Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of ExemptOrganization Reporting Quality by Margaret Riley
T
he number of tax-exempt organizations filing Forms 990-T, Exempt Organization Business Income Tax Returns, decreased only slightly between Tax Years 2001 and 2002, from 35,540 to 35,103. However, 2002 marked the fourth consecutive year of declining filings of Forms 990-T to report “unrelated business income” (UBI) and taxes. From Tax Year 1998 to Tax Year 2002, the number of organizations filing Forms 990-T dropped nearly 25 percent. The 13,395 returns filed with gross UBI of $10,000 or less represented a 6 percent increase over 2001, but a 40 percent decrease since 1998. The number of returns with gross UBI over $10,000 fell by 10 percent over the 4-year period. Figure A contains these and other statistics for selected major financial data items reported on Forms 990-T for Tax Years 1998, 2001, and 2002. Gross UBI reported on Forms 990-T, which was an aggregate $7.8 billion for 2002, grew by 11 percent between 1998 and 2000, but then declined by 8 percent from 2000 to 2002, resulting in an overall 2.5 percent growth from 1998 to 2002. After offsetting total gross UBI with $7.9 billion of total deductions, the resulting unrelated business taxable income (less deficit) was -$0.1 billion for 2002. Unrelated business (positive) taxable income (UBTI) of $647.2 million and the associated unrelated business income tax (UBIT) of $194.1 million reported on Tax Year 2002 Forms 990-T were a respective 18 percent and 1 percent less than that reported for 2001 [1]. From 1998 to 2002, taxable income and the associated UBIT liability declined sharply, by 61 percent and 62 percent, respectively. Figure B shows the computation of total tax liability for Tax Year 2002. After adjusting UBIT with certain credits and other taxes, the resulting total tax reported on Form 990-T for 2002 was $192.7 million, a 13 percent decrease from 2001. Total tax for 2002 takes into account $194.1 million of UBIT, plus $1.1 million of alternative minimum tax, $1.1 million of “proxy tax” on certain nondeductible lobbying and political expenditures, and $0.07 million of “other” taxes, minus $3.6 million of tax credits [2, 3].
Tax credits included the foreign tax credit ($1.6 million), general business credit ($1.4 million), credit for prior-year minimum tax ($0.3 million), and “other” credits ($0.2 million). (Detail does not equal totals because of rounding.)
Declines in Unrelated Business Taxable Income and Tax
Margaret Riley is a statistician with the Special Studies Special Projects Section. This article was prepared under the direction of Barry W. Johnson, Chief.
The decline between 1998 and 2002 in the UBTI of tax-exempt trusts was much greater than the decline in the UBTI of tax-exempt corporations [4]. As a result of the more rapid decline in the UBTI reported by tax-exempt trusts, the share of UBTI reported by tax-exempt corporations increased from 51 percent to 70 percent, respectively, of the total amount of UBTI reported for 1998 and 2002 [5]. The $192.6 million of UBTI reported by tax-exempt trusts for 2002 reflected a 76 percent drop from the $811.1 million reported for 1998, while the UBTI reported by tax-exempt corporations declined by 47 percent, from $858.7 million to $454.6 million between 1998 and 2002. The UBIT liability of trusts decreased by 72 percent during this 4-year period, while that of taxexempt corporations declined by 52 percent. In large part, the decline in the amount of UBTI reported by trusts filing Forms 990-T can be attributed to IRC section 501(c)(9) voluntary employees’ beneficiary associations (VEBAs) and section 401(a) pension, profit-sharing, and stock bonus plans [6]. (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.) These organizations together accounted for a respective 92 percent and 78 percent of the UBTI of trusts for 1998 and 2002. The UBIT of VEBAs fell by 83 percent between the 4 years, and that of section 401(a) trusts fell by 68 percent. Among the many factors that can influence the amount of an organization’s unrelated business taxable income and tax, the types of unrelated business activities in which they engage, and which generate their various types of unrelated business income, are key. Volatility of financial markets during the 1999 to 2002 period appears to be responsible for some of the annual decreases in unrelated business taxable income and tax reported, especially by tax-exempt trusts. Since these types of entities’ main source of income is investments, the annual amounts of total
57
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
Figure A
Selected Items from Forms 990-T, Exempt Organization Business Income Tax Returns, Tax Years 1998, 2001, and 2002
[Money amounts are in thousands of dollars] Item 1998 (1) Number of returns, total.......................................................................... With gross unrelated business income of $10,000 or less¹..................... With gross unrelated business income over $10,000¹............................. With unrelated business taxable income.................................................. Without unrelated business taxable income² ......................................... Gross unrelated business income.......................................................... Total deductions³ ................................................................................ Unrelated business taxable income (less deficit)................................. Unrelated business taxable income ....................................................... Deficit ..................................................................................................... Unrelated business income tax.............................................................. Total tax..................................................................................................... 46,208 22,124 24,084 24,332 21,876 7,584,915 6,484,443 1,100,470 1,669,753 569,283 505,896 464,288 2001 (2) 35,540 12,653 22,888 15,277 20,264 7,900,464 7,882,907 17,557 791,963 774,406 226,032 221,532 2002 (3) 35,103 13,395 21,708 14,495 20,608 7,776,017 7,922,208 -146,191 647,246 793,438 194,074 192,747 Percentage change 2001 to 2002 (4) -1.2 5.9 -5.2 -5.1 1.7 -1.6 0.5 -932.7 -18.3 2.5 -14.1 -13.0 1998 to 2002 (5) -24.0 -39.5 -9.9 -40.4 -5.8 2.5 22.2 -113.3 -61.2 39.4 -61.6 -58.5
¹ Organizations with gross unrelated business income (UBI) between $1,000 (the filing threshold) and $10,000 were not required to report itemized expenses and deductions, or to complete return schedules. Those with gross UBI over $10,000 were required to fill out a more detailed "complete" return. ² Includes returns with deficits and returns with equal amounts of gross unrelated business income and total deductions. ³ 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). Total cost of sales and services was $2.1 billion for 1998, $2.3 billion for 2001, and $2.4 billion for 2002. 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, unrelated business taxable income (less deficit), unrelated business income tax, and total tax.
58
58
UBI that they report are linked more closely to financial market fluctuations than UBI amounts reported by other types of organizations. The two main sources of UBI for section 501(c)(9) VEBAs consistently have been investment income (less loss) and capital gain net income. For the section 401(a) trusts, combined partnership and S corporation income and capital gain net income are the two main UBI producers. For tax-exempt corporations, the two largest sources of unrelated business income traditionally have been gross profit (less loss) from sales and services, and advertising income. Generally, investment income of section 501(c) corporations, except for those exempt under sections 501(c)(7), (9), and (17), is not taxed as unrelated business income. (See the definition of Investment Income (Less Loss) in the Explanation of Terms section of this article.) Between 1998 and 2002, investment income (less loss) and capital gain net income reported by section 501(c)(9) VEBA trusts with taxable income were 77 percent and 93 percent less than respective amounts reported for 1998. These two income items ac-
counted for 95 percent of taxable VEBA trusts’ gross UBI for 2002. Capital gain net income and combined partnership and S corporation income of section 401(a) trusts fell by a respective 74 percent and 64 percent between the 2 years, and 88 percent of gross UBI was attributable to these items for 2002. Incorporated organizations with taxable unrelated business income reported a 9 percent increase in gross profit (less loss) from sales and services and a 16 percent increase in advertising income between 1998 and 2002. Together, these income sources accounted for 67 percent of their 2002 gross UBI. The number of trusts with positive UBTI decreased by 71 percent from 1998 to 2002, from 11,044 to 3,156, compared to a decline of 15 percent for corporations, from 13,395 to 11,339. Most of the decline in the number of trusts was accounted for by the 77 percent decline in the number of IRC section 408(e) traditional IRA trusts reporting UBTI, from 9,741 to 2,253. However, these organizations accounted for only 4 percent to 5 percent of all trusts’ UBTI for each of the 2 years. A substantial portion of the gross UBI of smaller traditional IRA trusts
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
Figure B
Computation of Total Tax Reported on Exempt Organization Business Income Tax Returns, Tax Year 2002
[Money amounts are in thousands of dollars] Item Total unrelated business income tax (UBIT)....................... Corporate UBIT...................................................................... Trust UBIT............................................................................. PLUS: Total additional taxes............................................................ Alternative minimum tax...................................................... Proxy tax¹ ............................................................................ Other taxes.......................................................................... MINUS: Total tax credits..................................................................... Foreign tax credit................................................................. General business credit....................................................... Credit for prior-year minimum tax........................................ Other credits........................................................................ EQUALS: Total tax..................................................................................
1
Amount 194,074 126,652 67,422
2,234 1,061 1,104 69
Unrelated business income is produced from an activity that is both conducted on a regular basis and 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 [7]. Any profits from an organization’s unrelated business activities are taxed at regular corporate or trust income tax rates [8]. There are certain exclusions to this income taxation; some examples are engaging in business activities in which substantially all of the work is performed by volunteer labor; selling merchandise that the organization received as a gift or contribution; and operating certain games of chance, as specified in the Internal Revenue Code (IRC). Form 990-T Filing Requirements Organizations that are described in IRC sections 220(e), 401(a), 408(e), 408A, 501(c)(2)-(27), 529(a), and 530(a) must file a Form 990-T if they received $1,000 or more of gross income from business activities that were considered unrelated to the purposes for which they received tax-exempt status. IRC section 501(d) religious and apostolic organizations, farmers’ cooperatives, and section 4941(a)(1) “nonexempt charitable trusts” report taxes on forms other than Form 990-T. 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). IRC section 501(c)(3) private foundations and certain charitable trusts file an information return on Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation [9]. The 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.
59
3,562 1,617 1,434 262 248
192,747
Represents the tax for only those organizations that reported gross UBI above the $1,000 filing threshold. According to IRS Business Returns Transaction File records, the total proxy tax reported on all Forms 990-T was $12.1 million. Some organizations filed Form 990-T only to report the proxy tax and had no unrelated business income. NOTE: Detail may not add to totals because of rounding.
(those with gross income of $10,000 or less) consists of combined partnership and S corporation income. Changes in the gains or losses from partnerships and S corporations can affect whether small IRA trusts’ total gross UBI is above or below the $1,000 threshold for filing Form 990-T. For example, the number of returns filed by traditional IRA trusts fell by 32 percent between 1998 and 1999, and the amount of net partnership and S corporation income decreased by 52 percent.
Background
Definition of Unrelated Business Income Nonprofit organizations that are granted Federal tax exemption based on their mission-related purposes are allowed, within certain limits, to generate income from unrelated business activities; however, the income from these activities is subject to taxation.
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
60
To report unrelated business income of $1,000 (the filing threshold) or more for Tax Year 2002, IRC section 220(e), 401(a), 408(e), 408A, and 530(a) trusts’ required reporting period was Calendar Year 2002, and the Form 990-T filing date was April 15, 2003. For all other organizations, the required reporting period was any accounting period beginning in Calendar Year 2002 (and, therefore, ending between December 2002 and November 2003, for full-year return filers). The associated required due dates for filing their Tax Year 2002 Forms 990-T generally spanned May 2003 to April 2004, but extensions of time to file beyond this period were routinely granted to many organizations. Corresponding to the required filing dates, the Tax Year 2002 study sample was drawn from Forms 990-T processed by IRS throughout Calendar Years 2003 and 2004. (See the “Data Sources and Limitations” section of this article for detailed information on the study sample.) Because of the various accounting periods of the organizations filing a 2002 return, the financial activities covered in this article span the period January 2002 through November 2003, although 54 percent of Form 990-T filers had Calendar Year 2002 accounting periods. Any returns filed by organizations with gross unrelated business income (UBI) below the $1,000 filing requirement threshold were excluded from the statistics presented in this article. Some of these returns were filed inadvertently; others were filed for a specific reason, such as to claim a refund of tax withheld erroneously on interest or dividend payments (reported on Form 1099) because the payer did not realize that the payee was a tax-exempt organization. Organizations with gross UBI between $1,000 and $10,000 were required to report only totals for expenses and deductions (except for the “specific deduction” and “net operating loss deduction,” which all organizations reported separately). Organizations with gross UBI over $10,000 were required to report more detailed expense and deduction information. Statistical Tables At the end of this article, Tax Year 2002 statistics covering selected financial data (including gross UBI, total deductions, unrelated business taxable income (UBTI), and total income tax) are shown in Tables 15. Tables 6 and 7 provide data on detailed sources of UBI and deductions, respectively. Statistics shown in Table 1 are distributed by type of organization based
on Internal Revenue Code sections. Tables 2, 4, 6, and 7 are distributed by size of gross UBI; Table 4 is also distributed by type of entity. Table 3 is distributed by size of UBTI, while Table 5 is distributed by unrelated business activity or industrial grouping.
Special Analyses of Exempt Organization Reporting Quality
Reporting Quality With the advent of electronic filing and imaging of IRS exempt-organization information returns and their widespread availability to the public, the quantity of data available for regulation and research has increased dramatically. Technological improvements that make more data more accessible are certainly desirable, but ensuring that preparers fill out the forms completely and accurately is equally important. Is “more” really better without quality reporting of return information? Ensuring reporting quality is a shared responsibility of both IRS and return preparers. IRS information and tax forms must require information that is essential for effective regulation, oversight, and public transparency; and the form instructions must be complete, explicit, and clear enough for preparers to follow. Preparers need to be diligent in providing complete responses to the requested information on the forms, especially itemized financial components. Form 990-T Deductions Allocation Study The deductions allocation study measures the extent to which high-income organizations (those with gross UBI of $500,000 or more) misreported specifically defined, itemized deduction components as “Other deductions” on Tax Year 2002 Forms 990-T. During the data entry process, SOI staff check the required Other deductions statement for inaccurately reported items and move (allocate) amounts, when appropriate, to one or more of the specifically defined deduction components, such as Salaries and wages. The study examined the difference between deduction amounts as initially reported by filers, and as corrected, through allocation, by SOI staff [10]. During normal IRS processing of paper and e-file returns, data are captured as reported by the return filer. Misreported amounts included in the residual “other” categories are not allocated to the proper, specifically defined return line items. Researchers
60
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
and IRS staff who use Returns Transaction File (RTF) data for examination or administrative purposes may find this study useful for gauging the extent to which deductions data may be understated, and extrapolating its results to draw conclusions about the possible understatement of itemized income, deductions, assets, and liabilities reported on other types of IRS exempt-organization returns. Of the 2,381 high-income returns filed, 20 percent required at least one allocation from Other deductions during SOI data entry. Paid preparers completed 79 percent of these 485 returns with misreported amounts [11]. After allocation, the increase in the total amount of each specifically defined deduction category reported by high-income filers ranged from 3 percent to 45 percent, as shown in Figure C. Salaries and wages, the largest aggregate itemized deduction reported on Form 990-T, rose
by only 3 percent, although it contained the largest aggregate amount allocated from Other deductions. Contributions to deferred compensation plans rose by 14 percent, and Repairs and maintenance rose by 45 percent. Allocations made to other types of itemized deductions resulted in increases ranging from 4 percent to 9 percent. The residual Other deductions category fell by 3.1 percent. It is worth noting that no allocations were made to Compensation of officers, directors, and trustees, Excess exempt expenses, or Excess readership costs. Form 990-T filers must provide detailed information on related schedules for these items and then enter schedule totals in the itemized deductions statement. The schedule preparation requirement apparently deters preparers from including these items in Other deductions.
Figure C
All High-Income Forms 990-T: Deduction Detail, As Edited by SOI, As Reported by Taxpayer, and Aggregate Amount Allocated, Tax Year 2002
[Money amounts are in thousands of dollars]
Item
Number of returns............................................... Total, as edited by SOI........................................ Total, as reported by taxpayer............................. Amount allocated from Other deductions............ Percentage increase after allocation................... Item
Compensation of officers, directors, and trustees (1) 2,381 16,563 16,563 --Taxes and licenses (6)
Salaries and wages (2) 1,393 1,059,609 1,027,583 32,027 3.1 Charitable contributions (7)
Repairs and maintenance (3) 943 70,135 48,469 21,667 44.7 Depreciation (8)
Bad debts (4) 287 41,349 39,741 1,608 4.0 Depletion (9) 7 1,790 1,790 --Excess readership costs (13) 399 217,549 217,549 ---
Interest (5) 413 39,180 37,090 2,090 5.6 Contributions to deferred compensation plans (10) 175 9,679 8,471 1,207 14.3 Other deductions (14) 1,751 2,465,018 2,543,794 -78,776 -3.1
Number of returns............................................... Total, as edited by SOI........................................ Total, as reported by taxpayer............................. Amount allocated from Other deductions............ Percentage increase after allocation................... Item
1,117 73,644 67,727 5,917 8.7
234 23,274 21,787 1,487 6.8 Employee benefit programs (11)
1,041 140,164 135,169 4,995 7.3 Excess exempt expenses (12) 40 6,397 6,397 ---
Number of returns................................................................................. Total, as edited by SOI......................................................................... Total, as reported by taxpayer.............................................................. Amount allocated from Other deductions............................................. Percentage increase after allocation.....................................................
1,018 175,184 167,406 7,778 4.6
NOTES: "High-income" Forms 990-T are those returns with gross unrelated business income of $500,000 or more. "SOI" is the abbreviation for the Statistics of Income program of the Internal Revenue Service. Other deductions did not include any amounts of Compensation of officers, directors, and trustees, Excess exempt expenses, Excess readership costs, or Depletion. Therefore, no allocations to these categories were necessary. For the first three of these items, Form 990-T filers must provide detailed information on related schedules and then enter schedule totals in the itemized deductions statement. The schedule preparation requirement apparently discourages filers from including these items in Other deductions.
61
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
As shown in Figure D, which includes only those returns to which allocations were made, the three deduction items with the largest aggregate dollar amount allocated from Other deductions were Salaries and wages ($32.0 million allocated), Repairs and maintenance ($21.7 million allocated), and Employee benefit programs ($7.8 million allocated). Among returns to which allocations were made, allocated amounts accounted for close to half of the SOIedited amount of Salaries and wages, and threequarters or more of the other two cited deduction items. The largest average dollar amounts allocated from Other deductions were made to Salaries and wages ($344,372), Net depreciation ($92,503), Repairs and maintenance ($89,164), and Employee benefit programs ($84,544). The deduction items with the highest frequency of allocation of misreported taxpayer amounts were Repairs and maintenance (243 returns), Taxes and licenses (180
returns), Salaries and wages (93 returns), and Employee benefit programs (92 returns). Overall, close to 10 percent of Other deductions reported on returns with allocations should have been included in the more specifically defined deduction items. The percentage change in itemized deduction amounts reported on these 485 returns, after SOI allocations were made, ranged from 12.5 (Salaries and wages) to 106.7 (Repairs and maintenance). Virtually all of the SOI edited amounts shown in Figure D for Bad debts, Interest, Charitable contributions, and Contributions to deferred compensation plans were allocated from Other deductions. Nearly 99 percent of these items’ combined SOI edited amounts was allocated from Other deductions, but the combined amounts accounted for less than 1 percent of the $753,388 Other deductions total. For the five deduction items with the largest aggregate allocated amounts shown in column (5) of Figure D,
Figure D
High-Income Forms 990-T with At Least One Allocation Made from Other Deductions: Deductions Detail, Tax Year 2002
[Money amounts are in thousands of dollars] Number of returns with allocations ¹ (1) Other deductions................................................................ Compensation of officers, directors, and trustees.............. Salaries and wages............................................................ Repairs and maintenance................................................... Bad debts........................................................................... Interest ……....................................................................... Taxes and licenses............................................................. Charitable contributions...................................................... Depreciation....................................................................... Depletion…......................................................................... Contributions to deferred compensation plans.................. Employee benefit programs............................................... Excess exempt expenses................................................... Excess readership costs..................................................... 485 -93 243 32 39 180 22 54 -26 92 --Percentage of all returns with allocations ¹ (2) 100.0 -19.2 50.1 6.6 8.0 37.1 4.5 11.1 -5.4 19.0 --SOIedited amount Taxpayer reported amount Percentage of SOI-edited amount allocated from Other deductions (6) N/A -47.1 75.1 99.4 99.8 36.5 97.6 83.2 -97.2 78.6 ---
62
Deduction item
Allocated amount
(3) 753,388 -68,069 28,840 1,618 2,094 16,213 1,524 6,004 -1,242 9,897 ---
(4) 832,164 -36,043 7,174 10 4 10,296 37 1,009 -34 2,119 ---
(5) -78,776 -32,027 21,667 1,608 2,090 5,917 1,487 4,995 -1,207 7,778 ---
¹ Detail does not add to total because some returns had allocations made to more than one deduction item. N/A--Not applicable. However, on returns with at least one allocation, 9.5 percent of the total amount of aggregate Other deductions was allocated to one or more specifically defined deduction items. NOTES: "High-income" Forms 990-T are those returns with gross unrelated business income of $500,000 or more. "SOI" is the abbreviation for the Statistics of Income program of the Internal Revenue Service. Other deductions did not include any amounts of Compensation of officers, directors, and trustees, Excess exempt expenses, Excess readership costs, or Depletion. Therefore, no allocations to these categories were necessary. For the first three of these items, Form 990-T filers must provide detailed information on related schedules and then enter schedule totals in the itemized deductions statement. The schedule preparation requirement apparently discourages filers from including these items in Other deductions.
62
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
their respective allocated amounts were between 37 percent to 83 percent of their associated SOI-edited amounts. The proportions of the SOI-edited (corrected) amount attributed to taxpayer reporting and SOI allocation for these deduction items are illustrated in Figure E. Sixty-eight percent of the high-income returns that required SOI allocations of misreported amounts were filed by section 501(c)(3) nonprofit organizations; the remainder were filed by organizations exempt under other sections of the tax code. Section 501(c)(6) business leagues, chambers of commerce, and real estate boards; section 501(c)(7) social and recreational clubs; section 501(c)(4) civic leagues and social welfare organizations; and section 501(c)(5) labor, agricultural, and horticultural organizations accounted for another 30 percent of all highincome returns that required allocations from Other deductions to specifically defined components. Fig-
ure F presents selected allocation study data for these organizations. While section 501(c)(3) charities had the highest frequency of returns with allocations, the percentage of their Other deductions allocated to more specifically defined deduction categories was smaller than that for section 501(c)(6), (7), and (5) organizations. The three primary unrelated business activities reported most often by organizations with allocations from Other deductions, based on self-reported North American Industry Classification System (NAICS) codes and percentage of returns with allocations, were medical and diagnostic laboratories (14 percent), gambling industries (9 percent), and advertising and related services (6 percent). A list of acceptable NAICS codes used to describe organizations’ unrelated business activities was provided with the 2002 Form 990-T instructions. These activities are included within the major NAICS industrial classifica-
Figure E
High-Income Forms 990-T with At Least One Allocation Made from Other Deductions: Top Five Deduction Items with Largest Amounts Allocated, Tax Year 2002
SOI-Edited Amount (Millions of dollars) 70.0 60.0 Allocated amount 50.0 40.0 30.0 20.0 10.0 0.0 Salaries and wages Repairs and maintenance Employee benefit programs Deduction Item
NOTES: "High-income" Forms 990-T are those returns with gross unrelated business income of $500,000 or more. "SOI" is the abbreviation for the Statistics of Income program of the Internal Revenue Service.
Reported amount
Taxes and licenses
Depreciation
63
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
Figure F
High-Income Forms 990-T with At Least One Allocation Made from Other Deductions: Top Five Organization Types1, by Number of Returns With Allocations, Tax Year 2002
[Money amounts are in thousands of dollars]
Type of organization by Internal Revenue Code section
Number of returns
Percentage of all returns
(1) All organizations........................................ 501(c)(3) charities²............................................ 501(c)(6) business leagues, chambers of commerce, and real estate boards............................................ 501(c)(7) social and recreational clubs................................................................ 501(c)(4) civic leagues and social welfare organizations............................ 501(c)(5) labor, agricultural, and horticultural organizations...............................
1
(2) 100.0 68.0
Total amount allocated from organization type's other deductions (3) 78,776 56,444
Allocated amount as a percentage of organization type's other deductions (4) 9.5 9.6
Deduction item with largest aggregate allocated amount (5) Salaries and wages Salaries and wages Employee benefit programs Salaries and wages Salaries and wages Taxes and licenses
Average amount allocated to deduction item in col. (5) (6) 344 435
485 330
51 35 24 14
10.5 7.2 4.9 2.9
5,630 5,116 2,453 2,811
23.8 29.0 2.2 13.8
146 202 444 172
Tax-exempt organization types are based on the Internal Revenue Code section describing them. See the Appendix to this article for descriptions of the types of tax-exempt organizations.
64
The term "charities" 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. NOTE: "High-income" Forms 990-T are those returns with gross unrelated business income of $500,000 or more.
2
tions of healthcare and social assistance; arts, entertainment, and recreation; and professional, scientific, and technical services, respectively. (See Table 5 for data distributed by major unrelated business activities/ industrial groupings for all Form 990-T filers.) The deductions allocation study makes it clear that Form 990-T preparers, as well as preparers of other types of exempt-organization returns, could do a much better job of accurately reporting all-inclusive amounts within the specifically defined deduction components. In order for IRS to make intelligent decisions regarding regulation, compliance, or potential abuses of tax-exempt status, it is imperative that a high priority be placed on educating nonprofit organizations and their tax practitioners to report detailed items completely and accurately. Also, because exempt organizations are not allowed to file supplementary electronic financial statements with e-filed returns (they must provide financial data in the IRS format), there is concern that if the data provided are
64
incorrect or incomplete, there will be no additional information available with the e-filed returns, as there is with paper returns, that can be used to correct these reporting errors. Comparing and Reconciling Unrelated Business Income Data Reported on Forms 990 and 990-T An analysis of Tax Year 2002 data from 2,894 linked records in the Forms 990 and 990-T “integrated sample” of section 501(c)(3) public charities concludes that unrelated business income (UBI) reported on Form 990-T oftentimes cannot be reconciled with that reported on Form 990. (See the Data Sources and Limitations section of this article for a description of the Forms 990 and 990-T integrated sample design.) Anecdotal information from reviewed cases indicates that the data entered on Form 990-T are much more accurate, perhaps because the purpose of Form 990-T is to calculate tax liability, which carries a greater potential for the assessment of monetary
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
penalties for misreporting than Form 990, whose purpose is to supply information only. Applying Form 990 weights to the sample records produced an estimated population of 8,992 public charities that were required to file both a Form 990 and a Form 990-T. The main sources of data for this analysis were Form 990, Part VII, Analysis of IncomeProducing Activities, and Form 990-T, Part I, Unrelated Trade or Business Income. Form 990, Part VII, provides a three-tiered breakout of an organization’s total revenue (excluding any contributions, gifts, and grants received from Government or public sources): potentially taxable UBI reportable on Form 990-T, UBI excluded from taxation under the Internal Revenue Code, and mission-related (exempt function) income. Form 990-T, Part I, contains a statement of gross UBI, direct expenses, and net UBI. As illustrated in Figure G, the Form 990 returns in the integrated sample were separated into three groups based on potentially taxable UBI reported in Part VII: those with positive total UBI (80 percent of all returns), those with zero UBI (13 percent of all returns), and those with negative total UBI (7 percent of all returns). Within these groups, Form 990 total
UBI was compared to both total gross UBI and total net UBI reported in Part I of Form 990-T, and also compared to a computed amount of total “adjusted UBI.” Adjusted UBI is derived from a combination of Form 990-T gross and net itemized UBI amounts, based on their correlation to the combination of gross and net UBI amounts required to be reported in Part VII, Form 990. If organizations had reported income consistently on both forms, it was expected that the Form 990 total UBI amount would be the same as the Form 990-T adjusted UBI amount, a value that was no more than gross UBI and no less than net UBI, depending on what types of income were reported in each individual case. For this analysis, Form 990 UBI in most cases was deemed reconcilable with Form 990-T UBI if it matched any of gross UBI, adjusted UBI, or net UBI, within a $100 tolerance. (Cases in which no Form 990 total UBI was reported are discussed below.) Any case where Form 990 UBI equaled Form 990-T adjusted UBI, the expected outcome if UBI was correctly reported on both forms, was considered a “perfect match.” Of particular note, as shown in Figure H, is that, out of the 5,567 linked returns with reconciled total UBI, 80 percent were
Figure G
Reconciliation of Unrelated Business Income (UBI) Data Reported by Public Charities on Form 990 and Form 990-T, Tax Year 2002
[Money amounts are in thousands of dollars]
Item
Number of returns (1)
Percentage of all returns (2) 100.0 80.0 27.2 13.2 9.5 6.8 1.4
Form 990-T Form 990 UBI (3) 3,807,095 3,869,524 1,870,317 ---62,429 -29,903 Gross UBI¹ (4) 4,089,889 3,574,474 1,521,271 270,348 251,173 245,067 181,211 Net UBI (5) 3,343,626 3,009,050 1,253,569 225,634 229,754 108,942 131,100 Adjusted UBI ² (6) 3,771,948 3,411,944 1,433,963 236,913 234,908 123,091 132,128
Linked returns, total............................................................ Number with Form 990 UBI greater than zero.................. Number with UBI that could not be reconciled ³................ Number with Form 990 UBI equal to zero.......................... Number with UBI that could not be reconciled ³................ Number with Form 990 UBI less than zero........................ Number with UBI that could not be reconciled ³................
8,992 7,194 2,447 1,183 853 614 124
¹ All returns in the Form 990-T sample had gross unrelated business income of $1,000 (the filing threshold) or more. ² Adjusted UBI is derived from a combination of Form 990-T gross and net itemized UBI amounts, based on their correlation to the combination of gross and net UBI amounts required to be reported on Form 990. ³ The amount of total UBI reported on Form 990, Part VII, does not equal gross UBI, net UBI, or adjusted UBI (within $100 tolerance) reported on Form 990-T, Part I.
65
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
perfect matches of Form 990 UBI and Form 990-T adjusted UBI. UBI reported on nearly 4 out of every 10 Forms 990 could not be reconciled with UBI reported on Form 990-T, meaning that total UBI on Form 990 did not match gross UBI, net UBI, or adjusted UBI on Form 990-T, within the $100 tolerance. The reasons for the inconsistency are twofold: some filers reported a combination of gross and net taxable income that differed from that specified in the Form 990 instructions; other filers did not report taxable UBI on Form 990 at all. Of the 7,194 returns where the Form 990 UBI amount was positive, 34 percent could not be reconciled. In some observed cases, the Form 990 amounts simply did not correspond to any Form 990-T amounts. In many other cases, filers of Form 990 erroneously reported Gross receipts from sales
and services in Part VII, rather than Gross profit from sales and services, which is the net of gross receipts minus cost of goods sold. Gross profit, not gross receipts, should be included in total UBI on both Forms 990 and 990-T. Twenty-eight percent of the 1,183 organizations that reported no potentially taxable UBI amounts on Form 990 filed Form 990-T with net UBI that was negative. Organizations may have presumed that negative net UBI amounts need not be reported on Form 990. These cases were not deemed irreconcilable for this analysis. However, 72 percent of the organizations reporting no taxable UBI on Form 990 filed Form 990-T with positive amounts of gross, net, and adjusted UBI. There is no known reason for this, with the exception of some degree of nonreporting on Form 990.
Figure H
Linked Forms 990 and 990-T of Public Charities: Unrelated Business Income (UBI) Reconciliation Outcome, Tax Year 2002
66
Linked forms, total
100%
UBI reconciled ¹
62% of linked returns
UBI "perfect match" ²
49% of linked returns 80% of reconciled returns
UBI not reconciled
38% of linked returns
0
2,000
4,000
6,000
8,000
10,000
Number of returns
¹ For this analysis, Form 990 UBI was deemed reconcilable with Form 990-T UBI if it matched any of gross UBI, adjusted UBI, or net UBI on Form 990-T, within a $100 tolerance. Linked cases in which Form 990-T net UBI was negative and Form 990 UBI was zero were also deemed reconcilable. ² Any case where Form 990 UBI corresponded to Form 990-T adjusted UBI, the expected outcome if total UBI was reported correctly on both forms, was considered a "perfect match."
66
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
About one-fifth of the 614 organizations reporting negative UBI on Form 990 filed a Form 990-T with positive amounts of gross, net, and adjusted UBI. In some cases, negative amounts entered on Form 990 for Gain or loss from sales of investment assets were not reported on Form 990-T. As mentioned earlier, income from investments is generally not considered unrelated business income for public charities that file Forms 990 and 990-T. Therefore, net investment income or losses should be reported on Form 990 in Part I, but not in Part VII as UBI. An exception to the UBIT rules regarding investment income applies to public charities that produce income from debt-financed property, in which case the income is subject to the unrelated business income tax. Public charities are required to provide detailed information about income from debt-financed property on Form 990-T, Schedule E, Unrelated Debt-Financed Income. This schedule contains several financial items used to compute the amount of debt-financed income that is subject to UBIT. In the above described cases, where organizations
reported losses from sales of investment assets on Form 990, Part VII, there was no debt-financed income reported on Form 990-T, within Part I or on Schedule E. In other irreconcilable cases involving the reporting of debt-financed income, organizations reported debt-financed income on both forms, but 1) the Form 990 amount was negative, and the Form 990-T amount was either positive or a smaller negative; or 2) the amounts on both forms were negative and equal, but positive amounts of other UBI components that were reported on Form 990-T were not reported on Form 990. In many other irreconcilable cases, negative entries on Form 990 could not be correlated with any amount reported on Form 990-T. Figure I presents distributions, by organization size, of the 3,424 linked Form 990 and Form 990-T cases with total UBI that could not be reconciled [12]. The linked returns are grouped by the three categories of total UBI reported on Form 990 that were discussed above: greater than zero, equal to zero, and less than zero. Of the 8,992 Form 990 filers in the linked return study, 34 percent were small
Figure I
Linked Forms 990 and 990-T of Public Charities with Total Unrelated Business Income (UBI) That Could Not Be Reconciled, by Organization Size¹, Tax Year 2002
Number of returns 5,000 4,000 3,000 2,000 1,000 0 All linked returns Returns with UBI that UBI greater than zero could not be reconciled² UBI equal to zero UBI less than zero Small charities Medium charities Large charities
Value of Total UBI on Form 990
¹For purposes of analysis, "small" charities hold less than $1 million in book value of total assets; “medium"charities hold from $1 million to less than $50 million in book value of total assets; and “large" charities hold $50 million or more in book value of total assets. ²For this analysis, Form 990 UBI in most cases was deemed not reconcilable with Form 990-T UBI if it did not match any gross UBI, adjusted UBI, or net UBI Form 990-T amount within a $100 tolerance.
67
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
68
charities, 46 percent were medium charities, and 20 percent were large charities. The proportions of small, medium, and large charities shown in Figure I for all irreconcilable returns and for those irreconcilable returns with positive Form 990 total UBI are very similar to the size proportions found within the overall population of linked returns. That was not the case for irreconcilable returns where no Form 990 UBI was reported or Form 990 UBI was negative. Small charities had a greater tendency than medium and large charities to report total UBI on Form 990-T, but not on Form 990. They accounted for half of the 853 Forms 990 on which Form 990-T UBI was omitted. The relatively small number of cases with irreconcilable negative total UBI on Form 990 was attributable mainly to medium-size charities, which filed about three-quarters of these 124 returns. For each taxable UBI item entered on Form 990, the filer is instructed to provide an associated business activity code from a list of NAICS codes. In 36 percent of the linked Forms 990 and 990-T cases, the primary unrelated business activity indicated on the organization’s Form 990-T did not match any activity code reported in Part VII of Form 990 for each itemized taxable UBI amount. This, along with UBI reporting inconsistencies, seems indicative of preparers who fill out Form 990 and 990-T exclusive of any attempted reconciliation of reporting of information on the two forms. Researchers, both in and outside of IRS, use Form 990 to make assessments of nonprofits’ financial activities, operations, and programs. Form 990, Part VII, for example, provides data that should be useful for gauging how much of an organization’s income is from taxable unrelated business activities and what types of activities are producing the income. Currently, an IRS team is designing a revised Form 990 that will be geared toward obtaining data that will be useful for better regulation and oversight of nonprofit and other tax-exempt organizations. Taxpayer education, comprehensive IRS form instructions, and complete and accurate reporting by return preparers are vital for making the Form 990 a consistent and reliable tool for research and public accountability.
zation Business Income Tax Returns, for Tax Year 2002. Compared to Tax Year 2001, organizations reporting “unrelated business income” (UBI) filed only slightly fewer returns for 2002, but it was the fourth consecutive year for which filings of Form 990-T declined. From Tax Year 1998 to Tax Year 2002, the number of filings dropped nearly 25 percent. After offsetting $7.8 billion of total gross UBI with $7.9 billion of expenses and deductions, the resulting unrelated business taxable income (less deficit) for 2002 was $-0.1 billion. Unrelated business taxable income (UBTI) and the associated unrelated business income tax (UBIT) decreased by 18 percent and 14 percent, respectively, over amounts reported for 2001. For the 4 years between 1998 and 2002, UBTI and UBIT each declined by approximately 61 percent. This article contains analyses from two special studies of exempt-organization reporting quality on Form 990, Return of Organization Exempt from Income Tax, and Form 990-T. The Form 990-T deductions allocation study measures the extent to which high-income organizations (those with gross UBI of $500,000 or more) misreported specifically defined, itemized deduction components as “Other deductions” on Tax Year 2002 Forms 990-T. After allocation, the increase in the total amount of each specifically defined deduction category reported by high-income filers ranged from 3 percent to 45 percent. A second special study, comparing total unrelated business income (UBI) amounts reported on Forms 990 and 990-T, revealed that total UBI reported on nearly 4 out of every 10 Forms 990 could not be reconciled with total UBI reported on Form 990-T. The main reasons for this were twofold: some Form 990 filers reported a combination of gross and net taxable income that differed from the combination specified in the return form instructions; other filers did not report total UBI on Form 990 at all.
Data Sources and Limitations
Summary
68
During 2003 and 2004, tax-exempt organizations filed an estimated 35,103 Forms 990-T, Exempt Organi-
The Tax Year 2002 Form 990-T study incorporated a two-stage sample design consisting of a stratified random sample and a special “integrated” sample. The integrated sample was designed to gather information on “related” (tax-exempt) and “unrelated” (taxable) income and expenses for section 501(c)(3) organizations that filed both Form 990, Return of Organization Exempt from Income Tax
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
(or Form 990-EZ, the short-form version of this information return), and Form 990-T. This integrated sampling program ensured that the Statistics of Income sample of Forms 990-T included any unrelated business income tax returns (with gross UBI of $1,000 or more) filed by organizations whose Form 990 or Form 990-EZ information returns were selected for the separate sample of section 501(c)(3) nonprofit charitable organizations. Organizations exempt under other Code sections were not subjected to the integrated sampling program. The Form 990-T returns were initially divided into strata, based on gross UBI, and selected using Bernouli sampling. Section 501(c)(3) returns not selected randomly were then linked, by Employer Identification Number (EIN), to returns in the Forms 990/990-EZ sample. These linked returns, along with any randomly selected Forms 990-T that also had counterparts in the Forms 990/990-EZ sample,
formed the “integrated” IRC section 501(c)(3) portion of the Form 990-T sample [13]. As shown in Figure J, the designed sampling rates ranged from a minimum of 2 percent (Form 990-T gross UBI less than $20,000, with either no Form 990/990-EZ EIN match or an EIN match to a Code section 501(c)(3) Form 990/990-EZ 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 an EIN match to a section 501(c)(3) Form 990 with total assets of $30,000,000 or more). Other Forms 990-T were selected at rates ranging from 2 percent to 30 percent. In addition to designed sample rates, Figure J contains population counts, sample counts, 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 or Form 990-EZ.
Figure J
Population and Sample Counts, and Designed and Achieved Sample Rates, by Sample Group, Tax Year 2002
Sample group number 1 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 or Form 990-EZ ¹ Population counts (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 or Form 990-EZ....................... 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 or Form 990-EZ..................... 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 or Form 990-EZ................... 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 or Form 990-EZ................. Gross UBI $300,000 or more, or total assets $30,000,000 or more......................................... All sample groups ²................................................................................................................ 15,021 Sample counts (2) 317 Designed Achieved sample sample rate rate Percentages (3) (4) 2.00 2.11
2
6,853
301
4.00
4.39
3
5,580
532
10.00
9.53
4
2,950 4,832 35,236
942 4,832 6,924
30.00 100.00 N/A
31.93 100.00 N/A
5
N/A--Not applicable. ¹ 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 Forms 990 and 990-EZ sample of IRC section 501(c)(3) filers. Form 990-EZ may be completed by smaller organizations, those with gross receipts of less than $100,000 and end-of-year assets of less than $250,000. ² After excluding returns that were originally selected for the sample but later rejected, the sample size was 6,893, and the estimated population size was 35,103.
69
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
70
70
The population from which the 2002 Form 990-T sample was drawn consisted of Form 990-T records posted to the IRS Business Master File system during 2003 and 2004. Returns filed after Calendar Year 2004 were not included in the sample, unless a return was considered a large income-size case (over $300,000 or more of gross UBI). The returns in the sample were stratified based on the size of gross unrelated business income (UBI). A sample of 6,924 returns was selected from a population of 35,236. After excluding returns that were selected for the sample but later rejected, the resulting sample size was 6,893 returns, and the estimated population size was 35,103. Rejected returns included those that had gross UBI below the $1,000 filing threshold; were filed for a part-year accounting period for 2002, 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 2002. For example, a final return filed for the short period of January 2003-June 2003 may have been initially selected for the 2002 sample based on the criterion of an accounting period that ended between December 2002 and November 2003, but it was later rejected because, in actuality, it was a Tax Year 2003 return. The information presented in this article was obtained from returns as originally filed with the Internal Revenue Service. The data were subjected to comprehensive testing and correction procedures in order to improve statistical reliability and validity. In most cases, due to time constraints, changes made to the original return as a result of administrative processing, audit procedures, or a taxpayer amendment were not incorporated into the database. 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 K shows CVs for selected financial data. CVs are not shown for returns with gross UBI of $300,000 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 SOI Bulletin.
Figure K
Coefficients of Variation for Selected Items, by Size of Gross Unrelated Business Income, Tax Year 2002
Gross Unrelated Number unrelated Total business of returns business deductions taxable income income Coefficient of variation (percentages) (1) Total................................. $1,000 under $10,001 ¹....... $10,001 under $100,000 ¹... $100,000 under $300,000... $300,000 or more................ 0.15 2.69 2.77 2.43 N/A (2) 0.57 4.40 2.28 1.94 N/A (3) 0.59 10.87 2.93 2.35 N/A (4) 1.19 9.87 7.52 6.44 N/A (5) 1.05 11.94 9.47 7.38 N/A Total tax
Size of gross unrelated business income
N/A--Not applicable because the achieved sample rate was 100 percent. ¹ Organizations with gross unrelated business income (UBI) between $1,000 (the filing threshold) and $10,000 were not required to report itemized expenses and deductions, or to complete return schedules. Those with gross UBI over $10,000 were required to fill out a more detailed "complete" return.
Explanation of Selected Terms
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. This section provides definitions to help the reader understand the terms contained in the article and in Tables 1 through 7 at the end of the 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.) 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 part of gross receipts from sales and services. All other organizations reported this income separately.
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
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, capital gain net income on sales of debt-financed 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 a partnership or 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), was taxed as a capital gain or loss. (See the explanation of Investment 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 under the rules applicable to individual taxpayers, 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. Cost of Sales and Services.--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. Cost of sales and services was subtracted from gross
receipts from sales and services in computing gross profit (less loss) from sales and services, which is 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. 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 allocable to rental of personal property; those allocable to unrelated debt-financed income; those allocable to 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 and maintenance; bad debts; interest; taxes and licenses; depreciation (unless deducted elsewhere); depletion; contributions to deferred compensation plans; contributions to employee benefit plans; the “net operating loss deduction”; 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 deduction” (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 ex-
71
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
72
penses,” 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, Contributions, 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 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 manufactur-
ers. 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 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.)
72
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
A tax-exempt organization’s income was treated as unrelated business income if it was from a trade or business that was regularly carried on by the organization and that 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. Income from Controlled Organizations.-When an exempt organization controls another organization, the entire amount of gross annuities, interest, rents, and royalties (termed “specified payments”) received from the controlled organization are included in the gross UBI of the controlling organization, to the extent that the specified payments were claimed as a deduction from the controlled organization’s own UBI (in the case of an exempt controlled organization) or the “equivalent” of UBI (in the case of a nonexempt controlled organization). The equivalent of UBI was computed as if the nonexempt controlled organization 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. 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.) 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
73
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
74
74
on Form 990-T as a component of gross unrelated business income, and it was subtracted when computing total gross UBI. 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 Operating Loss Deduction (NOLD).--The net operating loss carryover or carryback (as described in Internal Revenue Code section 172) was allowed as a deduction (limited to the current-year excess of receipts over deductions, prior to applying the NOLD) 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 net operating loss deduction statistics in this article represent only net operating loss carryovers from prior years 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 government tax payments, if the payments were previously reported as a deduction. Proxy Tax.--This was a tax on certain nondeductible lobbying and political expenditures. A membership organization that was tax-exempt under Internal Revenue Code sections 501(c)(4), 501(c)(5), or 501(c)(6) was liable for the proxy tax if the organization did not notify its members of the shares of their dues that were allocated to the nondeductible lobbying and political expenditures, or if the notice did not include the entire amount of dues that was allocated. The proxy tax was computed as 35 percent of the aggregate amount of nondeductible lobbying expenditures that was not included in the notices sent to the organization’s members. 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 (and not included in gross UBI). Any rents not covered by 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.)
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
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 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 ($2.4 billion for 2002), which was subtracted from gross receipts from sales and services in computing gross profit (less loss) from sales and services, which is a component of gross unrelated business income (UBI). (See the explanation of Cost of Sales and Services.) 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 certain lobbying and political expenditures, the “alternative minimum tax,” and “other” taxes.
Unrelated Business Income (UBI).--See definition of Gross Unrelated Business Income (UBI). Unrelated Business Income Tax.--This was the tax imposed on unrelated business taxable income. It was determined based on the regular corporate or trust income tax rates that were in effect for the 2002 Tax Year, as shown in the following schedules. Tax Rates for Corporations Amount of unrelated business taxable income is: Of the But not amount Over— over— Tax is: over— $0 $50,000 15% $0 50,000 75,000 $7,500 + 25% 50,000 75,000 100,000 13,750 + 34% 75,000 100,000 335,000 22,250 + 39% 100,000 335,000 10,000,000 113,900 + 34% 335,000 10,000,000 15,000,000 3,400,000 + 35% 10,000,000 15,000,000 18,333,333 5,150,000 + 38% 15,000,000 18,333,333 -35% 0 Tax Rates for Trusts Amount of unrelated business taxable income is: Of the But not amount Over— over— Tax is: over— $0 $1,850 15.0% $0 1,850 4,400 $277.50 + 27.0% 1,850 4,400 6,750 966.00 + 30.0% 4,400 6,750 9,200 1,671.00 + 35.0% 6,750 9,200 -- 2,528.50 + 38.6% 9,200 Unrelated Business Taxable 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 (unrelated business taxable income), negative (deficit), or zero. Taxable income was subject to the unrelated business income tax. (See, also, explanations of Deductions Directly Connected With Unrelated Business Income and Deductions Not Directly Connected With Unrelated Business Income.)
75
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
76
Unrelated Debt-Financed Income.--Gross income from investment property for which acquisition indebtedness was 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 debt-financed 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.
for the proxy tax on certain nondeductible lobbying and political expenditures if the organization did not notify its members of the shares of their dues that were allocated to the nondeductible expenditures, or if the notice did not include the entire amount of dues that was allocated. (See “Proxy Tax” in the Explanation of Selected Terms section of this article for more information.) The proxy tax of $1.4 million shown in the total tax computation is only that reported by Form 990-T filers with gross unrelated business income above the $1,000 filing threshold, a criterion for selection for the Statistics of Income (SOI) sample. Proxy tax reported by organizations that had no UBI or those that had UBI below the filing threshold is not included. According to IRS Business Returns Transactions File records, total proxy tax of $12.1 million was reported on Forms 990-T for Tax Year 2002. [3] 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 litigation. [4] All Form 990-T filers described under Internal Revenue Code sections 220(e) (Archer Medical Savings Accounts), 401(a) (pension, profitsharing and stock bonus plans), 408(e) (traditional Individual Retirement Arrangement), 408A (Roth Individual Retirement Arrangement), 529(a) (Qualified State Tuition Plans), and 530(a) (Coverdall Education Savings Accounts) are trusts. The group of filers described under section 501(c) contains a mix of trusts and corporations, depending on an entity’s choice of organizational structure when it was created (defined in the organization’s articles of incorporation or association). See the Appendix to this article for a description of the various types of tax-exempt organizations subject to the unrelated business income tax provisions. [5] Most of the statistics on tax-exempt trusts and tax-exempt corporations presented in this
Notes and References
[1] The unrelated business income tax (UBIT) was imposed on the portion of a tax-exempt organization’s income produced from a trade or business that was conducted on a regular basis and was not substantially related to the organization’s tax-exempt mission. After reducing gross income by allowable deductions, any resulting positive net income was subject to UBIT. [2] 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 imposition of the unrelated business income tax or an organization’s involvement in unrelated business activities. A tax-exempt membership organization was liable
76
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
section are from unpublished data from Form 990-T SOI studies conducted for Tax Years 1998, 1999, and 2002. [6] Eighty-one percent of section 501(c)(9) voluntary employees’ beneficiary associations (VEBAs) that had taxable unrelated business income for 2002 were structured as trusts, and these trusts accounted for 98 percent of the unrelated business income tax liability of all VEBA’s filing Form 990-T for 2002. [7] 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, extent, and nature of the activities involved must be considered in relation to the size, extent, and nature 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. [8] The unrelated business income tax (UBIT) for exempt corporations and trusts was determined based on the regular corporate and trust income tax rates in effect for the tax year of the Form 990-T filing. 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 for Tax Year 2002 are included in the definition of Unrelated Business Income Tax, found in the Explanation of Selected Terms section of this article. [9] Churches, which are tax-exempt under Internal Revenue Code section 501(c)(3), are not required to apply for exemption unless they desire to obtain an Internal Revenue Service ruling, and they do not have to file a Form 990 information return. However, these churches are required to file Form 990-T if they received $1,000 or more of gross income from business activities that were considered unrelated to their religious purposes. For the most recent Form 990 annual data on organizations tax-exempt under Internal Revenue Code sections 501(c)(3) (excluding private foundations and most religious organizations) through 501(c)(9), see Arnsberger, Paul D., “Charities and Other TaxExempt Organizations, 2002,” Statistics of Income Bulletin, Fall 2005, Volume 25, Number 2. For the most recent data on private foundations, see Ludlum, Melissa, “Domestic Private Foundations, 1993-2002,” Statistics of Income Bulletin, Fall 2005, Volume 25, Number 2. Internal Revenue Code section 4947(a)(1) “nonexempt charitable trusts” and section 4947(a)(2) “split-interest trusts” are required to
77
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
report unrelated business income on Form 1041, Estate and Trust Income Tax Return, rather than Form 990-T. For information on splitinterest trusts, which file Form 5227, SplitInterest Trust Information Return, see Schreiber, Lisa, “Split-Interest Trusts, 2003,” Statistics of Income Bulletin, Spring 2006, Volume 25, Number 4. These reports, and statistical tables of nonexempt charitable trust data for 2002, are available from the IRS Tax Stats Web site at http://www.irs.gov/taxstats. [10] Data collected for the deductions allocation study were controlled to provide statistics solely on amounts of itemized deductions allocated from Other deductions. Any SOI adjustments made for reasons other than allocating, such as correcting math errors, are included in both the SOI adjusted amounts and the taxpayer reported amounts.
[11] The actual number of Tax Year 2002 largeincome Forms 990-T with allocations was 492. Seven returns could not be located for the study, and data on taxpayer entries of itemized deductions were not available from any other source. [12] For purposes of analysis, “small” public charities hold less than $1 million in book value of total assets; “medium” public charities hold from $1 million to less than $50 million in book value of total assets; and “large” public charities hold $50 million or more in book value of total assets. [13] For additional information on the Forms 990 and 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.
78
78
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
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 insurance 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 Traditional Individual Retirement Accounts (IRA's) Roth Individual Retirement Accounts (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 Labor, agricultural, and horticultural organizations
(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 Lodges 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 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
(5)
(6) (7) (8) (9)
Business leagues, chambers of commerce, real estate boards, and like organizations Social and recreational clubs Fraternal beneficiary societies and associations Voluntary employees' beneficiary associations (including Federal employees' voluntary beneficiary associations formerly covered by section 501(c)(10)) Domestic fraternal beneficiary societies and associations
(10)
(11)
Teachers' retirement fund associations
79
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
Appendix Types of Tax-Exempt Organizations Subject to the Unrelated Business Income Tax Provisions, by Internal Revenue Code Section--Continued
Code section 501(c)(12) Description of organization Benevolent life insurance associations, mutual ditch or irrigation companies, mutual or cooperative telephone companies, and like organizations General nature of activities Activities of a mutually beneficial nature implied by the description of the class of organization
(13) (14)
Cemetery companies State-chartered credit unions and mutual insurance or reserve funds 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
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 Providing services to veterans or their dependents; advocacy of veteran's issues; and promotion of patriotism and community service programs 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 multiple-employer pension fund Providing insurance and other benefits to veterans or their dependents Providing funds for employee retirement income
(15)
(16)
(17)
Supplemental unemployment benefit trusts
80
(18) (19)
Employee-funded pension trusts (created before June 25, 1959) Posts or organizations of past or present members of the armed forces
(21)
Black Lung Benefit Trusts
(22)
Withdrawal liability payment funds
(23) (24)
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
(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
80
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
Appendix Types of Tax-Exempt Organizations Subject to the Unrelated Business Income Tax Provisions, by Internal Revenue Code Section--Continued
Code section 501(c)(26) Description of organization State-sponsored high-risk health insurance plans General nature of activities Providing coverage for medical care on a not-forprofit basis to residents with pre-existing medical conditions that resulted in denied or exorbitantly priced traditional medical care coverage Pooled employers' funds providing reimbursements to employees for losses arising under workers' compensation acts; also, State-created, -operated, and -controlled organizations providing workers' compensation insurance to employers 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
(27)
State-sponsored workers' compensation reinsurance plans
529(a)
Qualified State Tuition Plans
530(a)
Coverdell Education Savings Accounts
NOTE: Corporations that are organized under an Act of Congress, and are instrumentalities of the United States, described in section 501(c)(1) of the Internal Revenue Code, are not subject to unrelated business income taxation. 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.
81
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
Table 1.--Number of Returns, Gross Unrelated Business Income (UBI), Total Deductions, Unrelated Business Taxable Income (Less Deficit), Unrelated Business Taxable Income, and Total Tax, by Internal Revenue Code Section Describing Type of Tax-Exempt Organization, Tax Year 2002
[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) All sections................................. 220(e)............................................... 401(a)............................................... 408(e)............................................... 408A................................................. 501(c)(2)........................................... 501(c)(3)........................................... 501(c)(4)........................................... 501(c)(5)........................................... 501(c)(6)........................................... 501(c)(7)........................................... 501(c)(8)........................................... 501(c)(9)........................................... 501(c)(10)......................................... 501(c)(11)......................................... 501(c)(12)......................................... 501(c)(13)......................................... 501(c)(14)......................................... 501(c)(15)......................................... 501(c)(16)......................................... 501(c)(17)......................................... 501(c)(18)......................................... 501(c)(19)......................................... 6 501(c)(21) ....................................... 501(c)(22)......................................... 501(c)(23)......................................... 501(c)(24)......................................... 501(c)(25)......................................... 501(c)(26)......................................... 501(c)(27)......................................... 529(a)............................................... 530(a)...............................................
5
Total deductions 1,2 Number of returns (3) 34,977 -334 2,300 ** 286 12,795 1,462 2,078 5,483 6,325 595 733 245 -231 Amount (4) 7,922,208 -31,491 3,288 ** 91,473 5,005,814 448,785 242,656 911,889 486,541 128,594 252,661 25,193 -77,279
Unrelated business taxable income (less deficit) Number of returns (5) 27,230 -325 2,253 ** 229 9,852 878 1,545 3,889 5,400 338 426 206 -182 Amount (6) -146,191 -48,467 9,837 ** -3,756 -284,924 -11,456 -1,400 12,452 7,983 1,444 94,892 -1,231 -631
Unrelated business taxable income (7) 647,246 -49,652 9,837 ** 11,099 288,853 14,598 19,360 73,346 50,067 3,931 102,233 1,922 -7,357
3
Total tax 4 Number of returns (8) 14,511 -249 2,206 ** 84 4,183 214 651 1,762 3,662 221 395 41 -102 Amount (9) 192,747 -16,591 3,373 ** 3,487 86,001 3,855 5,126 20,775 10,680 709 35,744 351 -2,499
(2) 7,776,017 -79,958 13,124 ** 87,717 4,720,890 437,329 241,256 924,341 494,524 130,038 347,553 23,962 -77,910
35,103 -381 2,300 ** 286 12,803 1,484 2,079 5,483 6,372 595 733 245 -231
82
*114
123 ** ---1,799 ---**
*3,470
45,949 ** ---135,489 ---**
*114
123 ** ---1,799 ---**
*3,034
56,372 ** ---139,487 ---**
*114
121 ** ---1,397 ---**
*436
-10,423 ** ----3,998 ---**
*997
4,026 ** ---6,795 ---**
*102
84 ** ---483 ---**
*211
1,224 ** ---1,094 ---**
*25
-** ---
*1,732
-** ---
*25
-** ---
*1,245
-** ---
*25
-** ---
*488
-** ---
*641
-** ---
*23
-** ---
*96
-** ---
82
*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 $2.4 billion. ² Includes both expenses and deductions reported on Form 990-T, lines 13(B) and 34, respectively. ³ Includes only positive amounts of unrelated business taxable income. 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 the "alternative minimum tax," the "proxy" tax on nondeductible lobbying and political expenditures, and "other" taxes. 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 $1.1 million. 5 Corporations that are organized under an Act of Congress and are instrumentalities of the United States, described in section 501(c)(1) of the Internal Revenue Code, are not subject to unrelated business income taxation. 6 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 descriptions of the types of tax-exempt organizations filing Form 990-T, by the Internal Revenue Code section describing them.
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
Table 2.--Number of Returns, Gross Unrelated Business Income (UBI), Total Deductions, Unrelated Business Taxable Income (Less Deficit), Unrelated Business Taxable Income, and Total Tax, by Size of Gross UBI, Tax Year 2002
[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) Total................................................ $1,000 under $10,001 ....................... $10,001 under $100,000 .................... $100,000 under $500,000................... $500,000 under $1,000,000................ $1,000,000 under $5,000,000............. $5,000,000 or more.............................
5 5
Total deductions Number of returns (3) 34,977 13,348 13,266 5,986 1,138 997 242 Amount (4) 7,922,208 62,733 541,776 1,339,646 798,162 2,041,214 3,138,677
1,2
Unrelated business taxable income (less deficit) Number of returns (5) 27,230 10,310 10,389 4,722 853 769 187 Amount (6) -146,191 -8,991 -33,619 -33,138 -3,324 -18,543 -48,577
Unrelated business taxable income (7) 647,246 13,624 71,541 136,918 69,732 194,002 161,429
3
Total tax 4 Number of returns (8) 14,511 6,868 4,584 2,237 410 329 82 Amount (9) 192,747 2,444 13,280 36,772 21,231 64,471 54,549
(2) 7,776,017 53,742 508,157 1,306,509 794,839 2,022,671 3,090,100
35,103 13,395 13,341 5,987 1,139 999 242
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 $2.4 billion. ² Includes both expenses and deductions reported on Form 990-T, lines 13(B) and 34, respectively. ³ Includes only positive amounts of unrelated business taxable income.
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 the "alternative minimum tax," the "proxy" tax on nondeductible lobbying and political expenditures, and "other" taxes. 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 $1.1 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 (not required to report itemized expenses and deductions, or to complete return schedules) and all other Form 990-T filers (required to file a more detailed "complete" return). 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.
83
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
Table 3.--Number of Returns, Gross Unrelated Business Income (UBI), Total Deductions, Unrelated Business Taxable Income (Less Deficit), Unrelated Business Taxable Income, and Total Tax, by Size of Unrelated Business Taxable Income or Deficit, Tax Year 2002
[All figures are estimates based on samples--money amounts are in thousands of dollars]
Gross Number Size of unrelated business taxable income or deficit of returns unrelated business income (UBI) (1) Total...................................................... Deficit........................................................ Zero ......................................................... $1 under $1,000........................................ $1,000 under $10,000............................... $10,000 under $100,000........................... $100,000 under $500,000......................... $500,000 under $1,000,000...................... $1,000,000 or more...................................
4
Total deductions Number of returns (3) 34,977 12,735 7,873 3,232 6,606 3,588 740 91 112 Amount (4) 7,922,208 4,260,153 1,872,093 59,225 245,392 544,351 490,728 160,677 289,591
1,2
Unrelated business taxable income (less deficit) Number of returns (5) 27,230 12,735 -3,232 6,653 3,663 741 92 114 Amount (6) -146,191 -793,438 -1,308 24,934 120,417 156,986 64,205 279,396 Number of returns (7)
Total tax 3
Amount (8) 192,747 650 584 197 3,982 22,328 49,490 20,825 94,691
(2) 7,776,017 3,466,715 1,872,093 60,533 270,326 664,768 647,714 224,881 568,987
35,103 12,735 7,873 3,232 6,653 3,663 741 92 114
14,511 108 123 3,227 6,522 3,592 736 90 113
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 $2.4 billion. ² Includes both expenses and deductions reported on Form 990-T, lines 13(B) and 34, respectively. 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 the "alternative minimum tax," the "proxy" tax on nondeductible lobbying and political expenditures, and "other" taxes. 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 $1.1 million.
4
84
The Zero category includes 7,873 returns with equal amounts of gross unrelated business income and total deductions. These returns are not included in the data shown in
column 5. NOTE: Detail may not add to totals because of rounding.
84
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
Table 4.--Returns with Positive Unrelated Business Taxable Income: Number of Returns, Gross Unrelated Business Income (UBI), Total Deductions, Unrelated Business Taxable Income, and Total Tax, by Type of Entity and Size of Gross UBI, Tax Year 2002
[All figures are estimates based on samples--money amounts are in thousands of dollars]
Gross Type of entity and size of gross unrelated business income (UBI) Number of returns unrelated business income (UBI) (1) ALL ENTITIES Total......................................................................... $1,000 under $10,001................................................... 4 $10,001 under $100,000 .............................................. $100,000 under $500,000............................................. $500,000 under $1,000,000.......................................... $1,000,000 under $5,000,000....................................... $5,000,000 or more...................................................... TAX-EXEMPT CORPORATIONS Total......................................................................... $1,000 under $10,001 ................................................ 4 $10,001 under $100,000 ............................................ $100,000 under $500,000............................................. $500,000 under $1,000,000.......................................... $1,000,000 under $5,000,000....................................... $5,000,000 or more...................................................... TAX-EXEMPT TRUSTS Total......................................................................... $1,000 under $10,001 ................................................ 4 $10,001 under $100,000 ............................................ $100,000 under $500,000............................................. $500,000 under $1,000,000.......................................... $1,000,000 under $5,000,000....................................... $5,000,000 or more......................................................
4 4 4
Total deductions Number of returns (3) Amount (4)
1,2
Total Unrelated business taxable income tax Number of returns (6) Amount (7)
3
(2)
(5)
14,495 6,820 4,621 2,239 410 329 75
2,437,209 24,294 171,812 505,147 279,005 637,535 819,417
14,369 6,773 4,546 2,238 409 327 75
1,789,963 10,669 100,270 368,228 209,273 443,534 657,987
647,246 13,624 71,541 136,918 69,732 194,002 161,429
14,281 6,773 4,514 2,195 402 322 74
191,513 2,152 12,954 36,607 21,150 64,225 54,425
11,339 4,277 4,277 2,058 377 285 64
2,164,609 18,068 160,462 463,021 255,598 547,739 719,721
11,260 4,230 4,249 2,057 376 283 64
1,709,995 7,749 98,376 360,823 203,964 419,960 619,123
454,613 10,319 62,086 102,197 51,634 127,779 100,598
11,223 4,277 4,217 2,014 370 280 64
124,840 1,556 9,593 24,108 15,235 40,881 33,466
3,156 2,543 345 181 33 44 11
272,600 6,225 11,350 42,126 23,407 89,797 99,696
3,109 2,543 297 181 33 44 11
79,967 2,920 1,894 7,405 5,309 23,574 38,865
192,633 3,305 9,456 34,721 18,098 66,222 60,831
3,058 2,496 297 181 32 42 10
66,673 595 3,361 12,499 5,915 23,344 20,959
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 positive unrelated business taxable income, cost of sales and services was $710.6 million, 99 percent of which was attributable to tax-exempt corporations. ² Includes both expenses and deductions reported on Form 990-T, lines 13(B) and 34, respectively. 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 the "alternative minimum tax," the "proxy" tax on nondeductible lobbying and political expenditures, and "other" taxes. 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 unrelated business taxable income, total proxy tax was $0.4 million.
4 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 (not required to report itemized expenses and deductions, or to complete return schedules) and all other Form 990-T filers (required to file a
more detailed "complete" return). 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.
85
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
Table 5.--Number of Returns, Gross Unrelated Business Income (UBI), Total Deductions, Unrelated Business Taxable Income (Less Deficit), Unrelated Business Taxable Income, and Total Tax, by Primary Unrelated Business Activity or Industrial Grouping, Tax Year 2002
[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) All activities and groupings......................... Agriculture, forestry, hunting, and fishing........... Mining................................................................. Utilities................................................................ Construction....................................................... Manufacturing..................................................... Wholesale trade................................................. Retail trade......................................................... Transportation and warehousing........................ Information......................................................... Finance and insurance, total.............................. Unrelated debt-financed activities, other than rental of real estate ................... Investment activities of Code section 501(c)(7), (9), and (17) organizations......... Passive income activities with controlled organizations............................. Other finance and insurance .......................... Real estate and rental and leasing, total............ Rental of personal property ........................... Other real estate and rental and leasing........ Professional, scientific, and technical services.. Management of companies and enterprises...... Administrative and support and waste management and remediation services......... Educational services.......................................... Healthcare and social assistance....................... Arts, entertainment, and recreation.................... Accommodation and food services.................... Other services.................................................... Exploited exempt activities................................. Not allocable...................................................... 704 12 993 4,070 2,739 698 210 163 335,269 32,602 1,348,143 616,715 485,360 154,288 75,233 4,933 704 12 991 4,022 2,739 698 210 163
5 5, 6 5
Total deductions Number of returns (3) 34,977 224 244 30 52 139 *63 1,625 32 671 8,421 437 3,187 341 4,456 6,081 620 5,461 7,854 4 Amount (4) 7,922,208 21,943 26,136 25,336 111,350 68,228 *2,173 501,662 7,935 230,076 905,596 61,805 256,770 166,634 420,387 928,794 52,694 876,100 1,784,898 1,128 351,506 37,650 1,468,051 662,940 536,932 170,293 74,517 5,064
1,2
Unrelated business taxable income (less deficit) Number of returns (5) 27,230 173 181 26 45 105 *62 1,294 30 506 7,009 372 2,462 286 3,889 4,921 486 4,436 5,114 4 482 8 837 3,171 2,394 608 145 115 Amount (6) -146,191 19,190 367 826 -488 -10,240 *223 -60,534 -1,081 954 196,614 38,993 109,924 14,302 33,396 12,841 102 12,739 -52,891 2,439 -16,237 -5,049 -119,909 -46,225 -51,572 -16,005 716 -131
Unrelated business taxable income (7) 647,246 22,680 4,306 *1,431 *1,401 11,233 *559 19,021 1,031 22,101 263,473 48,008 118,609 27,851 69,005 106,421 5,304 101,118 75,924 2,476 16,953 351 42,616 26,261 16,702 6,436 5,309 *561
3
Total tax 4 Number of returns (8) 14,511 158 179 *19 *29 58 *49 564 4 273 5,812 211 2,156 209 3,236 2,470 210 2,259 1,674 3 207 3 307 1,420 851 300 127 *5 Amount (9) 192,747 7,664 1,049 *517 *453 3,864 *139 5,222 340 7,777 84,499 15,677 38,495 8,965 21,362 29,860 1,196 28,663 20,969 837 5,059 112 13,517 4,488 3,423 1,348 1,432 *178
(2) 7,776,017 41,133 26,503 26,162 110,862 57,988 *2,396 441,128 6,854 231,030 1,102,210 100,798 366,694 180,936 453,782 941,635 52,796 888,839 1,732,006 3,567
35,103 224 244 30 52 139 *63 1,625 32 673 8,470 437 3,187 342 4,505 6,106 620 5,486 7,854 4
86
* 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 $2.4 billion. ² Includes both expenses and deductions reported on Form 990-T, lines 13(b) and 34, respectively. ³ Includes only positive amounts of unrelated business taxable income. 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 the "alternative minimum tax," the "proxy" tax on nondeductible lobbying and political expenditures, and "other" taxes. 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 $1.1 million. 5 See the Explanation of Selected Terms section of this article for definitions of Unrelated Debt-Financed Income, Investment Income (Less Loss), and Income from Controlled Organizations. 6 Section 501(c)(7) organizations are social and recreational clubs; section 501(c)(9) organizations are voluntary employees' beneficiary associations; and section 501(c)(17) organizations are supplemental unemployment benefit trusts.
86
NOTE: Detail may not add to totals because of rounding.
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
Table 6.--Sources of Gross Unrelated Business Income (UBI), by Size of Gross UBI, Tax Year 2002
[All figures are estimates based on samples--money amounts are in thousands of dollars]
Sources of gross unrelated business income (UBI) ¹ Gross unrelated business income (UBI) Size of gross unrelated business income (UBI) Number of returns (1) Total............................................................... $1,000 under $10,001 ..................................... $10,001 or more, total .................................... $10,001 under $100,000................................ $100,000 under $500,000.............................. $500,000 under $1,000,000........................... $1,000,000 under $5,000,000........................ $5,000,000 or more........................................
2,3 2
Gross profit (less loss) from sales and services Number
Capital gain net income Number of returns Amount
Amount
of returns
Amount
(2) 7,776,017 53,742 7,722,275 508,157 1,306,509 794,839 2,022,671 3,090,100
(3) 14,895 2,864 12,031 6,731 3,734 735 659 172
(4) 4,322,643 10,010 4,312,632 230,100 707,744 412,856 1,094,952 1,866,979
(5) 614 *151 463 214 159 30 42 18
(6) 106,267 *184 106,083 7,641 17,842 11,109 38,761 30,730
35,103 13,395 21,708 13,341 5,987 1,139 999 242
Sources of gross unrelated business income (UBI) ¹--Continued Net capital loss Size of gross unrelated business income (UBI) Number of returns (7) Total............................................................... $1,000 under $10,001 ..................................... $10,001 or more, total .................................... $10,001 under $100,000................................ $100,000 under $500,000.............................. $500,000 under $1,000,000........................... $1,000,000 under $5,000,000........................ $5,000,000 or more........................................
2,3 2
Net gain (less loss), sales of noncapital assets 4 Number
(trusts only)
Income (less loss) from partnerships and S corporations
Number Amount of returns (10) (11) 3,977 2,793 1,184 548 317 107 150 62 (12) 180,890 7,353 173,537 10,652 35,560 20,078 59,219 48,028 4,445 *-220 4,664 -160 697 242 -820 4,706 Amount
Amount
of returns
(8) 147 *47 99 -62 10 24 3 930 *142 788 -548 30 200 9
(9) 250 *10 240 121 65 15 23 16
Sources of gross unrelated business income (UBI) ¹-- Continued Rental Size of gross unrelated business income (UBI) Number of returns (13) Total............................................................... $1,000 under $10,001 ..................................... $10,001 or more, total .................................... $10,001 under $100,000................................ $100,000 under $500,000.............................. $500,000 under $1,000,000........................... $1,000,000 under $5,000,000........................ $5,000,000 or more........................................
2,3 2
Unrelated debt5
Investment income (less loss)
6
income
financed income
Number Amount (14) 240,445 5,415 235,031 55,547 63,133 31,728 47,944 36,678 of returns (15) 3,079 866 2,213 1,380 590 95 120 28 (16) 436,949 3,539 433,410 43,575 81,312 40,519 120,796 147,208 Amount
Number of returns (17) 5,454 2,606 2,848 1,630 951 169 84 14 (18) 350,619 7,702 342,917 22,184 43,446 30,141 94,406 152,738 Amount
4,550 1,163 3,387 2,423 722 125 92 25
Footnotes at end of table.
87
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
Table 6.--Sources of Gross Unrelated Business Income (UBI), by Size of Gross UBI, Tax Year 2002 --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....................................................... $1,000 under $10,001 ............................ $10,001 or more, total ........................... $10,001 under $100,000........................ $100,000 under $500,000...................... $500,000 under $1,000,000................... $1,000,000 under $5,000,000................ $5,000,000 or more................................
2,3 2
Exploited exempt activity
7
Advertising income Number
Other income (less loss) Number
controlled organizations
income, except advertising Number
Amount
of returns
Amount
of returns
Amount
of returns
Amount
(20) 211,110 1,100 210,010 8,508 22,890 12,691 58,568 107,352
(21) 842 *181 661 291 225 57 69 19
(22) 128,202 *1,080 127,122 5,520 17,272 15,973 45,285 43,072
(23) 8,226 3,387 4,839 2,686 1,512 313 265 62
(24) 1,281,633 13,927 1,267,706 80,801 220,800 170,229 316,355 479,522
(25) 5,035 1,131 3,905 2,134 1,254 215 234 68
(26) 513,745 3,795 509,950 43,789 96,360 49,302 147,403 173,096
1,358 400 958 540 249 57 75 37
*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 (not required to report itemized expenses and deductions, or to complete return schedules) and all other Form 990-T filers (required to file a more detailed "complete" return). 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
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.
88
5 6 7
NOTE: Detail may not add to totals because of rounding.
88
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
Table 7.--Types of Deductions, by Size of Gross Unrelated Business Income (UBI), Tax Year 2002
[All figures are estimates based on samples--money amounts are in thousands of dollars] All organizations Total number of returns Total deductions 1,2 Number of returns (2) 34,977 13,348 13,266 5,986 1,138 997 242 Organizations with gross unrelated business income (UBI) of $1,000 under $10,001 ³ Net operating loss deduction Number of Amount returns (6) 921 921 -----(7) 1,263 1,263 ------
Size of gross unrelated business income (UBI)
Amount (3) 7,922,208 62,733 541,776 1,339,646 798,162 2,041,214 3,138,677
Total deductions 2,4 Number of Amount returns (4) 13,348 13,348 -----(5) 62,733 62,733 ------
Specific deduction Number of Amount returns (8) 8,117 8,117 -----(9) 7,614 7,614 ------
(1) Total.......................................... $1,000 under $10,001 ³................. $10,001 under $100,000 ³............. $100,000 under $500,000............. $500,000 under $1,000,000.......... $1,000,000 under $5,000,000....... $5,000,000 or more....................... 35,103 13,395 13,341 5,987 1,139 999 242
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) deductions 2,5 Number of returns Total.......................................... $1,000 under $10,001 ³................. $10,001 under $100,000 ³............. $100,000 under $500,000............. $500,000 under $1,000,000.......... $1,000,000 under $5,000,000....... $5,000,000 or more....................... (10) 20,704 -12,591 5,800 1,112 967 232 Number of returns (12) 20,704 -12,591 5,800 1,112 967 232 Total Number of returns (14) 1,623 -1,162 328 57 59 18 Allocable to rental income 6 Amount (13) 7,305,072 -511,619 1,265,199 728,510 1,908,607 2,891,138 Amount (15) 156,010 -29,933 40,222 17,292 33,067 35,496 Allocable to unrelated debt-financed income6 Number of returns (16) 2,115 -1,334 550 92 113 26 Amount (17) 426,611 -48,458 85,515 36,443 116,738 139,457 Allocable to investment income 6,7 Number of returns (18) 908 -351 413 92 49 3
Amount (11) 7,305,072 -511,619 1,265,199 728,510 1,908,607 2,891,138
Organizations with gross unrelated business income (UBI) of $10,001 or more ³--Continued Deductions directly connected with UBI--Continued Allocable to Size of gross unrelated business income (UBI) investment income 6,7 --Continued Amount (19) 15,018 -1,300 4,100 1,580 5,833 2,206 Allocable to income from controlled organizations 6 Number of returns (20) 467 -225 128 39 48 27 Allocable to exploited exempt activity income, except advertising 6 Number of returns (22) 605 -281 192 54 62 16 Number of returns (24) 4,450 -2,463 1,383 301 245 57 Direct advertising costs 6 Compensation of officers, directors, and trustees Number of returns (26) 1,766 -929 604 101 107 26
Amount (21) 147,724 -6,477 15,747 9,074 33,622 82,805
Amount (23) 120,403 -4,533 18,192 12,983 44,591 40,104
Amount (25) 923,970 -65,959 153,724 125,396 223,681 355,210
Amount (27) 38,242 -8,660 13,018 3,516 8,323 4,723
Total.......................................... $1,000 under $10,001 ³................. $10,001 under $100,000 ³............. $100,000 under $500,000............. $500,000 under $1,000,000.......... $1,000,000 under $5,000,000....... $5,000,000 or more.......................
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................................................................... $1,000 under $10,001 ³........................................... $10,001 under $100,000 ³....................................... $100,000 under $500,000....................................... $500,000 under $1,000,000.................................... $1,000,000 under $5,000,000................................. $5,000,000 or more................................................. Footnotes at end of table. 10,063 -5,260 3,410 652 585 156 Repairs and maintenance Number of returns (30) 6,935 -3,546 2,445 456 383 104 Bad debts Number of returns (32) 918 -304 326 104 129 54 Number of returns (34) 2,912 -1,387 1,112 211 148 54 Interest
Amount (29) 1,517,666 -112,517 345,539 174,121 403,065 482,423
Amount (31) 117,790 -16,065 31,590 13,591 23,701 32,843
Amount (33) 43,132 -276 1,507 1,710 10,151 29,488
Amount (35) 61,518 -6,263 16,075 9,340 18,929 10,912
89
Unrelated Business Income Tax Returns, 2002: Financial Highlights and Special Analyses of Exempt-Organization Reporting Quality
Table 7.--Types of Deductions, by Size of Gross Unrelated Business Income (UBI), Tax Year 2002 --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...................................................... $1,000 under $10,001 ³............................. $10,001 under $100,000 ³......................... $100,000 under $500,000.......................... $500,000 under $1,000,000....................... $1,000,000 under $5,000,000.................... $5,000,000 or more................................... 10,169 -5,828 3,224 557 444 116 Amount (37) 161,329 -22,032 65,653 26,370 29,139 18,135 Number of returns (38) 7,689 -4,152 2,496 469 438 134 Amount (39) 221,587 -24,370 57,052 26,991 54,935 58,238 Number of returns (40) 94 -*74 *12 ** **7 ** Amount (41) 3,457 -*730 *937 ** **1,790 ** Depreciation Depletion Contributions to deferred compensation plans Number of Amount returns (42) 981 -446 360 ** **175 ** (43) 12,204 -478 2,047 ** **9,679 **
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 programs Number of returns (44) Total...................................................... $1,000 under $10,001 ³............................. $10,001 under $100,000 ³......................... $100,000 under $500,000.......................... $500,000 under $1,000,000....................... $1,000,000 under $5,000,000.................... $5,000,000 or more................................... 4,960 -2,127 1,815 442 447 129 Number of returns (46) 3,296 -1,893 963 181 203 55 Net operating loss deduction Total Amount (45) 212,057 -7,366 29,508 21,733 62,739 90,712 Amount (47) 164,487 -15,087 29,038 20,667 44,810 54,885 Number of returns (48) 13,598 -7,629 4,217 804 753 195 Amount (49) 2,961,868 -141,114 355,737 226,235 791,001 1,447,781 Number of returns (50) 10,430 -6,192 3,045 601 474 117 Amount (51) 554,402 -30,156 74,447 69,652 132,607 247,539 Other deductions directly connected with UBI
90
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) Total...................................................... $1,000 under $10,001 ³............................. $10,001 under $100,000 ³......................... $100,000 under $500,000.......................... $500,000 under $1,000,000....................... $1,000,000 under $5,000,000.................... $5,000,000 or more................................... 8,031 -4,917 2,288 427 324 75 Charitable contributions Number of returns (54) 1,456 -735 487 100 100 34 Set-asides 7 Number of returns (56) 351 -*195 90 28 30 9 Excess exempt expenses 8 Number of Amount returns (58) 2,314 -1,130 769 199 171 45 (59) 290,640 -16,479 50,215 43,527 75,749 104,670
Amount (53) 7,635 -4,611 2,208 418 323 75
Amount (55) 32,740 -2,577 6,890 10,704 8,237 4,333
Amount (57) 223,387 -*6,490 15,135 15,004 48,297 138,462
* Estimate should be used with caution because of the small number of sample returns on which it is based. **Data in adjacent size classes are combined to avoid disclosure of information about specific taxpayers. 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 $2.4 billion. ² Includes both expenses and deductions reported on Form 990-T, lines 13(B) and 34, respectively. 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 deduction, 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 $48.5 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 $2.3 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. 8 Includes excess exempt-activity expenses from Form 990-T, Schedule I, and excess readership costs from Form 990-T, Schedule J. NOTE: Detail may not add to totals because of rounding.
90