent of all organizations reported one of the five special activity codes used specifically for Form 990-T filers, another 78 percent reported a NAICS-based primary activity code, and less than 1 percent did not report any code or other information to allow them to be classified. The proportions of gross UBI attributed to organizations reporting either a special activity code or one of the NAICS-based codes to describe a primary activity were about 21 percent and 79 percent, respectively, similar to the breakout of the number of organizations reporting the two types of codes. Almost 16 percent, or $1.2 billion, of total gross UBI was reported by organizations that indicated their primary unrelated business activity was “investment activities of Code section 501(c)(7), (9), or (17) organizations,” one of the five special categories [7]. This was the largest amount of aggregate gross UBI ascribed to any one single activity description contained on the Form 990-T list of 169 codes used to describe primary unrelated business activities. It is important to note that, in addition to providing a code for a primary unrelated business activity, organizations may report another NAICS code to classify a secondary unrelated business activity, if appropriate. However, they are not required to identify the portion of gross UBI associated with each activity. Therefore, the aggregate gross UBI amounts contained in Table 5 and Figures C through H can be attributed to the group of organizations reporting a given primary activity, but cannot be entirely attributed to the primary activity itself. Because 17 percent of all organizations also reported a secondary activity code, it is evident that some part of the aggregate gross UBI amounts contained in Table 5 and Figures C through H would actually be connected to an activity other than that shown as the primary activity. RankingsofPrimaryUnrelatedBusinessActivities byTypeofOrganization For selected types of tax-exempt organizations, classified by IRC section, Figures C through H contain rankings of primary unrelated business activities (UBA’s). The rankings are based on the size of aggregate gross UBI attributable to the groups of organizations reporting the primary business Figure C Top 10 Primary Unrelated Business Activities of All Organizations, Ranked by Size of Organizations' Total Gross Unrelated Business Income (UBI), Tax Year 1998 [Money amounts are in thousands of dollars] Primary unrelated business activity Number of returns Total gross UBI All organizations, all activities...................................................................... 46,208 7,584,915 Total, top 10 activities ...................................................................... 22,223 4,462,110 1. Investment activities of Code section 501(c)(7), (9) and (17) organizations...................................................................... 3,930 1,194,561 2. Advertising and related services...................................................................... 5,884 940,997 3. Medical and diagnostic laboratories...................................................................... 440 570,715 4. Securities, commodity contracts, and other intermediation and brokerage...................................................................... 73 471,340 5. Offices of real estate agents and brokers...................................................................... 1,861 264,033 6. Other amusement and recreation industries...................................................................... 1,928 240,540 7. Other professional, scientific, and technical services...................................................................... 879 8. Gambling industries...................................................................... 1,719 9. Periodical publishers...................................................................... 954 10. Unrelated debt-financed activities other than 238,203 205,956 173,445 rental of real estate...................................................................... 162,320 4,555 NOTE: Any activity described as "All other..." or "Other..." is a distinct category within the North American Industrial Classification System (NAICS). An "other" classification was to be assigned, within a particular industry group, to an activity that did not correspond to any of the more specific NAICS activity classifications within the group. 190 activities. The top 10 primary UBA’s are provided in Figures C and D for all organizations and for Code section 501(c)(3) charitable organizations, respectively [8]. Figures E through H show the top 5 primary UBA’s of organizations tax-exempt under sections 501(c)(4) through 501(c)(7), respectively. Ten activity rankings are provided for charitable organizations because they are a much larger and more diverse group, compared to the other organizations shown in Figures E through H [9]. For the most part, organizations wishing to supplement income by engaging in an unrelated business activity will choose an ancillary activity that is closely tied to their exempt-program operations [10]. By doing so, they can take advantage of organizational expertise and resources readily available to them. This is clearly the case with section 501(c)(3) charitable organizations that reported “medical and diagnostic laboratories” as their primary unrelated business activity. Virtually all of these organizations were hospitals and medical centers. The same is true of section 501(c)(6) organizations that reported “advertising and related services.” Many of these Unrelated Business Income Tax Returns, 1998 Figure D UnrelatedBusinessActivityCodingInconsistencies The self-coding of UBA’s using the list of NAICS Top 10 Primary Unrelated Business Activities of codes provided with Form 990-T is imperfect beInternal Revenue Code (IRC) Section 501(c)(3) cause of the different rationales employed by the Organizations, Ranked by Size of Organizations' return preparers when selecting the code that best Total Gross Unrelated Business Income (UBI), describes their activities. In reviewing many of the Tax Year 1998 NAICS code choices made by return preparers, it [Money amounts are in thousands of dollars] appears that some preparers selected different codes Number Total Primary unrelated business activity of gross to describe like activities when there were two or returns UBI more closely connected activity descriptions on the list. Others selected a code that might not have been IRC section 501(c)(3) charitable organizations, all activities ¹...................................................................... 10,898 4,127,119 the best choice available. A discussion of some of Total, top 10 activities...................................................................... 4,311 2,272,077 these cases follows. 1. Medical and diagnostic laboratories...................................................................... 439 567,212 Several organizations appear to have mistakenly 2. Securities, commodity contracts, and other intermediation and brokerage..........................................................451,760 33 provided NAICS codes for their primary UBA’s that 3. Advertising and related services...................................................................... 1,841 412,342 are associated more directly with their related ex4. Lessors of nonresidential buildings, except empt missions than with their unrelated business miniwarehouses...................................................................... 747 171,357 5. Other professional, scientific, and technical activities. A number of section 501(c)(3) museums, services...................................................................... 270 141,241 for example, reported “museums, historical sites, and 6. Direct health and medical insurance carriers.......................................................... 4 115,953 similar institutions” as their primary unrelated activity. 7. Pharmacies, drug stores...................................................................... 108 110,042 8. All other ambulatory healthcare services...................................................................... 151 105,176 This describes what type of tax-exempt organization 9. Other amusement and recreation industries...................................................................... 383 99,641 they are, rather than identifying a specific unrelated 10. Gift, novelty, and souvenir stores...................................................................... 335 97,353 business activity, such as “gift, novelty, and souvenir The term "charitable" refers to tax-exempt organizations with purposes that are charitable, educational, scientific, literary, or religious in nature, or organizations stores.” Hospitals and medical centers also followed ¹ that test for public safety or prevent cruelty to children or animals. The term also covers organizations that otherwise qualified for tax-exempt status under the Income Tax Regulations issued for Internal Revenue Code section 501(c)(3). NOTE: Any activity described as "All other..." or "Other..." is a distinct category within the North American Industrial Classification System (NAICS). An "other" classification was to be assigned, within a particular industry group, to an activity that did not correspond to any of the more specific NAICS activity classifications within the group. Figure E Top 5 Primary Unrelated Business Activities of Internal Revenue Code (IRC) Section 501(c)(4) Organizations, Ranked by Size of Organizations' Total Gross Unrelated Business Income (UBI), Tax Year 1998 [Money amounts are in thousands of dollars] Number Primary unrelated business activity of returns IRC section 501(c)(4) civic leagues, social welfare organizations, and local associations of employees, all activities...................................................................... 1,500 263,236 Total, top 5 activities...................................................................... 880 2. Gambling industries...................................................................... 514 4. Other professional, scientific, and technical services...................................................................... 52 13,026 5. Other activities related to real estate...................................................................... 37 11,383 NOTE: Any activity described as "All other..." or "Other..." is a distinct category within the North American Industrial Classification System (NAICS). An "other" classification was to be assigned, within a particular industry group, to an activity that did not correspond to any of the more specific NAICS activity classifications within the group. business leagues, chambers of commerce, real estate boards, and similar organizations reported unrelated business income from paid advertisements displayed in their trade publications. In other cases, the unrelated income of an organization may not be generated from an active trade or business, but rather from passive activities. Earning investment income from securities purchased with debt-financed funds is one example, as in the case of section 501(c)(3) organizations reporting “securities, commodity contracts, and other intermediation and brokerage” as their primary unrelated business activity. All investment income, whether debt-financed or not, of section 501(c)(7), (9), and (17) organizations is considered unrelated business income, while the investment income of other types of organizations is generally not taxed unless the investment was purchased with borrowed funds. Total gross UBI 171,647 53,079 1. Advertising and related services...................................................................... 140 77,612 3. Other amusement and recreation industries...................................................................... 137 16,547 191 Unrelated Business Income Tax Returns, 1998 Figure F 192 roll services,” or “custom computer programming services.” Top 5 Primary Unrelated Business Activities of It is possible that the section 501(c)(3) organizaInternal Revenue Code (IRC) Section 501(c)(5) tions that reported “securities, commodity contracts, Organizations, Ranked by Size of Organizations' and other intermediation and brokerage” should have Total Gross Unrelated Business Income (UBI), coded their primary unrelated business activity as Tax Year 1998 “unrelated debt-financed activities, except rental of [Money amounts are in thousands of dollars] real estate.” For some of these organizations, the Number Total largest source of gross UBI was capital gain net Primary unrelated business activity of gross returns UBI income; for others, it was income from partnerships and S corporations. None of the 501(c)(3) organizaIRC section 501(c)(5) labor, agricultural, and tions reported the largest source of their gross UBI horticultural organizations, all activities...................................................................... 2,497 226,132 Total, top 5 activities...................................................................... 1,465 132,119 as debt-financed income. 1. All other insurance-related activities...................................................................... 802 47,583 Form 990-T filers are instructed to include in 2. Advertising and related services...................................................................... 358 37,441 capital gain net income any net gains on the sale, 3. Other professional, scientific, and technical exchange, or other disposition of debt-financed propservices...................................................................... 116 19,344 4. Periodical publishers...................................................................... 46 14,604 erty. In this case, even though the income is from 5. Lessors of nonresidential buildings, except debt-financed property, it is not reported on the tax miniwarehouses...................................................................... 143 13,147 NOTE: Any activity described as "All other..." or "Other..." is a distinct category return as unrelated debt-financed income, so this within the North American Industrial Classification System (NAICS). An "other" results in the reporting of debt-financed income in at classification was to be assigned, within a particular industry group, to an activity that did not correspond to any of the more specific NAICS activity classifications least two different lines on the return. In addition, if within the group. an exempt organization invested borrowed funds in a partnership carrying on an unrelated business activity, this pattern, with some reporting a code for “hospitals” when they should have been reporting a code to Figure G describe the specific activity that produced unrelated business income. It is also apparent that organizations sometimes Top 5 Primary Unrelated Business Activities of choose different NAICS codes to identify like activiInternal Revenue Code (IRC) Section 501(c)(6) ties, which can diminish the usefulness of the selfOrganizations, Ranked by Size of Organizations' coding system for statistical purposes. For example, Total Gross Unrelated Business Income (UBI), while many organizations tax-exempt under sections Tax Year 1998 501(c)(3), 501(c)(5), and 501(c)(6) reported “periodi[Money amounts are in thousands of dollars] cal publishers” as their primary unrelated activity, Number Total Primary unrelated business activity of gross perhaps they should have selected the code for returns UBI “advertising and related services,” because their sole source of income was advertising, and income from a IRC section 501(c)(6) business leagues, chambers of commerce, real estate boards, periodical that contains no unrelated advertisements and like organizations, all activities...................................................................... 6,238 817,893 is tax-exempt. Total, top 5 activities...................................................................... 4,530 576,008 In another example, an organization may choose 1. Advertising and related services...................................................................... 3,145 386,968 a NAICS code for one of the broad “catchall” cat2. Periodical publishers...................................................................... 592 60,108 3. Other professional, scientific, and technical egories, such as “other professional, scientific, and services...................................................................... 350 57,540 technical services,” which appears in many of the 4. Lessors of nonresidential buildings, except activity rankings in Figures C through H, instead of miniwarehouses...................................................................... 275 36,730 5. All other insurance-related activities...................................................................... 168 34,662 choosing a code for a more specific description NOTE: Any activity described as "All other..." or "Other..." is a distinct category within the same industrial grouping. Better choices within the North American Industrial Classification System (NAICS). An "other" classification was to be assigned, within a particular industry group, to an activity might have been “management consulting services,” that did not correspond to any of the more specific NAICS activity classifications “accounting, tax preparation, bookkeeping, and paywithin the group. 192 Unrelated Business Income Tax Returns, 1998 Figure H Top 5 Primary Unrelated Business Activities of Internal Revenue Code (IRC) Section 501(c)(7) Organizations, Ranked by Size of Organizations' Total Gross Unrelated Business Income (UBI), Tax Year 1998 [Money amounts are in thousands of dollars] was used. However, in some cases, taxpayers did not provide the required description, and the income statement did not provide enough information to determine a code. In these cases, the returns were coded as “not allocable.” FuturePlansforUnrelatedBusinessActivityCoding With the implementation of the NAICS codes for the Number Total Tax Year 1998 Statistics of Income study of Forms Primary unrelated business activity of gross returns UBI 990-T, this article has provided the first set of NAICS-based unrelated business activity statistics IRC section 501(c)(7) social and for analysis. It is apparent that there are some recreational clubs, all activities...................................................................... 6,840 482,213 inconsistencies in the way organizations code their Total, top 5 activities...................................................................... 5,485 402,558 1. Investment activities of Code section 501(c)(7), activities. The analysis of NAICS coding on Forms (9), and (17) organizations...................................................................... 3,285 169,566 990-T filed for 1998 has provided insight for making 2. Full-service restaurants...................................................................... 95,381 658 improvements in future SOI studies, such as addi3. Other amusement and recreation industries...................................................................... 1,064 94,070 4. Limited-service eating places...................................................................... 244 27,476 tional testing and correction of the codes during 5. Spectator sports (including sports clubs and return processing or revising the tax form instructions racetracks)...................................................................... 234 16,065 to provide more comprehensive guidance to the NOTE: Any activity described as "All other..." or "Other..." is a distinct category within the North American Industrial Classification System (NAICS). An "other" return preparer. classification was to be assigned, within a particular industry group, to an activity A data-entry system enhancement, effective with that did not correspond to any of the more specific NAICS activity classifications within the group. the Tax Year 2000 Form 990-T study, involves an automated comparison of the current year’s primary NAICS code with that reported for the prior year, then the exempt organization’s share of the partnership’s gross income from the unrelated activwhen available. If the two codes are not the same, a ity would be considered unrelated debt-financed determination is made as to which code is more consistent with the organization’s unrelated business income. Because income from sales and brokerage of investments in securities or commodities contracts activity, based on the activity description and any is only considered to be UBI when purchased with other information reported on the two returns. In cases where there is sufficient information available borrowed funds, it can be argued that perhaps some of the above-mentioned 501(c)(3) organizations that to make a determination, a correction is made to the reported the largest portion of their gross UBI as code deemed to be inconsistent or incorrect. Additional testing of NAICS codes is planned for the Tax income from partnerships and S corporations should have reported it as debt-financed income. Year 2001 SOI study of Forms 990-T, which will be For the 1998 study, an attempt was made to initiated in July 2002. Because the United States NAICS classifications determine a NAICS code when one was not supplied by the filer or the code provided was not a valid were updated for 2002, and, to a lesser extent, becode; otherwise the codes provided by the return filer cause of the findings from a review of NAICS codes reported on Forms 990-T for 1998, the list provided to were not changed. The description of an organization’s principal unrelated business activity filers of Tax Year 2002 Forms 990-T will be revised. that is required to be reported on the return and the SOI is directly involved in recommending changes to the Form 990-T NAICS code list. Certain new sources of income reported on the income statement were used during SOI processing in making a detercodes will be added, mostly within the Information mination of a code, when necessary. For example, if sector, and several existing codes will be deleted altogether or rolled into a more general classification, the return filer was a section 501(c)(9) voluntary employees’ beneficiary organization, and all or most mostly within the Manufacturing sector, because they of its income was reported as investments, then the were used rarely or not at all. Lessons learned from the 1998 study, along with an update of the codes on code with the description “ Investment activities of Code section 501(c)(7), (9), or (17) organizations” the current list, will lead to the improvement of the 193 Unrelated Business Income Tax Returns, 1998 classification of unrelated business activities of taxexempt organizations. Summary Tax-exempt organizations reported $7.6 billion of aggregate gross income from “unrelated business” activities on their 1998 Forms 990-T, Exempt Organization Business Income Tax Returns. After offsetting income with deductions, about half of the filers reported taxable profits, which collectively amounted to $1.7 billion. The unrelated business income tax (UBIT) liability reported by these filers was $505.9 million. Figure B compares data from the Tax Year 1998 Form 990-T study with adjusted amounts from the 1997 study. (See the body of the article for details on the 1997 adjustments.) Overall, gross unrelated business income (UBI) and total deductions each rose at moderate rates, which were 8 percent and 5 percent, respectively. Both taxable profits and UBIT liability, however, increased 27 percent between the 2 years. Beginning with 1998, the use of the North American Industry Classification System (NAICS) was implemented for coding the unrelated business activities of Form 990-T filers. This system replaced the Standard Industrial Classification (SIC) system that had been used previously. Organizations filing Forms 990-T are required to identify a primary unrelated business activity, and they are also permitted to identify a secondary activity, if applicable. Of the $7.6 billion of gross UBI reported for 1998, about 75 percent was associated with filers that reported NAICS-based primary unrelated business activities (UBA’s) within one of the service sectors. Figures C and D in this article present the top-10 primary UBA’s of all Form 990-T filers and Internal Revenue Code (IRC) section 501(c)(3) charitable organizations, respectively. Figures E through H provide the top-5 primary UBA’s for each respective group of IRC section 501(c)(4) through 501(c)(7) organizations. (The various types of tax-exempt organizations subject to the unrelated business income tax provisions are described by Internal Revenue Code section in the Appendix to this article.) 194 DataSourcesandLimitations 194 The statistics in this article are based on a sample of Tax Year 1998 Forms 990-T, Exempt Organization Business Income Tax Returns. The Internal Revenue Service required organizations having accounting periods beginning in 1998 (and, therefore, ending between December 1998 and November 1999, for full-year return filers) to file a 1998 Form 990-T to report unrelated business income of $1,000 (the filing threshold) or more. The associated required filing period for most Tax Year 1998 Forms 990-T generally spanned May 1999 to April 2000, but extensions of time to file beyond this period were granted to many organizations. For all Internal Revenue Code section 220(e), 401(a), 408(e), 408A, and 530(a) trusts, the required accounting period was Calendar Year 1998, and the filing date was April 15, 1999. Returns filed after Calendar Year 2000 were not included in the sample. Because of the various accounting periods of the organizations filing a 1998 return, the financial activities covered in this article span the period January 1998 through November 1999 (although the majority of activities occurred during Calendar Year 1998). The 1998 Form 990-T study design incorporated a special “integrated” sample to gather information on “related” (tax-exempt) and “unrelated” (taxable) income and expenses for organizations that filed both Form 990, Return of Organization Exempt from Income Tax, and Form 990-T. This integrated sampling program ensured that the Statistics of Income sample of Forms 990-T included unrelated business income tax returns filed by all organizations whose Form 990 information returns were selected for the sample of Internal Revenue Code section 501(c)(3) nonprofit charitable organizations. Organizations exempt under other Code sections were not subjected to the integrated sampling program. By appending an organization’s Form 990-T data to its Form 990 data, the resulting data set provides the means for consistency in analyzing exemptfunction and nonexempt-function income of organizations that are involved in unrelated business activities. Special analyses of related and unrelated income and expenses of matched Forms 990/990-T records were published in past issues of the SOI Bulletin for Tax Years 1993, 1994, and 1997 [11]. Prior to Tax Year 1996, the integrated sample included returns of organizations exempt under sections 501(c)(3) through 501(c)(9). For 1996 and later years, only section 501(c)(3) returns were included in the integrated portion of the Form 990-T sample. An analysis of Unrelated Business Income Tax Returns, 1998 the combined Forms 990/990-T data has not been included in this article; however, Form 990-T returns from the integrated portion of the sample are represented in the statistics. The Form 990-T sample included returns that were initially selected based on independent Form 990-T sampling criteria, and additional returns that were not initially selected but were subsequently matched to returns in the Form 990 sample. These matched returns, along with any independently selected Forms 990-T that also had counterparts in the Form 990 sample, formed the “integrated” portion of the Form 990-T sample [12]. The population from which the 1998 Form 990-T sample was drawn consisted of Form 990-T records posted to the IRS Business Master File system during 1999 and 2000. The returns in the sample were stratified based on the size of gross unrelated business income (UBI). A sample of 7,598 returns was selected from a population of 46,307. After excluding returns that were selected for the sample but later rejected, the sample size was 7,577, and the estimated population size was 46,208. Rejected returns included those which had gross UBI below the $1,000 filing threshold; were filed only to claim a refund or report the “proxy tax”; were filed for a part-year accounting period for 1998, and a full-year return was also filed for that year; or were filed for a part-year accounting period that began in a year other than 1998. For example, a final return filed for the short period of January 1999 -June 1999 may have been initially selected for the 1998 sample based on the criterion of an accounting period that ended between December 1998 and November 1999, but it was later rejected because, in actuality, it was a Tax Year 1999 return. Figure I contains population counts, sample counts, designed sample rates, and achieved sample rates, by size of gross unrelated business income reported on Form 990-T and size of total assets reported on Form 990. The designed sampling rates ranged from a minimum of 3 percent (Form 990-T Figure I Population and Sample Counts, and Designed and Achieved Sample Rates, by Size of Gross Unrelated Business Income on Form 990-T and Size of Total Assets on Matching IRC Section 501(c)(3) Form 990, Tax Year 1998 Sample group number Size of gross unrelated business income (UBI) on Form 990-T and size of total assets on matching IRC section 501(c)(3) Form 990 Population counts (1) 1 Gross UBI $1,000 under $20,000 and total assets under $1,000,000, or Gross UBI $1,000 under $20,000 and no matching Form 990...................................................................... 26,204 773 0.0300 0.0295 Sample counts (2) Designed sample rate (3) Achieved sample rate (4) 2 Gross UBI $1,000 under $20,000 and total assets $1,000,000 under $2,500,000, or Gross UBI $20,000 under $60,000 and total assets under $2,500,000, or Gross UBI $20,000 under $60,000 and no matching Form 990...................................................................... 7,650 467 0.0600 0.0610 3 Gross UBI $1,000 under $60,000 and total assets $2,500,000 under $10,000,000, or Gross UBI $60,000 under $150,000 and total assets under $10,000,000, or Gross UBI $60,000 under $150,000 and no matching Form 990...................................................................... 5,268 698 0.1300 0.1325 4 Gross UBI $1,000 under $150,000 and total assets $10,000,000 under $30,000,000, or Gross UBI $150,000 under $300,000 and total assets under $30,000,000, or Gross UBI $150,000 under $300,000 and no matching Form 990...................................................................... 2,755 1,230 0.4500 0.4465 5 Gross UBI $300,000 or more, or total assets $30,000,000 or more...................................................................... 4,430 All sample groups ¹............................................................................................................... 46,307 4,430 7,598 1.0000 N/A 1.0000 N/A ¹ After excluding returns that were originally selected for the sample but later rejected, the sample size was 7,577, and the estimated population size was 46,208. N/A - Not applicable. 195 Unrelated Business Income Tax Returns, 1998 196 gross UBI less than $20,000, with either no Form 990 match or a Form 990 match to a Code section 501(c)(3) return with total assets under $1,000,000) to a maximum of 100 percent (either Form 990-T gross UBI of $300,000 or more, or Form 990-T with any amount of gross UBI and a match to a section 501(c)(3) Form 990 with total assets of $30,000,000 or more). Other Forms 990/990-T matches within various ranges of gross UBI, assets, and Internal Revenue Code sections were selected at rates ranging from 6 percent to 45 percent. The information presented in this article was obtained from returns as originally filed with the IRS. The data were subjected to comprehensive testing and correction procedures in order to improve statistical reliability and validity. In most cases, changes made to the original return as a result of administrative processing, audit procedures, or a taxpayer amendment were not incorporated into the data base. Because the data are based on a sample, they are subject to sampling error. In order to use these statistics properly, the magnitude of the sampling error, measured by the coefficient of variation (CV), should be taken into account. Figure J shows CV’s for selected financial data. CV’s are not shown for returns with gross UBI of $500,000 or more because they were sampled at a 100-percent rate and, therefore, are not subject to sampling variability. A discussion of the reliability of estimates based on samples and methods for evaluating both the magnitude of sampling and nonsampling error and the precision of sample estimates can be found in the general Appendix, located near the back of this issue of the Bulletin. ExplanationofSelectedTerms In some of the following explanations, tax-exempt organizations are cited by the Internal Revenue Code section under which they are described. The various types of tax-exempt organizations subject to the unrelated business income tax provisions are described by Code section in the Appendix to this article. Advertising Income.--Gross income realized by a tax-exempt organization from the sale of advertising in a periodical was gross income from an unrelated trade or business activity involving the “exploitation of an exempt activity,” namely, the circulation and readership of the periodical developed by producing and distributing the readership content of that periodical. Advertising income was reported separately from other types of “exploited exempt activity income.” (See the explanation of Exploited Exempt Activity Income, Except Advertising.) Internal Revenue Code section 501(c)(7), (9), and (17) organizations reported gross advertising income, as well as other types of “exploited exempt activity income,” as gross receipts from sales and services. All other organizations reported this income separately. Capital Gain Net Income.--Generally, organizations required to file Form 990-T (except organizations tax-exempt under Internal Revenue Code sections 501(c)(7), (9), and (17)) were not taxed on net gains from the sale, exchange, or other disposition of property. However, net capital gains on sales of debtfinanced property, certain gains on the cutting of timber (section 1231), and gains on sales of certain depreciable property (described in sections 1245, 1250, 1252, 1254, and 1255) were taken into account in computing capital gain net income. Also, any gain or loss passed through from an S corporation or any gain or loss on the disposition of S corporation stock by a qualified tax-exempt (defined in the explanation of Income (Less Loss) from Partnerships and S Corporations) is taxed as a capital gain or loss. (See, also, the explanation of Invest- Figure J Coefficients of Variation for Selected Items, by Size of Gross Unrelated Business Income, Tax Year 1998 Gross unrelated Size of gross unrelated business income business income Total deductions Net income (taxable profit) Total tax Coefficient of variation (percentages) (1) (2) (3) (4) Total....................................................................................................................... 0.18 0.74 0.42 0.40 $1,000 under $10,001 ¹........................................................................... 2.85 8.16 6.09 7.04 $10,001 under $100,000 ¹........................................................................... 6.25 1.75 5.17 5.17 $100,000 under $500,000........................................................................... 3.01 1.17 2.49 2.79 $500,000 or more........................................................................... N/A N/A N/A N/A ¹ The gross unrelated business income (UBI) brackets of "$1,000 under $10,001" and "$10,001 under $100,000" reflect the different filing requirements for organizations with gross UBI of $10,000 or less (only a "partial" return was required) and all other Form 990-T filers (a more detailed "complete" return was required). Organizations with gross UBI below $1,000 were not required to file Form 990-T. N/A - Not applicable. 196 Unrelated Business Income Tax Returns, 1998 ment Income (Less Loss) for information regarding investment income of section 501(c)(7), (9), and (17) organizations.) Contributions.--To the extent permissible under the Internal Revenue Code, a deduction was allowed for contributions or gifts actually paid within the tax year to, or for the use of, another entity that was a charitable or Governmental organization described in Code section 170(c). A tax-exempt corporation was allowed a deduction for charitable contributions up to 10 percent of its unrelated business taxable income (UBTI) computed without regard to the deduction for contributions. A tax-exempt trust was generally allowed a deduction for charitable contributions in the same amounts as allowed for individuals, except the limit on the deduction was determined in relation to UBTI computed without regard to the contributions deduction, rather than in relation to adjusted gross income. Contributions in excess of the respective corporate or trust limitations may be carried over to the next 5 taxable years, subject to certain rules. The contributions deduction was allowed whether or not directly connected with the carrying on of a trade or business. Deductions Directly Connected With Unrelated Business Income.--These were deductions allowed in computing net income, if they otherwise qualified as income tax deductions under the Internal Revenue Code and if they had a “proximate and primary” relationship to carrying on an unrelated trade or business. Allowable deductions included those directly connected with rental of personal property; those allocable to unrelated debt-financed income; those directly connected with investment income of Internal Revenue Code section 501(c)(7), (9), and (17) organizations; those allocable to interest, annuities, royalties, and rents received from “controlled organizations” (see definition of Income from Controlled Organizations); those allocable to “exploited exempt activity income” other than advertising; direct advertising costs; compensation of officers, directors, and trustees; salaries and wages; repairs; bad debts; interest; taxes; depreciation (unless deducted elsewhere); depletion; contributions to deferred compensation plans; contributions to employee benefit plans; the “net operating loss carryover”; and “other deductions.” Tax-exempt organizations with gross unrelated business income (UBI) above $10,000 were required to report each deduction component separately. Organizations with gross UBI between $1,000 (the filing threshold) and $10,000 reported a single total of the first five types of directly-connected expenses listed above (those described as “allocable to”) and a single total for all other types of deductions (both deductions directly connected with UBI and those not directly connected, each defined elsewhere in this section), except for two items that were required to be reported separately: the “net operating loss carryover” (directly connected) and the “specific deduction” (not directly connected), both also defined below. Deductions Not Directly Connected With Unrelated Business Income.--The component deductions were “set-asides,” “excess exempt expenses,” charitable contributions, and the “specific deduction.” The specific deduction was reported, when applicable, by all organizations with positive taxable income; the other types of deductions not directly connected with UBI were reported separately, when applicable, only by tax-exempt organizations with gross UBI above $10,000. (See, also, the explanations of Set-Asides, Excess Exempt Expenses, and the Specific Deduction.) Excess Exempt Expenses.--The two types of “excess” expenses allowed as deductions from unrelated business income were (1) excess exempt expenses attributable to commercial exploitation of exempt activities, and (2) excess exempt expenses attributable to advertising income. In the case of “exploited” exempt activity income (see the explanation of Exploited Exempt Activity Income, Except Advertising, below), if the expenses of the organization’s exempt activity exceeded the income from the exempt activity, then the excess expenses could be used to offset any positive net unrelated business income produced from exploiting the exempt activity, to the extent that it did not result in a loss. Excess expenses of a commercially exploited exempt activity could not be used to offset income from another type of unrelated business activity if the unrelated activity did not exploit that particular exempt activity. In the case of excess exempt expenses attributable to advertising income, if the expenses attributable to producing and distributing the readership content of a periodical exceeded the circulation income, then the excess of readership 197 Unrelated Business Income Tax Returns, 1998 198 costs over circulation income could be used to offset any net gain from advertising (gross advertising income less direct advertising costs), to the extent that it did not result in a loss. Exploited Exempt Activity Income, Except Advertising.--In some cases, exempt activities create goodwill or other intangibles that are capable of being exploited in a commercial manner. When an organization exploited such an intangible in commercial activities that did not contribute importantly to the accomplishment of an exempt purpose, the income it produced was gross income from an unrelated trade or business. An example of this type of activity would be an exempt scientific organization with an excellent reputation in the field of biological research that exploits its reputation regularly by selling endorsements of laboratory equipment to manufacturers. Endorsing laboratory equipment would not have contributed importantly to the accomplishment of any purpose for which tax exemption was granted to the organization. Accordingly, the income from selling such endorsements is gross unrelated business income. Exploited exempt activity income from advertising was reported separately from other types of exploited exempt activity income (see the explanation of Advertising Income). Internal Revenue Code section 501(c)(7), (9), and (17) organizations reported income from exploited exempt activities as part of gross receipts from sales and services. All other organizations reported this income separately. Gross Profit (Less Loss) from Sales and Services.--This was the gross profit (less loss) from any unrelated trade or business regularly carried on that involved the sale of goods or performance of services. It did not include income from unrelated business activities that were required to be reported separately on any of the tax form’s supporting schedules. For example, an Internal Revenue Code section 501(c)(7) social club would include gross restaurant and bar receipts from nonmembers in the calculation of gross profit (less loss) from sales and services, but would report its investment income from sales of securities on the required supporting schedule. Gross profit (less loss) from sales and services is computed as gross receipts from sales or services, less returns and allowances, minus cost of sales and services. Gross Unrelated Business Income (UBI).--This was the total gross unrelated business income (see the explanation of Unrelated Business Income), prior to reduction by allowable deductions used in computing unrelated business taxable income. All organizations were required to report detailed sources of gross UBI. The components of gross UBI were gross profit (less loss) from sales and services; capital gain net income; net gain (less loss) from sales of noncapital assets; net capital loss deduction (trusts only); income (less loss) from partnerships and S corporations; rental income; unrelated debt-financed income; investment income (less loss) of Internal Revenue Code section 501(c)(7), (9), and (17) organizations; income (annuities, interest, rents, and royalties) from controlled organizations; “exploited exempt activity” income, except advertising; advertising income; and “other” income (less loss). (For an explanation of these sources of income, see the separate explanations of each component.) Income from Controlled Organizations.--A new definition of “controlled organization” was effective for tax years beginning after August 5, 1997. However, there was a 2-year grace period for organizations that had a written, binding contract with a controlled organization that was in effect on June 8, 1997. Organizations qualifying for the grace period reported income under the old law. Under both the old and new tax law provisions, all deductions “directly connected” with a Form 990-T filer’s gross controlled-organization income were allowed. The rules for debt-financed property did not apply to passive income (generally, investment income) from controlled organizations. (See the definition of Unrelated Debt-Financed Income.) For organizations that had tax years beginning on or before August 5, 1997, or were covered by the 2-year grace period: When an exempt organization controls another organization, the gross annuities, interest, rents, and royalties from the controlled organization are included in the gross UBI of the controlling organization at a specified ratio, depending on whether the controlled organization is tax-exempt or not. “Control” meant: (a) for a stock corporation, the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote, and ownership of at least 80 percent of the total number of shares of all other classes of stock of the corporation; or (b) for a nonstock organization, at least 80 percent of the 198 Unrelated Business Income Tax Returns, 1998 directors or trustees of the organization were either representatives of, or directly or indirectly controlled by, a tax-exempt organization. For organizations that had tax years beginning after August 5, 1997, and were not covered by the 2-year grace period: When an exempt organization controls another organization, the entire amount of gross annuities, interest, rents, and royalties (termed “specified payments” under the new law) from the controlled organization are included in the gross UBI of the controlling organization, to the extent that the specified payments reduced the net unrelated income (or increased the net unrelated loss) of the controlled organization. “Net unrelated income (or loss)” for an exempt controlled organization was its unrelated business taxable income (or loss). For a nonexempt controlled organization, it was the part of its taxable income (or loss) that would be unrelated business taxable income (or loss) if it were exempt and had the same exempt purpose as the controlling organization. “Control” meant: (a) for a stock corporation, the ownership (by vote or value) of more than 50 percent of the stock; (b) for a partnership, ownership of more than 50 percent of the profits or capital interests; or (c) for any other organization, ownership of more than 50 percent of the beneficial interests. Income (Less Loss) from Partnerships and S Corporations.--If an organization was a partner in any partnership that carried on an unrelated trade or business, this income item included the organization’s share of partnership gross unrelated business income less its share of partnership deductions that were directly connected with the unrelated income. If an organization was a qualified tax-exempt that held stock in an S corporation, this income item included the income or loss from the stock interest. The stock interest was treated as an unrelated trade or business, and all items of income, loss, or deduction were taken into account in computing unrelated business taxable income. A qualified tax-exempt was an organization described in Internal Revenue Code section 401(a) (qualified stock bonus, pension, or profit-sharing plan) or section 501(c)(3), and exempt from tax under section 501(a). Investment Income (Less Loss).--This income was reported only by organizations exempt under Internal Revenue Code sections 501(c)(7), (9), and (17) and included such income as gross unrelated debt-financed income, gross income from the ownership or sale of securities, and set-asides deducted from investment income in previous years that were subsequently used for a purpose other than that for which a deduction was allowed. (See, also, the explanation of Set-Asides.) All gross rents (except those that were exempt-function income) of section 501(c)(7), (9), and (17) organizations were treated as unrelated business income and were reported as “rental income.” Organizations exempt under sections other than 501(c)(7), (9), and (17) did not report “investment income (less loss).” Generally, these organizations’ investment income (dividends, interest, rents, and annuities) and royalty income were not taxed as unrelated business income, unless it was income, other than dividends, from a controlled organization or debt-financed income, or the rents were of the type described in the explanation of rental income. (See explanations of Income from Controlled Organizations, Rental Income, and Unrelated DebtFinanced Income.) Net Capital Loss (Trusts Only).--If a trust had a net loss from sales or exchanges of capital assets, it was allowed a deduction for the amount of the net loss or $3,000, whichever was lower. (Tax-exempt corporations were not allowed to deduct any excesses of capital losses over capital gains.) Taxexempt trusts reported the net capital loss deduction on Form 990-T as a negative component of gross unrelated business income. Net Gain (Less Loss), Sales of Noncapital Assets.--This was the gain or loss from the sale or exchange of business property, as reported on Form 4797, Sales of Business Property. Property other than capital assets generally included property of a business nature, in contrast to personal and investment properties, which were capital assets. Net Income (Less Deficit).--This was gross income derived from any unrelated trade or business regularly carried on by an exempt organization, less deductions directly connected with carrying on the trade or business and less other allowable deductions not directly connected. On a return-by-return basis, the result of this computation was either positive (net income), negative (deficit), or zero. Net income represented taxable profit, which was subject to the unrelated business income tax. (See, also, explanations of Deductions Directly Connected With Unre199 Unrelated Business Income Tax Returns, 1998 200 lated Business Income and Deductions Not Directly Connected With Unrelated Business Income.) Net Operating Loss Deduction.--The net operating loss carryover or carryback (as described in Internal Revenue Code section 172) was allowed as a deduction in computing unrelated business taxable income. However, the net operating loss carryover or carryback (allowed only to or from a tax year for which the organization was subject to tax on unrelated business income) was determined without taking into account any amount of exempt-function income or deductions that had been excluded from the computation of unrelated business taxable income. A “net operating loss” represented the excess of deductions over receipts for a specified year for which an organization reported an overall deficit from its unrelated trade or business activities. The statistics in this article represent only the net operating loss carryover because carrybacks from future years would be reported in a later year on an amended return, not on the return as initially filed (which served as the basis for the statistics). Other Deductions.--This included all types of unrelated business deductions that were not specifically required to be reported elsewhere on the tax return. Examples are fees for accounting, legal, consulting, or financial management services; insurance costs (if not for employee-related benefits); equipment costs; mailing costs; office expenses, such as janitorial services, supplies, or security services; rent; travel expenses; educational expenses; and utilities. Other Income (Less Loss).--This included all types of unrelated business income that were not specifically required to be reported elsewhere on the tax return. Examples are insurance benefit fees; member support fees; commissions; returned contributions that were deducted in prior years; income from insurance activities that was not properly set aside in prior years; recoveries of bad debts; and refunds of State or local tax payments, if the payments were previously reported as a deduction. Proxy Tax.--This was a tax on certain nondeductible lobbying and political expenditures paid or incurred after December 31, 1993, by organizations that were tax-exempt under Internal Revenue Code sections 501(c)(4), 501(c)(5), and 501(c)(6). If the organization failed to notify its members regarding their shares of dues to which nondeductible lobbying and political expenditures were allocable, or if the notice did not include the entire amount of dues that was allocable, then the proxy tax was imposed on the organization. It was computed as the aggregate amount of nondeductible lobbying expenditures that was not included in the notices sent to the organization’s members, multiplied by 35 percent. The proxy tax was required to be reported on Form 990-T and was included in total tax; however, there was no connection between the proxy tax and the taxation of income from an organization’s unrelated business activities. Rental Income.--For organizations tax-exempt under Internal Revenue Code sections other than 501(c)(7), (9), and (17), this was the amount of (1) gross rents from personal property (e.g., computer equipment or furniture) leased with real property, if the rental income from the personal property was more than 10 percent, but not more than 50 percent, of the total rents from all leased property; or (2) gross rents from both real property and personal property leased with real property if the personal property was more than 50 percent of the total rents from all leased property. Except for the second situation covered above, gross rents from real property were generally excluded in computing unrelated business taxable income. In addition, gross rents from personal property that did not exceed 10 percent of the total rents from all leased property were excluded. Any rents excluded from the explanation of “rental income” had to be considered in terms of their taxability as unrelated business income from controlled organizations or unrelated debt-financed income, in that order. For organizations tax-exempt under sections 501(c)(7), (9), and (17), rental income included all gross rents (except those that were exempt-function income), with no exclusions. (See explanations of Income from Controlled Organizations and Unrelated Debt-Financed Income.) Set-Asides.--This deduction from investment income was allowed to social and recreational clubs (Internal Revenue Code section 501(c)(7)), voluntary employees’ beneficiary associations (section 501(c)(9)), and supplemental unemployment benefit trusts (section 501(c)(17)). The deduction was equal to the amount of passive income (generally, investment income) that these organizations set aside (1) to be used for charitable purposes or (2) to provide 200 Unrelated Business Income Tax Returns, 1998 payment of life, health, accident, or other insurance benefits (section 501(c)(9) and (17) organizations only). However, any amounts set aside that exceeded the “qualified asset account” limit, as figured under section 419A, were not allowed as a deduction from unrelated business investment income; they were treated as taxable investment income. A section 419A qualified asset account is any account consisting of assets set aside to provide for the payment of disability benefits, medical benefits, severance pay benefits, or life insurance benefits. Specific Deduction.--The specific deduction was $1,000 or the amount of positive taxable income, whichever was less. The amount deducted was considered “not directly connected” with gross unrelated business income and was allowed to all organizations that had positive taxable income after all other types of deductions were taken. This deduction provided the equivalent benefit of the $1,000 gross unrelated business income filing threshold under which some organizations were exempted from filing a return and paying the unrelated business income tax. Total Deductions.--Total deductions included both deductions reported on the main part of Form 990-T and expense items reported on any of six supporting schedules, which were also part of the tax form. It excluded cost of sales and services ($2.1 billion for 1998), which was subtracted from gross receipts from sales and services in computing gross profit (less loss) from sales and services. Gross profit (less loss) from sales and services was a component of gross unrelated business income (UBI). Because Form 990-T filing requirements are based on gross UBI, and cost of sales and services is factored into the computation of gross income, the deduction for cost of sales and services is reported in the gross income section of Form 990-T, not the deductions section. Cost of sales and services was reported as a lump-sum total, but may have included depreciation, salaries and wages, and certain other types of deductible items. For this reason, the total amount shown for some of the separately reported components of total deductions, such as “salaries and wages,” may be understated. Total Tax.--Total tax was unrelated business income tax less the foreign tax credit, general business credit, credit for prior-year minimum tax, and other allowable credits, plus the “proxy tax” on cer- tain lobbying expenditures, the tax from recomputing certain prior-year credits (“recapture taxes”), and the “alternative minimum tax.” Unrelated Business Income.--This was income of a tax-exempt organization that was from a trade or business which was regularly carried on by the organization and which was not substantially related to the performance of the organization’s exempt purpose or function (other than that the organization needed the profits derived from the unrelated activity). The term “trade or business” generally comprised any activities carried on for the production of income from selling goods or performing services. These activities did not lose their identity as trades or businesses merely because they were carried on within a larger aggregate of similar activities or within a larger complex of other endeavors that may, or may not, have been related to the exempt purposes of the organization. For example, soliciting, selling, or publishing commercial advertising is identified as 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. Unrelated Business Income Tax.--This was the tax imposed on unrelated business net income (taxable profit). It was determined based on the regular corporate or trust income tax rates that were in effect for the 1998 Tax Year, as shown in the following schedules. Tax Rates for Corporations Amount of unrelated business taxable income is: But not over— $50,000 75,000 100,000 335,000 10,000,000 15,000,000 18,333,333 -- Over— $0 50,000 75,000 100,000 335,000 10,000,000 15,000,000 18,333,333 Tax is: 15% $7,500 + 25% 13,750 + 34% 22,250 + 39% 113,900 + 34% 3,400,000 + 35% 5,150,000 + 38% 35% Of the amount over— $0 50,000 75,000 100,000 335,000 10,000,000 15,000,000 0 201 Unrelated Business Income Tax Returns, 1998 Tax Rates for Trusts Amount of unrelated business taxable income is: Over— $0 1,700 4,000 6,100 8,350 But not over— $1,700 4,000 6,100 8,350 -- Tax is: 15% $255 + 28% 899 + 31% 1,550 + 36% 2,360 + 39.6% Of the amount over— $0 1,700 4,000 6,100 8,350 the regular corporate income tax rates in effect for Tax Year 1998. Nonprofit trusts were generally taxed at the regular individual (single status) income tax rates established for estates and trusts for Tax Year 1998. Trusts that were eligible for the maximum 28-percent tax rate on capital gain net income figured their tax based on Schedule D of Form 1041, U.S. Income Tax Return for Estates and Trusts. The corporate and trust tax-rate schedules are included in the definition of Unrelated Business Income Tax, found in the Explanation of Selected Terms section of this article. [2] The amount of total tax liability originally reported on Forms 990-T, as stated in these statistics, may not necessarily be the amount ultimately paid to the Internal Revenue Service (IRS). Changes in tax liability assessments can be made after the original return is filed, either by the taxpayer on an amended return, by the IRS after examination, or by rulings of the U.S. tax courts after litigation. [3] The $10.7 million of total proxy tax was reported on 638 Forms 990-T filed for Tax Year 1998. These statistics are from an unpublished tabulation of IRS Business Returns Transaction File records. [4] Information related to Teachers Insurance and Annuity Association of America’s Form 990-T return filed for Tax Year 1997 is being disclosed with their permission. [5] See Executive Office of the President, Office of Management and Budget, North American Industry Classification System: United States, 1997, Berman Press, Lanham, MD, 1998. [6] Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts (NIPA) Tables, Table 1.9, Relation of Gross Domestic Product, Gross National Product, Net National Product, National Income, and Personal Income, February 28, 2002. This and other NIPA tables can be accessed from http://www.bea.doc.gov/bea/dn/nipaweb. According to Table 1.9, the amount of gross domestic product for 1998 was $8,781.5 billion. [7] Eighty-six percent of the $1.2 billion of gross UBI associated with organizations having a 202 Unrelated Debt-Financed Income.--Gross income from investment property for which there was acquisition indebtedness outstanding at any time during the tax year was subject to the unrelated business income (UBI) tax. The percentage of investment income to be included as gross UBI was proportional to the ratio of average acquisition indebtedness to the average adjusted basis of the property. Various types of passive income (generally, investment income) were considered to be unrelated debtfinanced income, but only if the income arose from property acquired or improved with borrowed funds and if the production of income was unrelated to the organization’s tax-exempt purpose. When any property held for the production of income by an organization was disposed of at a gain during the tax year, and there was acquisition indebtedness outstanding at any time during the 12-month period prior to the date of disposition, the property was considered debtfinanced property, and the gain was treated as unrelated debt-financed income. Income from debtfinanced property did not include rents from personal property (e.g., computers or furniture) leased with real property, certain passive income (generally, investment income) from controlled organizations, and other amounts that were otherwise included in computing unrelated business taxable income. Internal Revenue Code section 501(c)(7), (9), and (17) organizations reported all debt-financed income as “Investment Income (Less Loss).” All other organizations reported debt-financed income separately. NotesandReferences 202 [1] The unrelated business income tax (UBIT) for nonprofit corporations was determined based on Unrelated Business Income Tax Returns, 1998 primary activity of “investment activities of Code section 501(c)(7), (9), or (17) organizations” was reported by Internal Revenue Code section 501(c)(9) voluntary employees’ beneficiary associations, which generally administer trust funds for providing payment of life, health, accident, and other insurance benefits to their members. Any part of net investment income from these employee benefit associations that is not set aside for future charitable-purpose use is taxable. [8] The term “charitable” refers to tax-exempt organizations with purposes that are charitable, educational, scientific, literary, or religious in nature, or organizations that test for public safety or prevent cruelty to children or animals. The term also covers organizations that otherwise qualified for tax-exempt status under the Income Tax Regulations issued for Internal Revenue Code section 501(c)(3). [9] Another reason for presenting only the top-5 primary UBA’s of organizations tax-exempt under sections 501(c)(4) through 501(c)(7) is that specific taxpayer information reported on Form 990-T cannot be disclosed to the public, and providing more UBA’s beyond the top-5 activities in Figures E through H has the potential for disclosing the identity of the one or two organizations that reported some of them. Most tax-exempt organizations are required to file an annual Form 990, Return of Organization Exempt From Income Tax, or Form 990-EZ, Short Form Return of Organization Exempt From Income Tax (used by organizations with annual gross receipts of less than $100,000 and total end-of-year assets of less than $250,000). Form 990-T is required only for a tax year in which an organization has unrelated business income. While specific taxpayer information reported on an exempt organization’s Form 990/ 990-EZ “information return” can be disclosed to the public, specific taxpayer information reported on its Form 990-T “tax return” cannot. Under disclosure rules governing the release of taxpayer information, only aggregate totals from Form 990-T can be presented in this article. [10] A business activity is considered unrelated if it does not contribute importantly (other than the production of funds) to accomplishing an organization’s charitable, educational, or other purpose that is the basis for the organization’s tax exemption. 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. 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. The part of the activity that is more than needed to accomplish the exempt purpose is an unrelated trade or business. Whether an activity contributes importantly depends in each case on the facts involved. See IRS Publication 598, Tax on Unrelated Business Income of Exempt Organizations, for additional information on unrelated business income and tax. The following is a case example from Publication 598. An American folk art museum operates a shop in the museum that sells reproductions of works in the museum’s own collection and also works from the collections of other art museums. In addition, the museum sells souvenir items of the city where the museum is located. The sale of the reproductions, regardless of which museum houses the original works, is considered to be “related” because it contributes 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. However, the sale of souvenir items depicting the city in which the museum is located is considered to be “unrelated” because it 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. [11] These analyses can be found in Riley, Margaret, “Exempt Organization Business Income Tax Returns: Highlights and an Analysis of 203 Unrelated Business Income Tax Returns, 1998 Exempt and Nonexempt Finances, 1993,” Statistics of Income Bulletin, Spring 1997, Volume 16, Number 4; Riley, Margaret, “Unrelated Business Income of Nonprofit Organizations, 1994,” Spring 1998, Volume 17, Number 4; and Riley, Margaret, “Unrelated Business Income of Nonprofit Organizations, 1997,” Spring 2001, Volume 20, Number 4. [12] For additional information on the Form 990 and Form 990-T integrated sample design, see Harte, James M. and Hilgert, Cecelia H., “Enriching One Sample While Improving Another: Linking Differently Stratified Samples of Documents Filed by Exempt Organizations,” Statistics of Income: Turning Administrative Systems Into Information Systems, 1993. SOURCE: IRS, Statistics of Income Bulletin, Spring 2002, Publication 1136 (Revised 6-02). 204 204 Unrelated Business Income Tax Returns, 1998 Appendix Types of Tax-Exempt Organizations Subject to the Unrelated Business Income Tax Provisions, by Internal Revenue Code Section Code section 220(e) Description of organization Archer Medical Savings Accounts (MSA's) General nature of activities Fiduciary agent for accounts used in conjunction with high-deductible health plans to save funds for future medical expenses Fiduciary agent for pension, profit-sharing, or stock bonus plans Fiduciary agent for retirement funds Fiduciary agent for retirement funds; subject to same rules as traditional IRA's, except contributions are not tax deductible and qualified distributions are tax free Holding title to property for exempt organizations Activities of a nature implied by the description of the class of organization 401(a) 408(e) 408A Qualified pension, profit-sharing, or stock bonus plans Individual Retirement Arrangements (IRA's) Roth Individual Retirement Arrangements (IRA's) 501(c)(2) (3) Title-holding corporations for exempt organizations Religious, educational, charitable, scientific, or literary organizations; testing for public safety organizations. Also, organizations preventing cruelty to children or animals, or fostering national or international amateur sports competition Civic leagues, social welfare organizations, and local associations of employees (4) Promotion of community welfare and activities from which net earnings are devoted to charitable, educational, or recreational purposes Educational or instructive groups whose purpose is to improve conditions of work, products, and efficiency Improving conditions in one or more lines of business Pleasure, recreation, and social activities Lodge providing for payment of life, health, accident, or other insurance benefits to members Providing for payment of life, health, accident, or other insurance benefits to members (5) Labor, agricultural, and horticultural organizations (6) (7) (8) Business leagues, chambers of commerce, real estate boards, and like organizations Social and recreational clubs Fraternal beneficiary societies and associations (9) Voluntary employees' beneficiary associations (including Federal employees' voluntary beneficiary associations formerly covered by section 501(c)(10)) Domestic fraternal beneficiary societies and associations (10) Lodges, societies, or associations devoting their net earnings to charitable, fraternal, and other specified purposes, without life, health, or accident insurance benefits to members Fiduciary associations providing for payment of retirement benefits Activities of a mutually beneficial nature implied by the description of the class of organization (11) (12) Teachers' retirement fund associations Benevolent life insurance associations, mutual ditch or irrigation companies, mutual or cooperative telephone companies, and like organizations 205 Unrelated Business Income Tax Returns, 1998 Appendix Types of Tax-Exempt Organizations Subject to the Unrelated Business Income Tax Provisions, by Internal Revenue Code Section--Continued Code section 501(c)(13) (14) Description of organization Cemetery companies State-chartered credit unions and mutual insurance or reserve funds General nature of activities Arranging for burials and incidental related activities Providing loans to members or providing insurance of, or reserve funds for, shares or deposits in certain banks or loan associations Providing insurance to members, substantially at cost Financing crop operations in conjunction with activities of a marketing or purchasing association Fiduciary agent for payment of supplemental unemployment compensation benefits Providing for payments of benefits under a pension plan funded by employees Activities implied by the nature of the organization (15) Mutual insurance companies or associations other than life, if written premiums for the year do not exceed $350,000 Corporations organized to finance crop operations (16) (17) Supplemental unemployment benefit trusts (18) Employee-funded pension trusts (created before June 25, 1959) Posts or organizations of past or present members of the armed forces Black Lung Benefit Trusts (19) 206 (21) Created by coal mine operators to satisfy their liability for disability or death due to black lung disease Providing funds to meet the liability of employers withdrawing from a multi-employer pension fund Providing insurance and other benefits to veterans or their dependents Providing funds for employee retirement income (22) Withdrawal liability payment funds (23) Associations of past and present members of the armed forces founded before 1880 Trusts described in section 4049 of the Employee Retirement Income Security Act of 1974 Title-holding corporations or trusts with no more than 35 shareholders or beneficiaries and only one class of stock or beneficial interest Qualified State Tuition Plans (24) (25) Acquiring real property and remitting all income earned from such property to one or more exempt organizations; pension, profit-sharing, or stock bonus plans; or governmental units State- and agency-maintained plans that allow individuals to purchase credits or certificates, or make contributions to an account, to pay for future educational expenses Fiduciary agent for accounts created for the purpose of paying qualified higher education expenses of a designated beneficiary 529(a) 530(a) Coverdall Education Savings Accounts 206 NOTE: Prepaid legal service funds, previously described in section 501(c)(20) of the Internal Revenue Code, were no longer tax exempt effective with tax years beginning after June 30, 1992. Unrelated Business Income Tax Returns, 1998 Table 1.--Number of Returns, Gross Unrelated Business Income (UBI), Total Deductions, Net Income (Less Deficit), Net Income (Taxable Profit), and Total Tax, by Internal Revenue Code Section Describing Type of Tax-Exempt Organization, Tax Year 1998 [All figures are estimates based on samples--money amounts are in thousands of dollars] Gross Number Internal Revenue Code section of returns unrelated business income (UBI) (1) (2) Number of returns (3) Total deductions 1,2 Net income (less deficit) Number Amount (4) of returns ³ (5) 39,494 -771 11,279 *118 235 9,416 1,222 2,071 5,047 5,935 697 510 218 -147 *25 125 ** -** -1,667 -** -** ** --(6) -596,853 -66,983 30,765 *588 -36,317 -887,510 -43,901 -71,289 -178,170 -11,506 -27,807 578,781 -4,534 --191 *338 -3,436 ** -** --14,642 -** -** ** --(7) 1,669,753 -155,899 32,298 *588 5,871 654,792 7,888 23,655 70,575 89,745 5,985 598,217 662 -5,484 *426 1,367 ** -** -10,720 -** -** ** --Amount Net income (taxable profit) Number of returns (8) 24,172 -562 9,707 *118 106 3,838 364 933 2,158 4,438 392 438 *61 -58 *17 *85 ** -** -888 -** -** ** --- Total tax 4 Amount (9) 464,288 -43,524 8,567 *171 1,821 174,699 1,886 6,143 21,302 19,532 1,107 179,959 *100 -1,612 *132 *302 ** -** -1,677 -** -** ** --- All sections.......................................................................................... 46,208 7,584,915 45,918 220(e).................................................................................................... ---- 8,181,766 -138,711 44,678 *602 79,362 5,014,629 307,137 297,421 996,064 493,719 95,091 472,509 20,852 -31,849 *2,675 18,411 ** -** -162,384 -** -** ** --- 401(a).................................................................................................... 875 205,694 874 408(e).................................................................................................... 12,599 12,635 75,443 *118 *1,189 *118 408A.................................................................................................... 501(c)(2).................................................................................................... 290 290 43,045 501(c)(3).................................................................................................... 10,898 4,127,119 10,838 1,500 263,236 501(c)(4)....................................................................................................1,465 2,497 226,132 501(c)(5)....................................................................................................2,496 501(c)(6)....................................................................................................6,238 6,238 817,893 501(c)(7)....................................................................................................6,754 6,840 482,213 920 67,283 501(c)(8).................................................................................................... 887 501(c)(9).................................................................................................... 759 768 1,051,290 501(c)(10).................................................................................................... 253 253 16,318 501(c)(11).................................................................................................... ---- 501(c)(12).................................................................................................... 185 186 31,658 501(c)(13).................................................................................................... *59 *59 *3,013 125 14,975 501(c)(14).................................................................................................... 125 ** ** 501(c)(15).................................................................................................... ** 501(c)(16).................................................................................................... --501(c)(17).................................................................................................... ** ** --501(c)(18).................................................................................................... 5 -** -- 501(c)(19).................................................................................................... 1,961 147,742 1,938 501(c)(21) .................................................................................................... ---** ** 501(c)(22).................................................................................................... ** 501(c)(23).................................................................................................... --501(c)(24).................................................................................................... ** ** 501(c)(25).................................................................................................... ** ** --529(a).................................................................................................... 530(a).................................................................................................... ---** ** --- *Estimate should be used with caution because of the small number of sample returns on which it is based. **Data deleted to avoid disclosure of information for specific taxpayers. However, data are included in the appropriate totals. ¹ Excludes cost of sales and services, which was subtracted from gross receipts from sales and services in computing gross profit from sales and services. Gross profit from sales and services was a component of gross unrelated business income (UBI). Cost of sales and services can include amounts attributable to depreciation, salaries and wages, and certain other deductible items. For all exempt organizations reporting gross UBI, cost of sales and services was $2.1 billion. ² Includes both deductions reported on the main part of the tax return and expense items reported on supporting schedules. ³ Excludes returns with net income (less deficit) equal to zero. 4 Total tax is the regular unrelated business income tax after reduction by any tax credits (foreign tax credit, general business credit, prior-year minimum tax credit, and other allowable credits), plus taxes from recapture of certain prior-year credits, the "alternative minimum tax," and the "proxy" tax on nondeductible lobbying and political expenditures. The proxy tax was reported on Form 990-T and was included in total tax; however, it had no connection to the tax on unrelated business income or an organization's involvement in unrelated business activities. For exempt organizations reporting gross UBI above the $1,000 filing threshold, total proxy tax was $2.9 million. 5 Prepaid legal service funds, previously described in section 501(c)(20) of the Internal Revenue Code, were no longer tax-exempt beginning with tax years after June 30, 1992. Therefore, these organizations are not listed in this table. NOTES: Detail may not add to totals because of rounding. See the Appendix to this article for a listing of the types of tax-exempt organizations, by the Internal Revenue Code section describing them. 207 Unrelated Business Income Tax Returns, 1998 Table 2.--Number of Returns, Gross Unrelated Business Income (UBI), Total Deductions, Net Income (Less Deficit), Net Income (Taxable Profit), and Total Tax, by Size of Gross UBI, Tax Year 1998 [All figures are estimates based on samples--money amounts are in thousands of dollars] Gross Number Size of gross unrelated business income (UBI) of returns unrelated business income (UBI) (1) 5 Total deductions Number of returns (3) Amount (4) 8,181,766 123,954 873,554 1,707,771 867,526 2,053,544 2,555,419 1,2 Net income (less deficit) Number of returns ³ (5) 39,494 18,269 14,272 5,128 885 752 187 (6) -596,853 -35,883 -283,488 -438,347 -173,672 -342,042 676,579 (7) 1,669,753 26,319 107,262 161,122 84,185 225,540 1,065,325 Amount Net income (taxable profit) Number of returns (8) 24,172 13,298 7,497 2,526 422 334 95 Total tax 4 Amount (9) 464,288 4,678 21,259 43,925 25,501 73,329 295,596 (2) Total................................................................................................................ 46,208 7,584,915 45,918 $1,000 under $10,001 ....................................................................... 22,124 88,072 $10,001 under $100,000 ....................................................................... 16,280 590,066 $100,000 under $500,000....................................................................... 5,753 1,269,423 $500,000 under $1,000,000....................................................................... 1,001 693,854 $5,000,000 or more....................................................................... 214 3,231,998 5 21,972 16,166 5,738 997 212 $1,000,000 under $5,000,000....................................................................... 833 836 1,711,502 ¹ Excludes cost of sales and services, which was subtracted from gross receipts from sales and services in computing gross profit from sales and services. Gross profit from sales and services was a component of gross unrelated business income (UBI). Cost of sales and services can include amounts attributable to depreciation, salaries and wages, and certain other deductible items. For all exempt organizations reporting gross UBI, cost of sales and services was $2.1 billion. ² Includes both deductions reported on the main part of the tax return and expense items reported on supporting schedules. ³ Excludes returns with net income (less deficit) equal to zero. 4 Total tax is the regular unrelated business income tax after reduction by any tax credits (foreign tax credit, general business credit, prior-year minimum tax credit, and other allowable credits), plus taxes from recapture of certain prior-year credits, the "alternative minimum tax," and the "proxy" tax on nondeductible lobbying and political expenditures. The proxy tax was reported on Form 990-T and was included in total tax; however, it had no connection to the tax on unrelated business income or an organization's involvement in unrelated business activities. For exempt organizations reporting gross UBI above the $1,000 filing threshold, total proxy tax was $2.9 million. 5 The gross unrelated business income (UBI) brackets of "$1,000 under $10,001" and "$10,001 under $100,000" reflect the different filing requirements for organizations with gross UBI of $10,000 or less (only a "partial" return was required) and all other Form 990-T filers (a more detailed "complete" return was required). Organizations with gross UBI below $1,000 were not required to file Form 990-T. NOTE: Detail may not add to totals because of rounding. 208 208 Unrelated Business Income Tax Returns, 1998 Table 3.--Number of Returns, Gross Unrelated Business Income (UBI), Total Deductions, Net Income (Less Deficit), and Total Tax, by Size of Net Income (Taxable Profit) or Deficit, Tax Year 1998 [All figures are estimates based on samples--money amounts are in thousands of dollars] Gross Number Size of net income (taxable profit) or deficit of returns unrelated business income (UBI) (1) (2) Number of returns (3) Total deductions 1,2 Net income (less deficit) Number Amount (4) 8,181,766 5,548,608 796,292 59,005 255,302 546,654 403,035 92,253 480,617 of returns ³ (5) 39,494 15,162 -6,557 11,521 5,204 808 102 140 (6) -596,853 -2,266,605 -2,988 44,969 157,402 172,014 71,921 1,220,459 Amount Number of returns (7) 24,172 178 31 6,518 11,269 5,135 799 102 140 Total tax 4 Amount (8) 464,288 1,129 521 445 7,900 29,863 54,821 24,211 345,399 Total................................................................................................................ 45,918 46,208 7,584,915 Deficit...................................................................................... 3,282,002 15,162 Zero 5 ...................................................................................... 6,714 796,292 $1 under $1,000...................................................................................... 6,557 61,993 $1,000 under $10,000...................................................................................... 11,521 300,271 $10,000 under $100,000...................................................................................... 5,204 704,056 $100,000 under $500,000...................................................................................... 808 575,050 $500,000 under $1,000,000...................................................................................... 102 164,174 $1,000,000 or more...................................................................................... 140 1,701,076 15,162 6,714 6,557 11,369 5,089 793 98 135 ¹ Excludes cost of sales and services, which was subtracted from gross receipts from sales and services in computing gross profit from sales and services. Gross profit from sales and services was a component of gross unrelated business income (UBI). Cost of sales and services can include amounts attributable to depreciation, salaries and wages, and certain other deductible items. For all exempt organizations reporting gross UBI, cost of sales and services was $2.1 billion. ² Includes both deductions reported on the main part of the tax return and expense items reported on supporting schedules. ³ Excludes returns with net income (less deficit) equal to zero. 4 Total tax is the regular unrelated business income tax after reduction by any tax credits (foreign tax credit, general business credit, prior-year minimum tax credit, and other allowable credits), plus taxes from recapture of certain prior-year credits, the "alternative minimum tax," and the "proxy" tax on nondeductible lobbying and political expenditures. The proxy tax was reported on Form 990-T and was included in total tax; however, it had no connection to the tax on unrelated business income or an organization's involvement in unrelated business activities. For exempt organizations reporting gross UBI above the $1,000 filing threshold, total proxy tax was $2.9 million. 5 Includes "breakeven" returns with equal amounts of gross unrelated business income and total deductions. NOTE: Detail may not add to totals because of rounding. 209 Unrelated Business Income Tax Returns, 1998 Table 4.--Returns with Positive Net Income (Taxable Profit): Number of Returns, Gross Unrelated Business Income (UBI), Total Deductions, Net Income (Taxable Profit), and Total Tax, by Type of Organization and Size of Gross UBI, Tax Year 1998 [All figures are estimates based on samples--money amounts are in thousands of dollars] Gross Type of organization and size of gross unrelated business income (UBI) Number of returns unrelated business income (UBI) (1) ALL ORGANIZATIONS Total................................................................................................................ 24,332 3,506,620 4 Total deductions Number of returns (3) Amount (4) 1,2 Total Net income (taxable profit) (5) Number of returns (6) (7) Amount tax ³ (2) 24,042 13,316 7,410 2,511 417 310 79 1,836,866 28,182 145,143 399,393 207,351 422,561 634,237 1,669,753 26,319 107,262 161,122 84,185 225,540 1,065,325 23,963 13,297 7,405 2,461 408 312 81 462,639 4,678 20,742 43,473 25,348 73,053 295,345 $1,000 under $10,001...................................................................................... 54,501 13,467 4 $10,001 under $100,000 ...................................................................................... 7,524 252,405 $100,000 under $500,000...................................................................................... 2,525 560,515 $500,000 under $1,000,000...................................................................................... 421 291,536 $1,000,000 under $5,000,000...................................................................................... 313 648,101 $5,000,000 or more...................................................................................... 1,699,562 81 TAX-EXEMPT CORPORATIONS Total................................................................................................................ 13,288 2,339,196 4 13,047 4,087 5,985 2,314 373 250 38 1,480,476 7,730 133,234 389,538 201,095 405,296 343,582 858,720 11,319 82,713 122,917 59,122 114,081 468,569 12,987 4,102 5,980 2,254 362 251 38 221,801 1,632 12,832 30,148 17,262 37,538 122,388 $1,000 under $10,001 ......................................................................................19,049 4,205 4 $10,001 under $100,000 ...................................................................................... 6,099 215,948 $100,000 under $500,000...................................................................................... 2,319 512,455 $500,000 under $1,000,000...................................................................................... 375 260,217 $1,000,000 under $5,000,000...................................................................................... 252 519,376 $5,000,000 or more...................................................................................... 812,151 38 TAX-EXEMPT TRUSTS 210 Total................................................................................................................ 11,044 1,167,424 4 10,995 9,228 1,425 197 44 60 41 356,391 20,452 11,908 9,855 6,255 17,265 290,655 811,033 15,000 24,549 38,205 25,064 111,460 596,756 10,976 9,194 1,425 206 46 61 43 240,838 3,046 7,910 13,325 8,085 35,515 172,958 $1,000 under $10,001 ......................................................................................35,453 9,262 4 $10,001 under $100,000 ...................................................................................... 1,425 36,457 $100,000 under $500,000...................................................................................... 206 48,060 $500,000 under $1,000,000...................................................................................... 46 31,319 $1,000,000 under $5,000,000...................................................................................... 61 128,725 $5,000,000 or more...................................................................................... 887,411 43 ¹ Excludes cost of sales and services, which was subtracted from gross receipts from sales and services in computing gross profit from sales and services. Gross profit from sales and services was a component of gross unrelated business income (UBI). Cost of sales and services can include amounts attributable to depreciation, salaries and wages, and certain other deductible items. For exempt organizations reporting net income (taxable profit), cost of sales and services was $714.0 million, of which $701.3 million were attributable to tax-exempt corporations. ² Includes both deductions reported on the main part of the tax return and expense items reported on supporting schedules. ³ Total tax is the regular unrelated business income tax after reduction by any tax credits (foreign tax credit, general business credit, prior-year minimum tax credit, and other allowable credits), plus taxes from recapture of certain prior-year credits, the "alternative minimum tax," and the "proxy" tax on nondeductible lobbying and political expenditures. The proxy tax was reported on Form 990-T and was included in total tax; however, it had no connection to the tax on unrelated business income or an organization's involvement in unrelated business activities. For exempt organizations reporting positive net income (taxable profit), total proxy tax was $1.9 million, all of which was attributable to tax-exempt corporations. The gross unrelated business income (UBI) brackets of "$1,000 under $10,001" and "$10,001 under $100,000" reflect the different filing requirements for organizations with gross UBI of $10,000 or less (only a "partial" return was required) and all other Form 990-T filers (a more detailed "complete" return was required). Organizations with gross UBI below $1,000 were not required to file Form 990-T. NOTE: Detail may not add to totals because of rounding. 4 210 Unrelated Business Income Tax Returns, 1998 Table 5.--Number of Returns, Gross Unrelated Business Income (UBI), Total Deductions, Net Income (Less Deficit), Net Income (Taxable Profit), and Total Tax, by Primary Unrelated Business Activity or Industrial Grouping, Tax Year 1998 [All figures are estimates based on samples--money amounts are in thousands of dollars] Gross Number Primary unrelated business activity or industrial grouping of returns unrelated business income (UBI) (1) (2) Number of returns (3) Total deductions 1,2 Net income (less deficit) Number Amount (4) of returns ³ (5) 39,494 (6) -596,853 -23,225 6,478 -11,458 *1,397 -28,789 -2,977 -194,198 -1,598 -104,306 1,138,592 42,361 610,142 13,468 472,621 -246,121 -8,553 -237,569 -319,554 6,113 (7) 1,669,753 3,625 8,932 2,291 *1,517 9,221 259 22,531 211 29,582 1,284,164 75,237 632,126 29,289 547,512 75,620 4,849 70,771 83,283 8,046 Amount Net income (taxable profit) Total tax Number of returns (8) 24,172 183 113 *60 *29 79 4 453 *11 488 13,857 4,348 3,012 369 6,127 2,417 305 2,112 2,266 29 (9) 464,288 998 2,674 *812 *400 2,578 77 6,772 *36 6,983 358,342 20,978 186,566 7,931 142,867 20,037 1,028 19,009 25,784 2,654 Amount 4 All activities and groupings...................................................................................... 46,208 7,584,915 45,918 8,181,766 Agriculture, forestry, hunting, and fishing.......................................................................................................................... 314 27,324 314 50,549 312 Mining.......................................................................................................................... 131 15,581 131 Utilities.......................................................................................................................... 65 22,869 64 Construction.......................................................................................................................... *35 *4,599 *35 Manufacturing.......................................................................................................................... 299 57,043 295 9,103 34,327 *3,202 85,832 129 64 *33 263 49 1,263 Wholesale trade.......................................................................................................................... 13,613 84 10,636 84 Retail trade.......................................................................................................................... 1,344 332,610 1,336 526,808 Transportation and warehousing.......................................................................................................................... 21 47 5,755 47 7,353 Information.......................................................................................................................... 1,985 408,675 1,985 512,982 1,455 Finance and insurance, total.......................................................................................................................... 16,529 18,984 2,369,744 18,868 1,231,152 Unrelated debt-financed activities, other than rental of real estate......................................................... 4,555 162,320 Investment activities of Code section 501(c)(7), (9), and (17) organizations......................................................... 3,888 3,930 1,194,561 Passive income activities with controlled organizations......................................................... 87,871 476 Other finance and insurance ......................................................... 10,023 924,992 Real estate and rental and leasing, total......................................................... 5,186 610,380 Rental of personal property ......................................................... 501 48,069 441 9,985 5,177 501 74,403 452,371 856,501 56,621 799,880 1,711,802 4,727 462 8,247 4,507 477 4,030 5,498 32 584,419 3,308 4,554 119,959 4,513 Other real estate and rental and leasing......................................................... 4,676 4,685 562,311 Professional, scientific, and technical services......................................................... 7,200 1,392,248 7,199 Management of companies and enterprises......................................................... 32 10,840 Administrative and support and waste management and remediation services......................................................... 722 193,081 Educational services......................................................... 194 99,486 721 194 1,169 4,107 3,135 32 247,418 136,141 1,235,927 635,770 556,984 670 188 1,053 3,710 2,789 449 273 207 -54,336 -36,656 -365,648 -127,007 -122,906 -97,468 -20,729 7,543 12,176 4,465 33,642 38,638 29,915 4,008 9,169 8,456 182 79 401 1,912 1,143 217 153 96 3,351 1,341 10,097 8,390 6,899 856 2,484 2,724 Healthcare and social assistance......................................................... 1,173 870,280 Arts, entertainment, and recreation......................................................... 4,192 508,763 Accommodation and food services......................................................... 3,159 434,078 Other services.......................................................................................................................... 206,856 494 109,388 459 Exploited exempt activities.......................................................................................................................... 326 83,711 326 104,440 Not allocable.......................................................................................................................... 242 17,823 241 10,281 * Estimate should be used with caution because of the small number of sample returns on which it is based. ¹ Excludes cost of sales and services, which was subtracted from gross receipts from sales and services in computing gross profit from sales and services. Gross profit from sales and services was a component of gross unrelated business income (UBI). Cost of sales and services can include amounts attributable to depreciation, salaries and wages, and certain other deductible items. For all exempt organizations reporting gross UBI, cost of sales and services was $2.1 billion. ² Includes both deductions reported on the main part of the tax return and expense items reported on supporting schedules. 4 ³ Excludes returns with net income (less deficit) equal to zero. Total tax is the regular unrelated business income tax after reduction by any tax credits (foreign tax credit, general business credit, prior-year minimum tax credit, and other allowable credits), plus taxes from recapture of certain prior-year credits, the "alternative minimum tax," and the "proxy" tax on nondeductible lobbying and political expenditures. The proxy tax was reported on Form 990-T and was included in total tax; however, it had no connection to the tax on unrelated business income or an organization's involvement in unrelated business activities. For exempt organizations reporting gross UBI above the $1,000 filing threshold, total proxy tax was $2.9 million. NOTE: Detail may not add to totals because of rounding. 211 Unrelated Business Income Tax Returns, 1998 Table 6.--Sources of Gross Unrelated Business Income (UBI), by Size of Gross UBI, Tax Year 1998 [All figures are estimates based on samples--money amounts are in thousands of dollars] Sources of gross unrelated business income (UBI) ¹ Gross unrelated Size of gross unrelated business income (UBI) Number of returns (1) Total...................................................................................... 46,208 2 2,3 Gross profit (less loss) from sales and services Number Number Amount of returns (4) 3,326,781 11,569 3,315,212 274,449 676,211 368,022 867,867 1,128,663 (5) Capital gain net income business income (UBI) Amount of returns Amount (2) 7,584,915 (3) 15,984 (6) 877 *37 740 425 158 51 68 39 572,955 *218 572,737 8,854 22,675 18,738 72,832 449,639 $1,000 under $10,001 .......................................................................................................................... 22,124 88,072 3,039 $10,001 or more, total .......................................................................................................................... 24,084 7,496,843 12,945 $10,001 under $100,000 ².......................................................................................................................... 16,280 590,066 7,993 $100,000 under $500,000.......................................................................................................................... 5,753 1,269,423 3,624 $500,000 under $1,000,000.......................................................................................................................... 1,001 693,854 655 $1,000,000 under $5,000,000.......................................................................................................................... 836 1,711,502 550 $5,000,000 or more..........................................................................................................................123 214 3,231,998 Sources of gross unrelated business income (UBI) ¹--Continued Net capital loss Size of gross unrelated business income (UBI) Number of returns (7) (8) 98 Amount (trusts only) Net gain (less loss), sales of noncapital assets Number of returns (9) 314 (10) 3,264 *150 3,114 1,443 1,923 443 -537 -157 Amount 4 Income (less loss) from partnerships and S corporations Number of returns (11) 13,878 11,797 2,080 1,517 332 72 107 53 (12) 627,537 41,982 585,556 28,747 42,301 12,568 43,813 458,127 Amount 212 Total...................................................................................... 28 2 2,3 $1,000 under $10,001 .......................................................................................................................... --*68 $10,001 or more, total .......................................................................................................................... 28 98 246 $10,001 under $100,000 ².......................................................................................................................... --147 $100,000 under $500,000.......................................................................................................................... *19 *73 54 $500,000 under $1,000,000.......................................................................................................................... 4 9 20 $1,000,000 under $5,000,000.......................................................................................................................... 5 15 17 $5,000,000 or more.......................................................................................................................... 8 --- Sources of gross unrelated business income (UBI) ¹-- Continued Rental Size of gross unrelated business income (UBI) Number of returns (13) Total...................................................................................... 4,235 2 2,3 Unrelated debt5 Investment income (less loss) Number 6 income financed income Number Amount (14) 171,275 of returns (15) 2,892 (16) 334,156 2,814 331,342 33,523 82,322 34,866 84,971 95,661 Amount of returns (17) 6,061 2,746 3,315 1,992 1,013 168 107 36 Amount (18) 795,020 9,476 785,544 32,713 67,150 46,635 121,719 517,327 $1,000 under $10,001 .......................................................................................................................... 1,256 5,317 686 $10,001 or more, total .......................................................................................................................... 2,979 165,958 2,205 $10,001 under $100,000 ².......................................................................................................................... 2,058 40,136 1,375 $100,000 under $500,000.......................................................................................................................... 727 52,814 606 $500,000 under $1,000,000.......................................................................................................................... 98 21,691 102 $1,000,000 under $5,000,000.......................................................................................................................... 78 38,693 98 $5,000,000 or more.......................................................................................................................... 24 18 12,624 Footnotes at end of table. 212 Unrelated Business Income Tax Returns, 1998 Table 6.--Sources of Gross Unrelated Business Income (UBI), by Size of Gross UBI, Tax Year 1998 --Continued [All figures are estimates based on samples--money amounts are in thousands of dollars] Sources of gross unrelated business income (UBI) ¹--Continued Income from Size of gross unrelated business income (UBI) Number of returns (19) Total...................................................................................... 1,509 2 2,3 Exploited exempt activity 7 Advertising income Other income (less loss) controlled organizations income, except advertising Number Amount of returns (20) 87,846 (21) 957 (22) 114,414 Amount Number of returns (23) 8,432 2,778 5,654 3,732 1,363 271 235 53 (24) 1,227,675 10,695 1,216,979 105,891 206,047 129,016 293,484 482,541 Amount Number of returns (25) 5,215 1,173 4,042 2,533 1,117 192 171 30 (26) 324,088 3,757 320,332 43,159 76,764 38,817 114,265 47,327 Amount $1,000 under $10,001 .......................................................................................................................... 436 1,169 *155 *925 $10,001 or more, total .......................................................................................................................... 1,073 86,677 802 113,489 $10,001 under $100,000 ².......................................................................................................................... 709 10,781 417 10,372 $100,000 under $500,000.......................................................................................................................... 252 17,131 239 24,159 $500,000 under $1,000,000.......................................................................................................................... 41 5,775 66 17,291 $1,000,000 under $5,000,000.......................................................................................................................... 57 27,753 68 46,657 14 25,236 12 15,010 $5,000,000 or more.......................................................................................................................... *Estimate should be used with caution because of the small number of sample returns on which it is based. ¹ For definitions of the sources of gross unrelated business income, see the Explanation of Selected Terms section of this article. ² The gross unrelated business income (UBI) brackets of "$1,000 under $10,001" and "$10,001 under $100,000" reflect the different filing requirements for organizations with gross UBI of $10,000 or less (only a "partial" return was required) and all other Form 990-T filers (a more detailed "complete" return was required). Organizations with gross UBI below $1,000 were not required to file Form 990-T. ³ All organizations were required to report each income item, as shown in columns 3 through 26. However, only organizations with gross UBI over $10,000 were required to report each deduction shown in columns 14 through 45, 48, 49, and 54 through 59 of Table 7. Income totals for these larger organizations with gross UBI over $10,000 are shown in order to facilitate comparison with Table 7. 4 5 6 7 Property other than capital assets generally included property of a business nature, in contrast to personal and investment property, which were capital assets. Income from real property and personal property leased with real property. Reported by Internal Revenue Code section 501(c)(7), (9), and (17) organizations only. Annuities, interest, rents, and royalties. NOTE: Detail may not add to totals because of rounding. 213 Unrelated Business Income Tax Returns, 1998 Table 7.--Types of Deductions, by Size of Gross Unrelated Business Income (UBI), Tax Year 1998 [All figures are estimates based on samples--money amounts are in thousands of dollars] All organizations Total number of returns Total 1,2 deductions Number of returns (1) Total......................................................... 46,208 (2) 45,918 (3) 8,181,766 Organizations with gross unrelated business income (UBI) of $1,000 under $10,001 ³ Net operating loss carryover Number of Amount returns (5) 123,954 (6) 6,165 6,165 -----(7) 58,894 58,894 ------ Size of gross unrelated business income (UBI) Amount Total 2,4 deductions Number of Amount returns (4) 21,972 Specific deduction Number of Amount returns (8) 15,765 15,765 -----(9) 14,580 14,580 ------ $1,000 under $10,001 ³.......................................................................................................................... 22,124 21,972 123,954 21,972 123,954 $10,001 under $100,000 ³.......................................................................................................................... 16,280 16,166 873,554 --$100,000 under $500,000.......................................................................................................................... 5,753 5,738 1,707,771 --$500,000 under $1,000,000.......................................................................................................................... 1,001 997 867,526 --$1,000,000 under $5,000,000.......................................................................................................................... 836 833 2,053,544 --$5,000,000 or more.......................................................................................................................... 214 212 2,555,419 --- Organizations with gross unrelated business income (UBI) of $10,001 or more ³ Deductions directly connected with UBI Total Size of gross unrelated business income (UBI) Number of returns (10) Total......................................................... 23,946 Amount (11) 8,057,812 Number of returns (12) 22,565 Amount (13) 7,338,661 Number of returns (14) 1,293 -875 311 48 47 11 Amount (15) 96,219 -20,517 31,368 13,309 24,443 6,582 deductions2,5 Total Allocable to rental income 6 Number of returns (16) 1,923 -1,174 540 96 93 20 Amount (17) 282,165 -38,936 78,323 30,119 79,247 55,540 Allocable to unrelated debt-financed income6 Allocable to investment income 6,7 Number of returns (18) 984 -393 439 77 54 21 $1,000 under $10,001 ³.......................................................................................................................... ----$10,001 under $100,000 ³.......................................................................................................................... 16,166 873,554 15,037 839,178 $100,000 under $500,000.......................................................................................................................... 5,738 1,707,771 5,570 1,632,576 $500,000 under $1,000,000.......................................................................................................................... 997 867,526 956 801,127 $1,000,000 under $5,000,000.......................................................................................................................... 833 2,053,544 799 1,926,206 $5,000,000 or more.......................................................................................................................... 212 2,555,419 203 2,139,575 214 Allocable to Size of gross unrelated business income (UBI) investment 6,7 income --Continued Amount (19) Organizations with gross unrelated business income (UBI) of $10,001 or more ³--Continued Deductions directly connected with UBI--Continued Allocable to income from controlled organizations 6 Number of returns (20) Allocable to exploited exempt activity income, 6 except advertising Number of returns (22) Direct advertising 6 costs Number of returns (24) 5,218 -3,412 1,278 258 221 50 Compensation of officers, directors, and trustees Number of returns (26) 2,087 -1,180 674 103 99 31 Amount (21) Amount (23) Amount (25) 887,327 -84,049 157,706 92,181 210,362 343,029 Amount (27) 53,348 -12,825 14,639 4,574 6,399 14,911 Total......................................................... 54,634 478 61,430 699 102,153 $1,000 under $10,001 ³.......................................................................................................................... -----$10,001 under $100,000 ³.......................................................................................................................... 3,214 295 8,320 351 8,693 $100,000 under $500,000.......................................................................................................................... 6,115 123 9,833 214 21,142 $500,000 under $1,000,000.......................................................................................................................... 14,396 2,436 18 4,475 60 $1,000,000 under $5,000,000.......................................................................................................................... 4,931 32 20,600 62 45,049 $5,000,000 or more.......................................................................................................................... 37,937 10 18,201 11 12,873 Organizations with gross unrelated business income (UBI) of $10,001 or more ³--Continued Deductions directly connected with UBI--Continued Size of gross unrelated business income (UBI) Salaries and wages Number of returns (28) Total...................................................................................... 10,544 (29) 1,171,642 Number of returns (30) 7,089 -4,004 2,296 393 326 70 (31) 78,521 -11,791 26,309 8,997 16,949 14,474 Repairs Bad debts Number of returns (32) 834 -319 294 85 105 31 (33) 29,399 -383 2,494 1,782 13,232 11,508 Number of returns (34) 2,829 -1,473 1,032 136 149 39 (35) 81,111 -8,226 17,224 4,909 22,175 28,577 Interest Amount Amount Amount Amount $1,000 under $10,001 ³...................................................................................... --$10,001 under $100,000 ³...................................................................................... 6,045 114,207 $100,000 under $500,000...................................................................................... 3,329 305,373 $500,000 under $1,000,000...................................................................................... 564 139,191 $1,000,000 under $5,000,000...................................................................................... 500 328,847 $5,000,000 or more...................................................................................... 106 284,023 214 Footnotes at end of table. Unrelated Business Income Tax Returns, 1998 Table 7.--Types of Deductions, by Size of Gross Unrelated Business Income (UBI), Tax Year 1998 --Continued [All figures are estimates based on samples--money amounts are in thousands of dollars] Organizations with gross unrelated business income (UBI) of $10,001 or more ³--Continued Deductions directly connected with UBI--Continued Size of gross unrelated business income (UBI) Taxes and licenses paid deduction Number of returns (36) Total......................................................... 11,625 Amount (37) 192,368 Number of returns (38) 7,767 Amount (39) 171,419 Number of returns (40) 119 -*105 *7 ** **4 3 Amount (41) 2,085 -*327 *163 ** **1,030 565 Depreciation Depletion Contributions to deferred compensation plans Number of returns (42) 937 -501 285 73 65 13 Amount (43) 9,170 -455 1,376 977 2,533 3,828 $1,000 under $10,001 ³.......................................................................................................................... ----$10,001 under $100,000 ³.......................................................................................................................... 7,371 28,029 4,630 19,952 $100,000 under $500,000.......................................................................................................................... 3,325 63,800 2,268 51,779 $500,000 under $1,000,000.......................................................................................................................... 467 22,187 408 19,184 $1,000,000 under $5,000,000.......................................................................................................................... 366 27,421 376 43,055 $5,000,000 or more.......................................................................................................................... 96 50,930 85 37,450 Organizations with gross unrelated business income (UBI) of $10,001 or more ³--Continued Deductions directly connected with UBI--Continued Deductions not Contributions Size of gross unrelated business income (UBI) to employee benefit plans Number of returns (44) Total......................................................... 4,532 (45) 225,386 Number of returns (46) 7,163 (47) 1,783,288 Net operating loss carryover Total Amount Amount Number of returns (48) 14,143 -8,619 4,070 707 601 146 (49) 2,056,997 -161,276 313,777 210,496 589,931 781,517 Amount Number of returns (50) 13,220 -8,934 3,200 552 418 116 (51) 719,151 -34,376 75,195 66,399 127,338 415,844 Amount Other deductions directly connected with UBI $1,000 under $10,001 ³.......................................................................................................................... ----$10,001 under $100,000 ³.......................................................................................................................... 1,993 5,002 4,665 312,977 $100,000 under $500,000.......................................................................................................................... 1,732 24,409 1,727 506,744 $500,000 under $1,000,000.......................................................................................................................... 364 15,146 357 216,491 $1,000,000 under $5,000,000.......................................................................................................................... 360 42,989 326 447,288 $5,000,000 or more.......................................................................................................................... 83 137,841 88 299,788 Organizations with gross unrelated business income (UBI) of $10,001 or more ³--Continued Deductions not directly connected with UBI--Continued Size of gross unrelated business income (UBI) Specific deduction Number of returns (52) Contributions Number of returns (54) 1,640 Set-asides 7 Number of returns (56) 416 -224 107 40 32 13 Excess exempt expenses Number of Amount returns (58) 2,412 -1,355 713 159 148 37 (59) 271,066 -19,178 44,440 29,962 69,068 108,417 Amount (53) Amount (55) 50,466 Amount (57) 386,989 -4,419 20,022 23,898 52,931 285,719 Total................................................................................................................ 10,908 10,630 $1,000 under $10,001 ³.......................................................................................................................... ----$10,001 under $100,000 ³..........................................................................................................................3,410 7,608 7,369 954 $100,000 under $500,000.......................................................................................................................... 8,247 2,520 2,485 505 $500,000 under $1,000,000.......................................................................................................................... 409 406 76 12,133 $1,000,000 under $5,000,000.......................................................................................................................... 293 292 75 5,047 $5,000,000 or more.......................................................................................................................... 78 78 30 21,629 * Estimate should be used with caution because of the small number of sample returns on which it is based. **Not shown to avoid disclosure of information about specific taxpayers. However, the data are combined with data in an adjacent size class, as appropriate, and included in the appropriate totals. ¹ Excludes cost of sales and services, which was subtracted from gross receipts from sales and services in computing gross profit from sales and services. Gross profit from sales and services was a component of gross unrelated business income (UBI). Cost of sales and services can include amounts attributable to depreciation, salaries and wages, and certain other deductible items. For all exempt organizations reporting gross UBI, cost of sales and services was $2.1 billion. ² Includes both deductions reported on the main part of the tax return and expense items reported on supporting schedules. ³ Organizations with gross UBI between $1,000 (the filing threshold) and $10,000 were required to report only totals for expenses and deductions (except for the specific deduction and net operating loss carryover, which all organizations reported separately). Organizations with gross UBI over $10,000 were required to report each expense and deduction item separately, as shown in columns 14 through 45, 48, 49, and 54 through 59. 4 Excludes $40.1 million of cost of sales and services reported by organizations with gross UBI of $10,000 or less. See footnote 1 for explanation. 5 Excludes $2.0 billion of cost of sales and services reported by organizations with gross UBI over $10,000. See footnote 1 for explanation. 6 This deduction was required to be reported as a lump-sum total only and may have included component deductions that were of the same type shown elsewhere in this table. For example, if deductions "allocable to rental income" included depreciation, then that amount of depreciation would not be included in the separately reported item, "depreciation." Therefore, the total amount shown for some of the separately reported deductions may be understated. 7 Reported by Internal Revenue Code section 501(c)(7), (9), and (17) organizations only. NOTE: Detail may not add to totals because of rounding. 215