UnrelatedBusinessIncomeofNonprofitOrganizations:
Highlightsof1995andaReviewof1991-1995
by Margaret Riley
onprofit organizations that are granted with gross UBI of $10,000 or less, which were not
N Federal tax exemption based on their mis-
sion-related purposes are allowed, within
certain limits, to generate income from “unrelated
required to report detailed income and expense items.
The larger organizations accounted for nearly the
entire amount, 99 percent, of gross UBI reported.
business activities,” though the income from these Within the major Form 990-T financial items
activities is subject to taxation. About 3 percent of shown in Figure A, the largest 5-year increase for
all organizations recognized as tax exempt under the nonprofit organizations engaged in unrelated busi-
Internal Revenue Code engaged in such non-mission- ness activities was in their income tax liability. The
related activities for 1995, and they generated $6.3 tax on unrelated business income rose 137 percent
billion of gross unrelated business income (UBI) [1]. over the period, partly as a result of the 107-percent
Of the 36,394 nonprofit organizations that filed a increase in taxable profits. These increases are
Tax Year 1995 Form 990-T, Exempt Organization analyzed in the following section on Taxes. Further
Business Income Tax Return, about half reported analysis of organizations’ net income (less deficit) is
aggregate net income (taxable profit) totaling $0.9 provided later in this section.
billion, with the remainder reporting a combined Figure B shows a distribution of Forms 990-T by
deficit of $1.9 billion [2]. Consistent with the pre- size of gross UBI for 1995. A small number of
ceding 4 tax years, nonprofit organizations, as a organizations that reported large amounts of gross
group, reported total deductions for 1995 that ex- UBI were responsible for most of the total gross UBI
ceeded total gross income. These deductions reported for 1995. Organizations that had gross UBI
amounted to $7.3 billion. of $500,000 or more were only 4 percent of the
The income tax on nonprofit organizations’ population of filers; however, together they reported
unrelated business taxable profits for 1995 totaled 73 percent of total gross UBI (see Table 2 at the end
$276.6 million. After adjustments for other taxes of this article). In contrast, organizations that re-
and certain credits were taken into account, these ported much smaller amounts of gross UBI, under
organizations incurred a total Federal income tax $100,000, made up 82 percent of all filers but ac-
80 liability of $277.5 million [3]. counted for only 9 percent of all gross UBI reported.
Gross profit (less loss) from sales and services
Finances was, by far, the largest component of total gross UBI
(see Table 6 at the end of this article). For 1995, this
IncomeandDeductions amounted to $3.2 billion, or 52 percent of total gross
Figure A , which contains selected financial data for UBI. It is important to note that the costs associated
Tax Years 1991 to 1995, shows that gross UBI with selling goods and performing services, which
increased by 17 percent between 1994 and 1995, for 1995 were $1.7 billion, were subtracted from
while the number of returns filed increased by only 2 gross receipts (totaling $5.0 billion) in order to com-
percent. Average gross income per return rose by 14 pute the amount of gross profit (less loss) included in
percent between these two years. The number of total gross UBI. These costs, therefore, are not
organizations reporting positive net income, or included in the $7.3 billion of total deductions re-
taxable profit, declined by 2 percent; returns without ported on Form 990-T, but they may include many of
net income (zero taxable income or a deficit) in- the same types of expenses that are components of
creased by 7 percent. Fifty-six percent of all filers total deductions, such as salaries and wages, utilities,
for 1995 were organizations with gross UBI above and depreciation.
$10,000. These organizations had to fill out a Advertising income was the second largest
complete Form 990-T, unlike smaller organizations income component reported, accounting for 16
percent of total gross UBI. Nonprofit “charitable”
organizations, business leagues, chambers of com-
Margaret Riley is a statistician with the Special Studies merce, and real estate boards together accounted for
Special Projects Section. This article was prepared under 85 percent of total advertising income [4]. These
the direction of Michael Alexander, Chief. organizations often include, in their mission-related
80
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
FigureA
Selected Financial Data from Exempt Organization Business Income Tax Returns, Tax Years 1991-1995
[Money amounts are in thousands of dollars]
Percentage change
Item 1991 1992 1993 1994 1995 1994-1995 1991-1995
(1) (2) (3) (4) (5) (6) (7)
32,690 31,122
Number of returns, total..................................................................................... 32,638 35,657 36,394 +2.1 +11.3
14,384 14,690
With net income (taxable profit)..................................................................................... 15,067 18,588 18,157 -2.3 +26.2
18,306 16,432
Without net income (taxable profit) ¹..................................................................................... 17,571 17,070 18,237 +6.8 -0.4
3,384,698 4,069,149
Gross unrelated business income..................................................................................... 4,694,181 5,379,838 6,279,659 +16.7 +85.5
4,047,183
Total deductions..................................................................................... 5,182,551 5,741,420 6,506,838 7,253,305 +11.5 +79.2
-662,487 -1,113,402
Net income (less deficit)..................................................................................... -1,047,239 -1,127,001 -973,648 +13.6 -47.0
431,143 485,874
Net income (taxable profit)..................................................................................... 603,593 642,953 892,974 +38.9 +107.1
1,093,630
Deficit..................................................................................... 1,599,276 1,650,831 1,769,954 1,866,621 +5.5 +70.7
116,605 132,353
Unrelated business income tax..................................................................................... 180,046 191,492 276,562 +44.4 +137.2
116,933
Total income tax..................................................................................... 132,378 181,437 195,191 277,481 +42.3 +137.3
¹ Includes returns with deficits and "breakeven" returns with equal amounts of gross unrelated business income and total deductions.
NOTE: Detail may not add to totals because of rounding. See the Explanation of Selected Terms section of this article for definitions of gross unrelated business income, total
deductions, net income (less deficit), unrelated business income tax, and total income tax.
publications, paid advertisements that are considered FigureB
“unrelated” and, therefore, taxed as unrelated busi-
ness income.
Other than the Form 990-T item, “other deduc- Exempt Organization Business Income Tax
tions,” which amounted to 32 percent of total deduc- Returns, by Size of Gross Unrelated Business
tions, the three largest deductions were for “net Income (UBI), Tax Year 1995
operating loss carryover” (21 percent), salaries and
wages (13 percent), and direct advertising costs (11 $500,000
$1,000,000
percent) (see Table 7 at the end of this article) [5]. under
or more
As noted earlier, nonprofit organizations reported $1,000,000
2%
$100,000 2%
aggregate deductions that exceeded aggregate gross
under
income for each of the years 1991-95, so it is not
$500,000
surprising that the net operating loss carryover is 14% $1,000
typically a large percentage of total deductions. under
“Other deductions” is a catch-all category for any $10,001 ¹
items not specifically required to be reported else- 44%
where on the tax return. It included deductions for 36,394
such items as occupancy expenses; accounting, legal, $10,001
and other professional fees; office supplies; equip- under
ment and other rental fees; payroll services; and $100,000¹
38%
travel and education costs.
Certain types of deductions are directly related to
the generation of unrelated business income, while
others are not. The items mentioned above, along
with several others, are considered “directly con- ¹ Organizations with gross UBI under $1,000 were not required to file a
nected” deductions. Four types are considered “not return. Organizations with gross UBI over $10,000 were required to fill
out a more detailed tax return than other filers.
directly connected”; these are the “specific deduc-
tion” (generally $1,000), contributions paid, “set-
asides,” and “excess exempt expenses.” Both cat- deductions, the net operating loss carryover, and
egories of deductions are shown in Table 7, and “other deductions” are contained in the Explanation
definitions of the four “not directly connected” of Selected Terms section. 81
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
Using “net income (less deficit)” as a measure of possible reasons for the difference and why organiza-
s
an organization’ profits, tax-exempt organizations tions would continue to conduct business activities
engaging in unrelated business operations, as a that incur losses year after year.
whole, appear not to have been particularly profit- One possibility is that nonprofit organizations are
able, sustaining aggregate losses every year during primarily engaged in tax-exempt mission-related
the 1991-95 period (see Figure C). While the com- activities and have a certain amount of operational
putation of net income (less deficit) is not consistent costs associated with conducting these activities,
across various forms of businesses because it is such as salaries and wages, building rents and mort-
based on tax laws that are specific to each type of gages, depreciation, utilities, equipment costs, and
entity, it can, nonetheless, be used for a general office expenses. When they also engage in unrelated
s
comparison of each group’ profits. Based on Fed- business activities to supplement mission-related
eral tax return data collected for Tax Years 1991 to income, they often choose an enterprise that will
1995, nonfarm sole proprietorships, partnerships, and allow them to use some, if not all, of the same re-
corporations all reported positive amounts of aggre- sources, or “inputs,” being used to carry on their
gate net income (less deficit) each year during the mission-related activities. Within the boundaries of
period [6]. A comparison of these results with the the tax laws, they can then shift a portion of the cost
annual aggregate unrelated business losses reported of these jointly used inputs from tax-exempt mission-
by nonprofit organizations raises questions about related activities to taxable, unrelated activities and,
FigureC
Unrelated Business Net Income (Taxable Profit), Deficit, and Net Income (Less Deficit), in Constant
Dollars, Tax Years 1991-1995 ¹
82
Billions of dollars
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
1991 1992 1993 1994 1995
Tax Year
Net income (taxable profit) Deficit Net income (less deficit)
¹ Adjustments for inflation are based on the 1992 chain-type price index for Gross Domestic Product, computed and reported by the U. S.
Department of Commerce, Bureau of Economic Analysis (BEA), Survey of Current Business, August 1998. The most recent updates of this
price index can be found on BEA's Wide World Web Home Page, http://www.bea.doc.gov/bea/dn1.htm. See "Time Series Estimates,"
Table 3.
82
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
FigureD
even though their unrelated enterprises may actually
be generating a positive cash flow, their resulting
unrelated business taxable income in many cases can Selected Financial Data, in Constant Dollars, Tax
be reduced to zero or less [7]. Years 1991-1995 ¹
It is, perhaps, this cost-shifting factor that most
Billions of dollars
notably distinguishes the business activities of non-
7
profit organizations from those of traditional profit-
making entities. Some nonprofit organizations might
6
not incur any new costs for facilities or staff required
to conduct unrelated, profit-making activities and,
while any real supplemental costs associated with 5
these activities may be only marginal, the organiza-
tions are allowed to offset UBI with additional pre- 4
existing (mission-related) expenses, which are pro-
rated based on the ratio of unrelated business income 3
to total income. Examples of the use of existing
mission-related facilities for unrelated business
2
activities would be a tax-exempt hospital that uses its
laboratory and staff to provide testing services for
non-hospital physicians or medical offices; a univer- 1
sity that charges fees to public users (not faculty,
staff, or students) of their parking lots, concert are- 0
nas, golf courses, or other facilities; and golf and 1991 1992 1993 1994 1995
country clubs that sell food and beverages to non- Tax Year
members. Gross unrelated business income
Total deductions
Taxes Net income (taxable profit)
In terms of constant dollars, Figure D shows that for Total income tax
Tax Years 1991 to 1995, total gross UBI and total ¹ Adjustments for inflation are based on the 1992 chain-type price index
deductions rose steadily throughout the period. for Gross Domestic Product, computed and reported by the U. S.
Taxable profit and total income tax also rose from Department of Commerce, Bureau of Economic Analysis (BEA), Survey of
Current Business , August 1998. The most recent updates of this price
1991 to 1995, but at much lower rates than income index can be found on BEA's Wide World Web Home Page,
and deductions. Annual increases in total income tax http://www.bea.doc.gov/bea/dn1.htm. See "Time Series Estimates," Table
were closely tied to increases in taxable profits. 3.
Changes in income tax rates for Tax Year 1993 also
increased some organizations’ total income tax riod. The associated unrelated business income tax
liabilities for the latter 3 years of the period (dis- (UBIT) rose 44 percent between 1994 and 1995. The
cussed further, below). For each year in the 5-year UBIT statistics graphically presented in Figure E
period, aggregate total deductions ranged between show that the share of total tax liability reported by
116 percent and 127 percent of aggregate total gross tax-exempt trusts was smaller than the share reported
UBI (see Figure A for these items). Nonetheless, by tax-exempt corporations for the first 2 years of the
half of all tax-exempt organizations engaging in period, edged slightly higher than the corporate share
unrelated business activities for 1995 reported for 1993, and then exceeded the corporate share for
aggregate taxable profits totaling $893.0 million. 1994 and 1995. While the tax liability of corporate
These total profits were 14 percent of the aggregate entities remained fairly stable throughout the 5-year
gross UBI reported by all organizations for 1995. period, the trusts were principally responsible for the
As shown previously in Figure A, taxable profit annual increases in total tax liability. Between Tax
increased 39 percent between 1994 and 1995, the Years 1992 and 1993, the highest marginal tax rate
largest year-to-year increase over the 1991-95 pe- for trusts increased 8.6 percentage points, while for 83
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
FigureE
tax reported was greater, annually, for the corporate
group reporting taxable profit of less than $1 million,
Unrelated Business Income Tax, by Type of compared to the corporate group reporting larger
Entity, Tax Years 1991-1995 amounts of taxable profit. The opposite occurred for
trusts. The group of trusts reporting taxable profit of
Millions of dollars
$1 million or more was responsible for much higher
amounts of UBIT liability than the group reporting
300 smaller amounts of taxable profit. For both types of
entities and for each year shown in Figure F, the vast
250
majority of organizations fell within the group re-
porting taxable profit of less than $1 million.
This is explained by the different tax rates ap-
200 plied to corporations and trusts that have unrelated
business taxable income (UBTI) of $1 million or
more [8]. For example, for corporations with UBTI
150
of $1,000,000 or more, there were four corporate
taxable income brackets for Tax Year 1995 that had
100 associated tax rates ranging from 34 percent to 35
percent (35 percent was the maximum rate, but there
was an intermediate 38-percent rate applied to tax-
50 able income amounts between $15,000,000 and
$18,333,333). For 1995, there was only one tax rate
0 of 39.6 percent applied to trust taxable income of
$1,000,000 or more.
1991 1992 1993 1994 1995
The UBIT liability of tax-exempt trusts nearly
84 Tax Year quadrupled from 1991 to 1995. The tax-exempt
corporations contributed comparatively less signifi-
Total Corporation Trust
cantly to the 5-year rise in total UBIT liability, re-
porting UBIT for 1995 that was less than one-and-a-
half times larger than the corporate UBIT reported
corporations it increased only 1 percentage point. for 1991. These disproportionate shares of UBIT
Furthermore, tax rate increases for 1993 affected all liability can be accounted for by each type of
trusts with taxable profits over $1,500, but affected s
organization’ income composition and the effect of
only those corporations with taxable profits over stock market performance during the 5-year period.
$10,000,000. Corporate tax-exempt entities reported aggregate
Figure F presents tabular unrelated business gross UBI of $5.5 billion for 1995, with the two
income tax data for the tax-exempt corporations and items, advertising income and gross profit (less loss)
trusts for the same 5-year period. Of the two types of from sales and services, accounting for 77 percent of
organizations, trusts consistently made up a much the total. (These and other statistics for tax-exempt
smaller proportion of all Form 990-T filers reporting trusts and corporations cited in this section are based
UBIT liability, ranging from one-fifth to about one- on unpublished study data.) The composition of the
third. For 1991, trusts comprised 20 percent of the $0.8 billion of trust UBI was markedly different, with
organizations reporting UBIT and accounted for 40 87 percent of the total attributable to three items:
percent of total UBIT. By 1995, they made up 33 capital gain net income, partnership income, and
percent of all organizations reporting UBIT and investment income. All three of these components of
accounted for 63 percent of the tax reported. During trust income are directly influenced by stock market
the period shown, the tax liability shares of corpora- performance, while the two corporate UBI compo-
tions and trusts contrasted sharply, when grouped by nents generally are not.
84 the amount of taxable profit reported. The amount of Corresponding with the peaks in the UBIT liabil-
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
FigureF
Returns with Unrelated Business Income Tax (UBIT) Liability: Number of Returns and UBIT, by Type
of Entity and Size of Net Income (Taxable Profit), Tax Years 1991-1995
[Money amounts are in millions of dollars]
Type of enity and size of 1991 1992 1993 1994 1995
net income (taxable profit)
(1) (2) (3) (4) (5)
Total number of returns:
14,384 14,690
All organizations............................................................................................................................ 15,067 18,588 18,157
11,539
Corporations............................................................................................................................ 11,718 11,835 12,084 12,210
2,845
Trusts............................................................................................................................ 2,972 3,232 6,504 5,947
Total unrelated business income tax (UBIT):
116.6
All organizations............................................................................................................................132.4 180.0 191.5 276.6
70.2
Corporations............................................................................................................................ 76.1 87.4 91.6 101.5
46.4
Trusts............................................................................................................................ 56.2 92.7 99.9 175.1
UBIT of organizations with net income (taxable profit)
of less than $1,000,000:
50.3
All organizations............................................................................................................................ 57.5 73.2 78.1 93.2
37.8
Corporations............................................................................................................................ 43.6 51.0 55.6 61.8
12.5
Trusts............................................................................................................................ 14.0 22.2 22.5 31.4
UBIT of organizations with net income (taxable profit)
of $1,000,000 or more:
66.3
All organizations............................................................................................................................ 74.8 106.9 113.4 183.4
32.4
Corporations............................................................................................................................ 32.5 36.3 36.0 39.6
34.0
Trusts............................................................................................................................ 42.3 70.5 77.4 143.7
NOTE: Detail may not add to totals because of rounding.
ity of tax-exempt trusts shown in Figure E for 1993 is similar for investment income. While investment
and 1995 were respective increases in rates of return income increased 43 percent for trusts and was 34
on stock market investments that resulted in substan- percent of their gross income, it increased 28 percent
tial increases in profits, especially for 1995. For that for corporations but was only 2 percent of corporate
year, 89 percent of all tax-exempt trusts reported gross UBI. The investment income disparity be-
taxable profits, compared to only 41 percent of the tween corporations and trusts is primarily due to the
tax-exempt corporations. An increase in the maxi- unrelated business income tax laws. Most corpora-
mum tax rate applied to trust income, from the 1992 tions, other than Internal Revenue Code section
rate of 31 percent to the 1993 rate of 39.6 percent, 501(c)(7) social and recreational clubs, generally are
also contributed to the increase in trusts’ UBIT not taxed on investment income unless it is debt-
liability for 1993. financed. Section 501(c)(9) voluntary employees’
The effect that these organizations’ contrasting beneficiary trusts and section 501(c)(17) supplemen-
primary income sources have on their respective tal unemployment benefit trusts may be taxed on all
taxation can be emphasized by comparing corporate of their investment income if they are fully funded.
and trust statistics for two major investment items (See the definitions of Investment Income (Less
reported on Form 990-T--“capital gain net income” Loss) and Unrelated Debt-Financed Income in the
and “investment income.” Capital gains rose 105 Explanation of Selected Terms section of this ar-
percent for trusts and 123 percent for corporations ticle.)
between 1994 and 1995; however, capital gains The amount of deductions that each type of
comprised 32 percent of trust gross UBI, but less organization can use to offset its largest sources of
than 1 percent of corporate gross UBI. The situation income is another factor affecting taxation. The 85
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
FigureG
nonprofit trusts, which operate mainly as managers
of investment income, are generally limited in the Exempt Organization Business Income Tax
amount of expenses that are allowed to be deducted Returns, by Internal Revenue Code Section, Tax
from investment income. As mentioned previously, Year 1995
nonprofit corporations’ main sources of unrelated Other ¹
5%
business income for 1995 were advertising and gross 408(e)
profit (less loss) from sales and services. Because of 13% 501(c)(3)
27%
the more labor-intensive nature of these unrelated
business operations, corporations can deduct com- 501(c)(19)
paratively larger amounts of directly-related ex- 5%
penses. For 1995, trusts filing Form 990-T ac- 501(c)(9)
counted for 57 percent of the total of positive net 2% 36,394
income (taxable profit) reported. In addition, the 501(c)(8) 501(c)(4)
average amount of taxable profit for the trusts was 3% 4%
$85,420, compared to an average of $31,530 for the
501(c)(5)
corporations. 7%
501(c)(7)
OrganizationsClassifiedbyInternal 18%
RevenueCodeSection 501(c)(6)
17%
Figure G shows the distribution of returns filed, by
¹ Includes all organizations tax exempt under Code sections 501(c)(2)-
the Internal Revenue Code section under which an (25) that are not shown elsewhere, as well as Code section 401(a)
organization received tax exemption. Twenty-seven organizations.
NOTES: Detail may not add to 100 percent because of rounding. See
percent of the filers were nonprofit charitable organi-
the Appendix to this article for a description of the types of tax-exempt
zations that were tax-exempt under section 501(c)(3). organizations.
Three-quarters of all returns were filed by four types
86 of organizations: the nonprofit charitable organiza- FigureH
tions; social and recreational clubs exempt under
section 501(c)(7); business leagues, chambers of Gross Unrelated Business Income, by Internal
commerce, and real estate boards exempt under Revenue Code Section, Tax Year 1995
section 501(c)(6); and fiduciary agents for Individual 401(a)
Other ¹
s)
Retirement Arrangements (IRA’ exempt under 501(c)(19) 3% 4%
section 408(e). (See the Appendix to this article for a 2%
description of the various types of tax-exempt 501(c)(9)
organizations.) 7%
As can be seen in Figure H, section 501(c)(3) 501(c)(7)
charities accounted for 57 percent of total gross UBI 6%
for 1995, and section 501(c)(6) business leagues,
chambers of commerce, and real estate boards ac- $6.3 Billion
counted for an additional 12 percent. Together, five 501(c)(6) 501(c)(3)
types of organizations, grouped by Internal Revenue 12% 57%
Code section, reported nearly 90 percent of total
gross income from unrelated business activities: the
501(c)(5)
section 501(c)(3) and 501(c)(6) organizations men- 3%
tioned above, plus civic leagues and social welfare 501(c)(4)
organizations exempt under section 501(c)(4), social 5%
and recreational clubs exempt under section ¹ Includes all organizations tax exempt under Code sections 501(c)(2)-
(25) that are not shown elsewhere, as well as Code section 408(e)
501(c)(7), and voluntary employees’ beneficiary organizations.
associations exempt under section 501(c)(9). When NOTES: Detail may not add to 100 percent because of rounding. See
compared to similar data compiled for 1991, the the Appendix to this article for a description of the types of tax-exempt
86 organizations.
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
distribution patterns shown in Figures G and H zations can only offset gross UBI with comparatively
remained practically unchanged for 1995. small amounts of deductions, so their unrelated
Table 1 at the end of this article shows major business taxable income is relatively high. Because
financial data items for various types of organiza- their investment portfolios are typically overseen by
tions, in terms of the Internal Revenue Code section only one or two trust managers, deductions for sala-
that describes them. The following discussion of ries and wages and other directly-connected expenses
these organizations uses data from Table 1, along are quite small. In terms of contrast, the section
with unpublished study data. In addition to account- 501(c)(3) charities had a 64-percent share of all
ing for the largest share of gross UBI reported, the deductions reported, as previously stated, compared
charities were responsible for 64 percent of total to a joint 3-percent share reported by the section
deductions, 23 percent of positive net income (tax- 501(c)(9) and 401(a) organizations.
able profits), and 21 percent of total income tax. Another reason why the voluntary employees’
They comprised 17 percent of all organizations beneficiary associations took smaller deductions than
reporting taxable profits. Combined, the IRA fidu- most other types of organizations was that they were
ciary agents and the social and recreational clubs allowed to take as a deduction amounts of income
accounted, with nearly equal shares, for almost half that were set aside to provide for future employee
of all organizations reporting taxable profits, but only benefits; but if these “set-asides” exceeded qualified
10 percent of the total amount of taxable profits and asset account limits, as specified in Internal Revenue
6 percent of total income tax. Code section 419A, then the excess was not allowed
A large majority of the section 501(c)(9) volun- as a deduction from gross unrelated business income
tary employees’ beneficiary associations, 92 percent, (see the definition of Set-Asides in the Explanation
were organized as trusts. Even though these organi- of Selected Terms section at the end of this article).
zations made up only 2 percent of all Form 990-T In the case where a section 501(c)(9) association
filers reporting taxable profits and were responsible overfunded an employee welfare benefit plan, its
for only 7 percent of total gross UBI, they were liable investment income could not be set aside tax-free. It
for the largest percentage of total income tax re- was taxable as unrelated business income.
ported by any Code section group. Along with
section 401(a) pension, profit-sharing, and stock PrimaryUnrelatedBusinessActivities
bonus plans, the two groups were liable for 58 per- The discussion of unrelated business activities that
cent of total income tax reported. The 401(a) plans follows takes into consideration only the primary
represented only 6 percent of organizations reporting (first) activity code of three possible codes reported
taxable profits and accounted for only 3 percent of on Form 990-T. If an organization was engaged in
total gross UBI. more than one unrelated business activity, it was
One of the reasons these organizations’ total instructed to list the code of the largest activity in
income tax liability was so large for Tax Year 1995 terms of gross UBI first, and then the codes for the
was the extremely high rates of return earned on next two largest activities. Because it is not possible
investments during that period. For both types of to distribute gross UBI according to each type of
organizations, investments were their primary source activity when more than one activity was reported
of gross UBI. The positive influence of investment (filers were not required to do this), the amount of
performance during nonprofit organizations’ 1995 gross UBI assigned to primary unrelated business
tax periods can be seen when comparing percentages activities discussed in this section is overstated for
of 1991 income tax liability to 1995 percentages. organizations that reported multiple activities.
For 1991, the section 501(c)(3) organizations ac- As was the case with the distribution of organiza-
counted for 35 percent of total income tax, while the tions by the Internal Revenue Code section under
section 501(c)(9) and 401(a) organizations together which they received income tax exemption, pre-
accounted for another 35 percent. For 1995, the tax sented in the previous section, the apportioning of
liability shares for these organization groupings were organizations filing Forms 990-T by primary unre-
21 percent and 58 percent, respectively. lated business activity for 1995, shown in Figure I,
Usually, the section 501(c)(9) and 401(a) organi- looks very similar to that for 1991, suggesting no
87
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
iue
Fgr I
Exempt Organization Business Income Tax Returns, by Primary Unrelated Business Activity or
Industrial Grouping, Tax Year 1995
Not reported
All others 1%
3%
Manufacturing
3%
Unrelated debt-financed activities,
except rental of real estate (3%) Retail trade
Investment activities of Code section 11%
501(c)(7),(9), and (17) organizations
(10%)
Finance, insurance, and
Rental of personal property (2%) real estate
Passive income activities with 42%
controlled organizations (1%)
36,394
Other finance, insurance, and real
estate (26%)
Services
39%
Exploited exempt
activities
1%
88
significant change over the 5-year period. The pri- estate; investment activities of section 501(c)(7), (9),
mary unrelated business activity reported on 95 and (17) organizations; rental of personal property;
percent of returns filed for 1995 fell within four passive income (generally, investment income)
major industrial groupings: services; finance, insur- activities with controlled organizations; and “ex-
ance, and real estate; retail trade; and manufacturing. ploited exempt activities.” In Figure I and Table 5,
For 1991, about 88 percent of returns filed had a the first four activities mentioned above are treated
primary activity within one of these four major as part of the finance, insurance, and real estate
industrial groupings [9]. For 1995, these industrial division. The exploited exempt activities classifica-
groupings were also responsible for 97 percent of tion is treated separately in Figure I and Table 5 as
total gross UBI, up 4 percentage points since 1991, one of the major industrial groupings [11].
with services producing $2.8 billion; finance, insur- Figure J shows selected primary unrelated busi-
ance, and real estate, $2.5 billion; retail trade, $0.6 ness activities or industrial subgroups that fell within
billion; and manufacturing, $0.2 billion (see Table 5 the four major industrial groupings that accounted for
for additional information on the major business 97 percent of total aggregate gross UBI for 1995.
activities or industrial classifications reported). The selected activities or subgroups included in the
The industrial classifications from which Form figure are those that had the largest percentages of
990-T filers were required to make a choice included gross UBI within their respective major industrial
155 industry codes and 5 additional categories that groupings [12].
were established specifically for exempt organiza- Of the 14,305 organizations reporting various
tions engaging in unrelated business activities, to services as their primary unrelated activity, 57 per-
reflect particular provisions of the Internal Revenue cent provided business services, most of which was
Code [10]. These five classifications were unrelated advertising (including printing). Income from busi-
88 Debt-Financed activities other than rental of real ness services contributed 42 percent to the total of
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
iue
Fgr J
Selected Primary Unrelated Business Activities or Industrial Subgroups Within the Four Largest
Unrelated Business Income-Producing Industrial Groupings, Tax Year 1995
[Money amounts are in millions of dollars]
Percentage Percentage Gross Percentage Percentage
Major industrial grouping and selected Number of of returns in of all unrelated of industrial of
primary unrelated business activity returns industrial returns business grouping total
or industrial subgroup grouping income (UBI) gross UBI gross UBI
(1) (2) (3) (4) (5) (6)
36,394 N/A 100.0
All activities and groupings......................................................................................................................... 6,279.7 N/A 100.0
912 100.0
Manufacturing ......................................................................................................................... 2.5 218.5 100.0 3.5
742 81.4
Printing and publishing......................................................................................................................... 2.0 210.3 96.2 3.3
170 18.6
All other manufacturing......................................................................................................................... 0.5 8.2 3.8 0.1
3,913
Retail trade......................................................................................................................... 100.0 10.8 550.2 100.0 8.8
2,656 67.9
Eating and drinking places......................................................................................................................... 7.3 288.7 52.5 4.6
1,131 28.9
Miscellaneous retail ¹......................................................................................................................... 3.1 226.8 41.2 3.6
128 3.3
All other retail trade ¹......................................................................................................................... 0.4 34.7 6.3 0.6
15,368 100.0 42.2
Finance, insurance, and real estate......................................................................................................................... 2,461.0 100.0 39.2
1,402
Insurance......................................................................................................................... 9.1 3.9 1,052.5 42.8 16.8
10,195
Finance......................................................................................................................... 66.3 28.0 991.3 40.3 15.8
Investment activities of Code section 501(c)(7),(9), and (17)
3,703 24.1
organizations......................................................................................................................... 10.2 568.8 23.1 9.1
Unrelated debt-financed activities other than rental
967 6.3
of real estate......................................................................................................................... 2.7 173.9 7.1 2.8
Holding and other investment companies, except bank
3,970 25.8
holding companies......................................................................................................................... 10.9 138.7 5.6 2.2
3,772
Real estate......................................................................................................................... 24.5 10.4 417.1 16.9 6.6
14,305
Services ......................................................................................................................... 100.0 39.3 2,838.9 100.0 45.2
8,096 56.6
Business services......................................................................................................................... 22.2 1,180.5 41.6 18.8
6,727 47.0 18.5
Advertising (including printing)......................................................................................................................... 944.8 33.3 15.0
1,028 7.2
Health services......................................................................................................................... 2.8 651.3 22.9 10.4
406 2.8
Medical laborabories......................................................................................................................... 1.1 407.6 14.4 6.5
3,367 23.5 9.3
Amusement and recreation services......................................................................................................................... 424.0 14.9 6.8
1,813 12.7
All other services......................................................................................................................... 5.0 583.0 20.5 9.3
1,894 100.0 5.2
All other activities and groupings......................................................................................................................... 211.2 100.0 3.4
¹ Miscellaneous retail is a specific subgroup of the retail trade major industrial grouping and includes mainly drugstores and proprietary stores, gift shops, book stores, and
"miscellaneous retail stores." A small number of retail activities that were not part of the eating and drinking places or miscellaneous retail subgroups are included in "all other retail
trade." These were mainly food stores, apparel and accessory stores, and "general merchandise" stores.
N/A - Not applicable.
NOTE: Detail may not add to totals because of rounding.
gross UBI reported within the services industrial business activity were business leagues and a variety
grouping and 19 percent to the total reported by all of nonprofit charitable associations and societies.
Form 990-T filers. The business service of advertis- The health services subgroup was responsible for
ing (including printing) was reported on more re- 23 percent of gross UBI generated from services and
turns, overall, than any other single unrelated busi- 10 percent of that generated from all activities.
ness activity, more than 18 percent of the total. In Within this subgroup, the medical laboratory activity
dollar terms, its nearly $1 billion share of total gross was reported most often and accounted for over 6
UBI, 15 percent, was also the largest for a single percent of total gross UBI reported by all organiza-
primary activity. The majority of organizations that tions. Health services was the third most frequently
indicated advertising as their primary unrelated reported activity, accounting for 7 percent of organi- 89
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
zations in the services industrial grouping. Organiza- profit-sharing, and stock-bonus plans; trustees of
tions reporting some type of health services as their Individual Retirement Arrangements; and an assort-
primary unrelated business activity typically included ment of nonprofit charitable organizations, mainly
hospitals, medical centers, and health care facilities. private foundations, hospitals, medical centers,
Another 24 percent of the organizations within colleges, and universities. “Investment activities by
the services industrial grouping reported amusement section 501(c)(7), (9), and (17), organizations,” a
and recreation services as their primary unrelated special category set up for Form 990-T filers, com-
business activity. About 7 percent of total gross UBI prised 36 percent of returns filed and 57 percent of
was attributable to organizations classified in this gross UBI reported within the finance subgroup.
subgroup. These types of activities were reported by They also accounted for 9 percent of total aggregate
a wide range of organizations: golf and country gross UBI.
clubs; civic leagues; social welfare organizations; The majority of organizations that carried on real
fraternal organizations; veterans’ organizations; and estate activities were nonprofit charitable organiza-
nonprofit charitable societies, associations, and tions; however, large numbers of civic and business
guilds. The latter group, nonprofit charitable organi- leagues, labor unions, real estate boards, social and
zations, mainly included educational institutions and recreational clubs; fraternal organizations, and trusts
athletic clubs. acting as fiduciary agents for retirement funds also
Finance, insurance, and real estate enterprises reported real estate as their primary unrelated busi-
were conducted as a primary unrelated business by ness activity.
42 percent of the organizations filing Form 990-T for Within retail trade, carried on by 3,913 exempt
1995. The 15,368 organizations in this major indus- organizations, 68 percent of the primary activities
trial grouping also accounted for 39 percent of the reported were in the “eating and drinking places”
total gross UBI reported by all filers. Organizations subgroup, followed by “miscellaneous retail” activi-
engaging in insurance accounted for 43 percent of ties, reported on 29 percent of the returns. Together,
the $2.5 billion total of gross UBI reported by orga- these two activity subgroups accounted for 94 per-
90 nizations that were part of the finance, insurance, and cent of the gross UBI attributable to the retail trade
real estate industrial grouping, closely followed by industrial grouping, but only 8 percent of the total of
those engaged in finance activities, accounting for 40 gross UBI reported by all Form 990-T filers.
percent. These two groups of organizations were Organizations operating eating and drinking
also responsible, respectively, for 17 percent and 16 places as an unrelated activity were mainly hospitals,
percent of total aggregate gross UBI. Organizations golf and country clubs, fraternal organizations, and
involved in real estate activities accounted for an- veterans’ organizations. The main types of retail
other 17 percent of the finance, insurance, and real establishments reported within the miscellaneous
s
estate industrial grouping’ gross UBI and 7 percent retail subgroup, ordered by the amount of gross UBI
of total gross UBI reported by all organizations. generated, were drugstores and proprietary stores;
Most of the organizations that engaged in unre- gift, novelty, and souvenir shops; “miscellaneous
lated activities in the insurance industry were county retail stores”; and book stores. Collectively, these
farm bureaus and trade associations. Section four types of activities made up 97 percent of the
501(c)(3) and (c)(4) organizations administering primary activity classifications reported within the
health or life insurance plans made up less than 1 miscellaneous retail subgroup and produced 87
percent of the insurance subgroup, but they reported s
percent of the subgroup’ gross UBI. A small num-
87 percent of the gross UBI attributable to the group ber of primary activities were reported separately
and 15 percent of the gross UBI reported by all Form from the eating and drinking places subgroup and the
990-T filers. miscellaneous retail subgroup and, therefore, are
The finance subgroup encompassed many differ- considered “other” retail trade in Figure J. These
ent types of nonprofit organizations. Principally included food stores, apparel and accessory stores,
among them were the Internal Revenue Code section and “general merchandise” stores.
501(c)(7), (9), and (17) organizations; nonprofit Hospitals and medical centers were the most
90 development corporations; trustees of pension, prevalent organizations reporting drugstores as a
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
primary activity. Gift shops were reported as an reported by the four major industrial groupings
unrelated business activity mainly by nonprofit discussed above. The largest portion of gross UBI
associations, societies, museums, and performing arts reported for each of the 5 years can be attributable to
centers. The operation of bookstores was the pri- unrelated business activities in the services industrial
mary activity conducted by colleges, universities, grouping, followed by income generated within the
and religious organizations. major industrial grouping of finance, insurance, and
There were 912 organizations that reported real estate. Within these two classifications,
unrelated activities in the manufacturing division. nonprofits reported gross UBI for 1995 that was 84
The majority, 81 percent, could be categorized under percent of the aggregate total.
printing and publishing. While 96 percent of the Over the 5-year period, the gross UBI of non-
s
manufacturing division’ total gross unrelated busi- profit organizations reporting finance, insurance, or
ness income was attributable to the printing and real estate as their primary unrelated business activity
publishing industrial subgroup, this subgroup ac- grew by more than 116 percent, and the number of
counted for only 3 percent of total gross UBI re- Forms 990-T they filed increased by 30 percent. The
ported by all organizations and only 2 percent of all number of filers providing unrelated business ser-
Form 990-T returns filed. Business leagues, real
vices rose 19 percent, and the gross UBI attributable
estate boards, and various types of nonprofit chari-
table organizations accounted for 66 percent of the to them increased 88 percent. Income from manu-
printing and publishing carried on by tax-exempt facturing grew over 85 percent, but the number of
organizations as their principal unrelated trade or returns filed reporting manufacturing as a primary
business activity. Civic leagues, social welfare activity dropped 39 percent. The 5-year growth of
organizations, labor and agricultural organizations, 49 percent in the gross UBI of organizations engag-
and fraternal beneficiary organizations accounted for ing primarily in retail trade activities was much
another 30 percent. smaller than that for manufacturing, but the number
Figure K shows, for the years 1991-1995, the of returns filed with a primary activity of retail trade
number of returns filed and the amount of gross UBI increased by 16 percent.
FigureK
Selected Primary Unrelated Business Activities or Industrial Groupings: Number of Returns and Gross
Unrelated Business Income (UBI), Tax Years 1991-1995
[Money amounts are in millions of dollars]
Percentage change,
1991 1992 1993 1994 1995
Primary unrelated 1991-1995
business activity or Number Gross Number Gross Number Gross Number Gross Number Gross Number Gross
industrial grouping of returns UBI of returns UBI of returns UBI of returns UBI of returns UBI of returns UBI
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
All activities and
32,690 3,384.7 31,122
groupings.............................................................. 4,069.1 32,638 4,694.2 35,657 5,379.8 36,394 6,279.7 +11.3 +85.5
1,495 117.8
Manufacturing.............................................................. 786 143.3 854 155.0 951 161.2 912 218.5 -39.0 +85.5
3,372 368.3
Retail trade.............................................................. 3,409 427.1 3,671 383.1 3,749 492.5 3,913 550.2 +16.0 +49.4
Finance, insurance,
11,862 1,136.9 12,159
and real estate.............................................................. 1,119.9 12,191 1,505.3 12,855 1,850.0 15,368 2,461.0 +29.6 +116.5
12,040 1,512.0
Services.............................................................. 12,762 2,161.2 13,587 2,455.8 13,949 2,658.1 14,305 2,838.9 +18.8 +87.8
All other activities
3,921 249.8 2,006
and groupings.............................................................. 217.7 2,335 194.9 4,153 218.1 1,896 211.2 -51.6 -15.5
NOTE: Detail may not add to totals because of rounding.
91
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
Summary 116 percent between 1991 and 1995.
Nonprofit organizations filing Form 990-T to report
income from “unrelated business” activities, those DataSourcesandLimitations
that were not related to their nonprofit missions, The statistics in this article are based on a sample of
grossed $6.3 billion of unrelated business income Tax Year 1995 Forms 990-T, Exempt Organization
(UBI) for 1995. After taking deductions totaling Business Income Tax Return. The Internal Revenue
$7.3 billion, the 36,394 organizations that filed Form Service required organizations having accounting
990-T reported an aggregate net income (less deficit) periods beginning in 1995 (and, therefore, ending
of $1 billion. About half of the organizations filing between December 1995 and November 1996) to file
Form 990-T reported aggregate net income (taxable a 1995 Form 990-T. The associated required filing
profit) of $0.9 billion, with an associated total period for Tax Year 1995 Forms 990-T generally
income tax liability of $277.5 million. was May 1996 to April 1997 (April 1996 to March
Between 1991 and 1995, nonprofit organiza- 1997 for Internal Revenue Code section 401(a) and
tions’ net income (taxable profit) grew by 107 per- 408(e) trusts), but extensions of time to file beyond
cent and their total income tax liability rose 137 this period were granted to many organizations.
percent. As a group, however, these organizations Because the accounting periods of the organizations
sustained aggregate losses every year during the 5- filing a 1995 return vary, the financial activities
year period, with total deductions exceeding total covered in this article span the period January 1995
gross income each year. During that time, their gross through November 1996 (although the majority of
unrelated business income and total deductions grew activities occurred during Calendar Year 1995).
by 86 percent and 79 percent, respectively. The population from which the 1995 Form 990-T
For 1995, about 27 percent of the organizations sample was drawn consisted of Form 990-T records
filing Form 990-T were nonprofit “charitable” orga- posted to the IRS Business Master File system during
nizations that were tax-exempt under Internal Rev- 1996 and 1997. The returns in the sample were
enue Code section 501(c)(3). Another 48 percent stratified based on the size of gross unrelated busi-
92 were business leagues, chambers of commerce, and ness income (UBI). A sample of 7,278 returns was
real estate boards exempt under section 501(c)(6); selected from a population of 36,736. After exclud-
social and recreational clubs exempt under section ing returns that were selected for the sample but later
501(c)(7); and fiduciary agents for Individual Retire- rejected, the sample size was 7,231 and the estimated
ment Arrangements (IRA’ exempt under section
s) population size was 36,394. Rejected returns in-
408(e). Together, the section 501(c)(3) and cluded those which had gross UBI below the $1,000
501(c)(6) organizations reported nearly 70 percent of filing threshold, were filed only to claim a refund, or
total gross UBI for 1995. The distribution of organi- were filed for a part-year accounting period that
zations by Internal Revenue Code section, in terms of began in a year other than 1995. (For example, a
the number of filers and the amount of gross UBI final return filed for the short period of January 1996 -
reported, did not change significantly from 1991 to June 1996 may have been computer-selected for the
1995. 1995 sample based on the criterion of having an
There also appears to be no significant change ending accounting period that fit into the December
when comparing the apportioning of Forms 990-T by 1995 to November 1996 range for a Tax Year 1995
primary unrelated business activities reported for return, but it would be rejected because, in actuality,
1995 to that for 1991. Ninety-five percent of the it was a Tax Year 1996 return.)
primary business activities for 1995, and 88 percent The 1995 Form 990-T study design incorporated
for 1991, fell within four major industrial groupings-- a special “integrated” sample to gather information
services; finance, insurance, and real estate; retail on “related” (tax-exempt) and “unrelated” (taxable)
trade; and manufacturing [13]. The gross unrelated income and expenses for organizations that filed both
business income of organizations involved in fi- forms. Under this program, the Form 990-T sample
nance, insurance, and real estate activities grew most included unrelated business income tax returns filed
rapidly over the 5-year period, when compared to by any organizations whose Form 990 (Return of
other industrial groupings, increasing by more than Organization Exempt From Income Tax) information
92
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
returns were selected for either of two other Statistics should be taken into account. Figure L shows CV’ s
of Income samples, one that included charities tax- s
for selected financial data. CV’ are not shown for
exempt under section 501(c)(3), and another sample returns with gross UBI of $500,000 or more because
that included organizations tax-exempt under sec- they were sampled at a 100-percent rate and, there-
tions 501(c)(4) through 501(c)(9) [14]. fore, are not subject to sampling variability. A dis-
Returns selected for the two Form 990 samples cussion of the reliability of estimates based on
were a determining factor in the selection of returns samples and methods for evaluating both the magni-
that were included in the integrated portion of the tude of sampling and nonsampling error and the
Form 990-T sample. The Form 990-T sample was precision of sample estimates can be found in the
designed so that if a return was not initially selected, general Appendix, located near the back of this issue
based on independent Form 990-T sampling criteria, of the SOI Bulletin.
it was subjected to further sampling based on a
Forms 990/990-T matching process. Under this
process, the Employer Identification Numbers FigureL
s)
(EIN’ of Form 990-T returns that were not initially
selected for the Form 990-T sample were compared
to the EIN’ of returns selected for the two Form 990
s Coefficients of Variation for Selected Items,
SOI samples. When a match occurred, the Form Tax Year 1995
990-T was added to the independently selected Form Gross
unrelated Total Net income Total
990-T sample. These specially matched returns,
Size of gross unrelated business deductions (taxable income
along with the independently selected Forms 990-T
business income income profit) tax
that also had counterparts in the Form 990 samples,
Coefficient of variation (percentages)
formed the “integrated” portion of the Form 990-T
(1) (2) (3) (4)
sample.
1.47 1.37 1.43
Total...................................................................................................... 1.42
Sampling rates ranged from a minimum of 2.6 3.37 9.13 7.02 7.45
$1,000 under $10,001 ¹......................................................................................................
percent (Form 990-T gross UBI was less than 1.62 4.97 5.68 6.46
$10,001 under $100,000 ¹......................................................................................................
$20,000, with either no Form 990 match or a Form 0.89 1.48 3.47 3.82
$100,000 under $500,000......................................................................................................
990 match to a section code 501(c)(3) return with N/A N/A N/A N/A
$500,000 or more......................................................................................................
assets under $2,500,000) to a maximum of 100 ¹ The gross unrelated business income (UBI) brackets of "$1,000 under $10,001"
percent (either Form 990-T gross UBI was $300,000 and "$10,001 under $100,000" reflect the different filing requirements for organi-
zations with gross UBI of $10,000 or less (only a "partial" return was required) and
or more, or Form 990-T had any amount of gross
all other Form 990-T filers (a more detailed "complete" return was required).
UBI and matched to a Form 990 with assets of Organizations with gross UBI below $1,000 were not required to file Form 990-T.
$10,000,000 or more) [15]. Other Forms 990/990-T N/A - Not applicable.
matches within various ranges of gross UBI, assets,
and Internal Revenue Code sections were selected at
rates ranging from 4 percent to 40 percent. ExplanationofSelectedTerms
The information presented in this article was Advertising Income.--Gross income realized by an
obtained from returns as originally filed with the exempt organization from the sale of advertising in a
IRS. The data were subjected to comprehensive periodical was gross income from an unrelated trade
testing and correction procedures in order to improve or business activity involving the “exploitation of an
statistical reliability and validity. In most cases, exempt activity,” namely, the circulation and reader-
changes made to the original return as a result of ship of the periodical developed by producing and
administrative processing, audit procedures, or a distributing the readership content of that periodical.
taxpayer amendment were not incorporated into the Advertising income was reported separately from
data base. other types of “exploited exempt activity income.”
Because the data are based on a sample, they are (See the explanation of Exploited Exempt Activity
subject to sampling error. In order to use these Income.) Internal Revenue Code section 501(c)(7),
statistics properly, the magnitude of the sampling (9), and (17) organizations (each described in the
error, measured by the coefficient of variation (CV), Appendix to this article) reported gross advertising 93
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
income, as well as other types of “exploited exempt tions.” Exempt organizations with gross unrelated
activity income,” as gross receipts from sales and business income (UBI) above $10,000 were required
services. All other organizations reported this to report each deduction component separately.
income separately. Organizations with gross UBI between $1,000 (the
Capital Gain Net Income.--Generally, organiza- filing threshold) and $10,000 reported a single total
tions required to file Form 990-T (except organiza- of the first five types of directly-connected expenses
tions exempt under Internal Revenue Code sections listed above (those described as “allocable to”) and a
501(c)(7), (9), and (17)) were not taxed on net gains single total for all other types of deductions (both
from the sale, exchange, or other disposition of deductions directly connected with UBI and those
property. However, net capital gains on sales of not directly connected, each defined below), except
debt-financed property, certain gains on the cutting for two items that were required to be reported sepa-
of timber (section 1231), and gains on sales of cer- rately: the “net operating loss carryover” and the
tain depreciable property (described in sections 1245, “specific deduction,” also defined below.
1250, 1252, 1254, and 1255) were taken into account Deductions Not Directly Connected With Unre-
in computing capital gain net income. (See the lated Business Income.--The component deductions
explanation of Investment Income (Less Loss) for were “set-asides,” “excess exempt expenses,” chari-
information regarding investment income of section table contributions, and the “specific deduction.”
501(c)(7), (9), and (17) organizations.) The specific deduction was reported, when appli-
Contributions.--To the extent permissible under cable, by all organizations with positive taxable
the Internal Revenue Code, a deduction was allowed income; the other types of deductions not directly
for contributions or gifts actually paid within the tax connected with UBI were reported separately, when
year to, or for the use of, another entity that was a applicable, only by exempt organizations with gross
charitable or governmental organization described in UBI above $10,000. (See, also, the explanations of
Code section 170(c). Any unused contributions Set-Asides, Excess Exempt Expenses, and the Spe-
carried over from earlier years were also allowed. cific Deduction.)
94 The contributions deduction was allowed whether or Excess Exempt Expenses.--The two types of
not directly connected with the carrying on of a trade “excess” expenses allowed as deductions from unre-
or business. lated business income were (1) excess exempt ex-
Deductions Directly Connected With Unrelated penses attributable to commercial exploitation of
Business Income.--These were deductions allowed in exempt activities, and (2) excess exempt expenses
computing net income, if they otherwise qualified as attributable to advertising income. In the case of
income tax deductions under the Internal Revenue “exploited” exempt activity income (see the explana-
Code and if they had a “proximate and primary” tion of Exploited Exempt Activity Income, Except
relationship to carrying on an unrelated trade or Advertising, below), if the expenses of the
business. Allowable deductions included those s
organization’ exempt activity exceeded the income
directly connected with rental of personal property; from the exempt activity, then the excess of exempt
those allocable to unrelated debt-financed income; expenses over exempt income could be used to offset
those directly connected with investment income of any positive net unrelated business income produced
Internal Revenue Code section 501(c)(7), (9), and from exploiting the exempt activity, to the extent that
(17) organizations; those allocable to interest, annu- it did not result in a loss. Excess expenses of a
ities, royalties, and rents received from controlled commercially exploited exempt activity could not be
organizations; those allocable to “exploited exempt used to offset income from another type of unrelated
activity income” other than advertising; direct adver- business activity if the unrelated activity did not
tising costs; compensation of officers, directors, and exploit that particular exempt activity. In the case of
trustees; salaries and wages; repairs; bad debts; excess exempt expenses attributable to advertising
interest; taxes; depreciation (unless deducted else- income, if the expenses attributable to producing and
where); depletion; contributions to deferred compen- distributing the readership content of a periodical
sation plans; contributions to employee benefit plans; exceeded the circulation income, then the excess of
94 the “net operating loss carryover”; and “other deduc- readership costs over circulation income could be
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
used to offset any net gain from advertising (gross ing unrelated business taxable income. All organiza-
advertising income less direct advertising costs), to tions were required to report detailed sources of
the extent that it did not result in a loss. gross UBI. The components of gross UBI, as shown
Exploited Exempt Activity Income, Except Adver- on the tax return, were gross profit (less loss) from
tising.--In some cases, exempt activities create good- sales and services; capital gain net income; net gain
will or other intangibles that are capable of being (less loss), sales of noncapital assets; net capital loss
exploited in a commercial manner. When an organi- deduction (trusts only); income (less loss) from
zation exploited such an intangible in commercial partnerships; rental income; unrelated debt-financed
activities that did not contribute importantly to the income; investment income (less loss) of Internal
accomplishment of an exempt purpose, the income it Revenue Code section 501(c)(7), (9), and (17) orga-
produced was gross income from an unrelated trade nizations; annuities, interest, rents, and royalties from
or business. An example of this type of activity controlled organizations; “exploited exempt activity”
would be an exempt scientific organization with an income; advertising income; and “other income”
excellent reputation in the field of biological research (less loss). (For an explanation of how income is
that exploits its reputation regularly by selling en- allocated to the components of gross UBI, see the
dorsements of laboratory equipment to manufactur- separate listings for each component.)
ers. Endorsing laboratory equipment would not have Income from Controlled Organizations.--When
contributed importantly to the accomplishment of an exempt organization controls another organization
any purpose for which tax exemption was granted to (as described below), the gross annuities, interest,
the organization. Accordingly, the income from rents, and royalties from the controlled organization
selling such endorsements is gross unrelated business are included in the gross UBI of the controlling
income. Exploited exempt activity income from organization at a specified ratio, depending on
advertising was reported separately from other types whether the controlled organization is tax-exempt or
of exploited exempt activity income (see the explana- not. For Tax Year 1995 “control” meant: (a) for a
tion of Advertising Income). Internal Revenue Code stock corporation, the ownership of stock possessing
section 501(c)(7), (9), and (17) organizations re- at least 80 percent of the total combined voting
ported income from exploited exempt activities as power of all classes of stock entitled to vote, and
gross receipts from sales and services. All other ownership of at least 80 percent of the total number
organizations reported this income separately. of shares of all other classes of stock of the corpora-
Gross Profit (Less Loss) from Sales and Ser- tion; or (b) for a nonstock organization, at least 80
vices.--This was the gross profit (less loss) from any percent of the directors or trustees of the organization
unrelated trade or business regularly carried on that were either representatives of, or directly or indi-
involved the sale of goods or performance of ser- rectly controlled by, a tax-exempt organization. The
vices. It did not include income from unrelated rules for debt-financed property did not apply to
business activities that were required to be reported passive income from controlled organizations. (See
separately on any of the tax return schedules. For the explanation of Unrelated Debt-Financed Income.)
example, an Internal Revenue Code section 501(c)(7) Income (Less Loss) from Partnerships.--If an
social club would include gross restaurant and bar organization was a partner in any partnership that
receipts from nonmembers in the calculation of gross carried on an unrelated trade or business, this was the
profit (less loss) from sales and services, but would s
organization’ share of partnership gross unrelated
report its investment income from sales of securities business income less its share of partnership deduc-
on the required return schedule. Gross profit (less tions that were directly connected with the unrelated
loss) from sales and services is computed as gross income.
receipts from sales or services, less returns and Investment Income (Less Loss).--This item was
allowances, minus cost of sales and services. reported only by organizations exempt under Internal
Gross Unrelated Business Income (UBI).--This Revenue Code sections 501(c)(7), (9), and (17) (each
was the total gross unrelated business income (see described in the Appendix to this article) and in-
the explanation of Unrelated Business Income), prior cluded such income as gross unrelated debt-financed
to reduction by allowable deductions used in comput- income, gross income from the ownership or sale of 95
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
securities, and set-asides deducted from investment represented taxable profit, which was subject to the
income in previous years that were subsequently unrelated business income tax. (See, also, explana-
used for a purpose other than that for which a deduc- tions of Deductions Directly Connected With Unre-
tion was allowed. (See, also, the explanation of Set- lated Business Income and Deductions Not Directly
Asides.) All gross rents (except those that were Connected With Unrelated Business Income.)
exempt-function income) of section 501(c)(7), (9), Net Operating Loss Carryover.--The net operat-
and (17) organizations were treated as unrelated ing loss carryover (as described in Code section 172)
business income and were reported as “rental in- was allowed as a deduction in computing unrelated
come.” Organizations exempt under sections other business taxable income. However, the net operating
than 501(c)(7), (9), and (17) did not report “invest- loss carryback or carryover (allowed only to or from
ment income (less loss).” Generally, these organiza- a tax year for which the organization was subject to
tions’ investment income (dividends, interest, rents, tax on unrelated business income) was determined
and annuities) and royalty income were not taxed as without taking into account any amount of exempt-
unrelated business income, unless it was income function income or deductions that had been ex-
from a controlled organization (excluding dividends) cluded from the computation of unrelated business
or debt-financed income, or the rents were of the taxable income. A “net operating loss” represented
type described in the explanation of rental income. the excess of deductions over receipts for specified
(See explanations of Income from Controlled Orga- prior or future years for which an organization re-
nizations, Rental Income, and Unrelated Debt-Fi- ported an overall deficit from its unrelated trade or
nanced Income.) business activities. The statistics in this article repre-
Net Capital Loss (Trusts Only).--If a trust had a sent only the net operating loss carryover because
net loss from sales or exchanges of capital assets, it carrybacks from future years would be reported on
was allowed a deduction for the amount of the net an amended return, not on the return as initially filed,
loss or $3,000, whichever was lower. (Corporations which served as the basis for the statistics.
were not allowed to deduct any excesses of capital Other Deductions.--This included all types of
96 losses over capital gains.) Trusts reported the net unrelated business deductions that were not specifi-
capital loss deduction on Form 990-T as a negative cally required to be reported elsewhere on the tax
component of gross unrelated business income. return. Examples are fees for accounting, legal,
Most of the trusts filing Form 990-T were Individual consulting, or financial management services; insur-
s);
Retirement Arrangements (IRA’ employee pen- ance costs (if not for employee-related benefits);
sion, profit-sharing, or stock bonus plans; and em- equipment costs; mailing costs; office expenses, such
ployees’ beneficiary associations providing for as janitorial services, supplies, or security services;
payment of life, sickness, health, or other benefits to rent; travel expenses; educational expenses; and
members. utilities.
Net Gain (Less Loss), Sales of Noncapital As- Other Income (Less Loss).--This included all
sets.--This was the gain or loss from the sale or types of unrelated business income that were not
exchange of business property, as reported on Form specifically required to be reported elsewhere on the
4797, Sales of Business Property. Property other tax return. Examples are insurance benefits fees;
than capital assets generally included property of a member support fees; commissions; returned contri-
business nature, in contrast to personal and invest- butions that were deducted in prior years; income
ment properties, which were capital assets. from insurance activities that was not properly set
Net Income (Less Deficit).--This was gross aside in prior years; recoveries of bad debts; and
income derived from any unrelated trade or business refunds of State or local tax payments, if the pay-
regularly carried on by an exempt organization, less ments were previously reported as a deduction.
deductions directly connected with carrying on the Proxy Tax.--This was a tax on certain nondeduct-
trade or business and less other allowable deductions ible lobbying and political expenditures paid or
not directly connected. On a return-by-return basis, incurred after December 31, 1993, by organizations
the result of this computation was either positive (net that were tax-exempt under Internal Revenue Code
96 income), negative (deficit), or zero. Net income sections 501(c)(4), 501(c)(5), and 501(c)(6). If the
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
organization failed to notify its members regarding income, in that order. For organizations tax-exempt
their shares of dues to which nondeductible lobbying under sections 501(c)(7), (9), and (17), rental income
and political expenditures were allocable, or if the included all gross rents (except those that were
notice did not include the entire amount of dues that exempt-function income), with no exclusions. (See
were allocable, then the proxy tax was imposed on explanations of Income from Controlled Organiza-
the organization. It was computed as the aggregate tions and Unrelated Debt-Financed Income.)
amount of nondeductible lobbying expenditures that Set-Asides.--These amounts were allowed to
was not included in the notices sent to the social clubs (Internal Revenue Code section
s
organization’ members, multiplied by 35 percent. 501(c)(7)), voluntary employees’ beneficiary asso-
The proxy tax was required to be reported on Form ciations (section 501(c)(9)), and supplemental unem-
990-T and was included in total income tax; how- ployment benefit trusts (section 501(c)(17)) as a
ever, there was no connection between the proxy tax deduction from investment income. The deduction
and the taxation of income from an organization’ s was equal to the amount of passive income (gener-
unrelated business activities. For this reason, and ally, investment income) that these organizations set
because the SOI sample did not include returns with aside (1) to be used for charitable purposes or (2) to
gross unrelated business income (UBI) below the provide payment of life, health, accident, or other
$1,000 filing threshold, Forms 990-T filed solely to insurance benefits (section 501(c)(9) and (17) orga-
report the proxy tax (no UBI reported) were excluded nizations only) . However, any amounts set aside
from the SOI sample. Organizations whose returns that exceeded the “qualified asset account” limit, as
were included in the SOI sample reported an aggre- figured under section 419A, were not allowed as a
gate $3.9 million of proxy tax. Based on an unpub- deduction from unrelated business investment in-
lished tabulation of data from the IRS Business come; they were treated as taxable investment in-
Returns Transaction File, a total of $11.8 million of come. A section 419A qualified asset account is any
proxy tax was reported on 665 Forms 990-T for Tax account consisting of assets set aside to provide for
Year 1995. It is estimated that about 60 percent of the payment of disability benefits, medical benefits,
these 665 returns were filed solely to report the severance pay benefits, or life insurance benefits.
proxy tax and, thus, were excluded from the SOI Specific Deduction.--The specific deduction
sample. generally was a $1,000 deduction, considered “not
Rental Income.--For organizations tax exempt directly connected” with gross unrelated business
under Internal Revenue Code sections other than income, allowed to all organizations that had positive
501(c)(7), (9), and (17), this was the amount of (1) taxable income after all other types of deductions
gross rents from personal property (e.g., computer were taken. The specific deduction was $1,000 or
equipment or furniture) leased with real property, if the amount of positive taxable income, whichever
the rental income from the personal property was was less.
more than 10 percent, but not more than 50 percent, Total Deductions.--Total Deductions included
of the total rents from all leased property; or (2) both deductions reported on the main part of Form
gross rents from both real property and personal 990-T and expense items reported on attached sched-
property leased with real property if the personal ules. It excluded cost of sales and services ($1.7
property was more than 50 percent of the total rents billion for 1995), which was subtracted from gross
from all leased property. Except for the second receipts from sales and services in computing gross
situation covered above, gross rents from real prop- profit (less loss) from sales and services. Gross
erty generally were excluded in computing unrelated profit (less loss) from sales and services was a com-
business taxable income. In addition, gross rents ponent of gross unrelated business income (UBI).
from personal property that did not exceed 10 per- Cost of sales and services was reported on Form
cent of the total rents from all leased property were 990-T as a lump-sum total, but may have included
excluded. Any rents excluded from the explanation amounts attributable to depreciation, salaries and
of “rental income” had to be considered in terms of wages, and certain other types of deductible items.
their taxability as unrelated business income from For this reason, the total amount shown for some of
controlled organizations or unrelated debt-financed the separately reported components of total deduc- 97
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
tions, such as “salaries and wages,” may be under- Tax Rates for Trusts
stated. (Section 1(e) of the Internal Revenue Code)
Total Income Tax.--Total income tax was unre-
Amount of unrelated
lated business income tax less the foreign tax credit, business taxable income is:
general business credit, credit for prior-year mini- Of the
mum tax, and other allowable credits, plus the But not amount
“proxy tax” on certain lobbying expenditures, the tax Over-- over-- Tax is: over--
from recomputing certain prior-year credits (“recap- $0 $1,500 15% $0
ture taxes”), the “alternative minimum tax,” and the 1,500 3,700 $232.50 + 28% 1,500
3,700 5,600 834.50 + 31% 3,700
“environmental tax.” 5,600 7,650 1,423.50 + 36% 5,600
Unrelated Business Income.--This was income of 7,650 -- 2,161.50 + 39.6% 7,650
a tax-exempt organization that was from a trade or
business which was regularly carried on by the Unrelated Debt-Financed Income.--Gross in-
organization and which was not substantially related come from investment property for which there was
s
to the performance of the organization’ exempt acquisition indebtedness outstanding at any time
purpose or function (other than that the organization during the tax year was subject to the unrelated
needed the profits derived from the unrelated activ- business income (UBI) tax. The percentage of in-
ity). The term “trade or business” generally com- vestment income to be included as gross UBI was
prised any activity carried on for the production of proportional to the ratio of average acquisition in-
income from selling goods or performing services. debtedness to the average adjusted basis of the prop-
Activities of producing or distributing goods or erty. Various types of passive income (generally,
performing services from which gross income was investment income) were considered to be unrelated
derived did not lose their identity as trades or busi- debt-financed income, but only if the income arose
nesses merely because they were carried on within a from property acquired or improved with borrowed
larger aggregate of similar activities or within a funds and if the production of income was unrelated
98 larger complex of other endeavors that may, or may s
to the organization’ tax-exempt purpose. When any
not, have been related to the exempt purposes of the property held for the production of income by an
organization. organization was disposed of at a gain during the tax
Unrelated Business Income Tax.--This was the year, and there was acquisition indebtedness out-
tax imposed on unrelated business net income (tax- standing at any time during the 12-month period
able profit). It was determined based on the regular prior to the date of disposition, the property was
corporate or trust income tax rates that were in effect considered debt-financed property, and the gain was
for the 1995 Tax Year, as shown in the following treated as unrelated debt-financed income. Income
schedules. from debt-financed property did not include rents
from personal property (e.g., computers or furniture)
Tax Rates for Corporations leased with real property, certain passive income
(Section 11 of the Internal Revenue Code)
from controlled organizations, and other amounts
Amount of unrelated that were otherwise included in computing unrelated
business taxable income is: business taxable income. Internal Revenue Code
Of the section 501(c)(7), (9), and (17) organizations re-
But not amount ported all debt-financed income as “Investment
Over-- over-- Tax is: over-- Income (Less Loss).” All other organizations re-
$0 $50,000 15% $0
ported debt-financed income separately.
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 Notes and References
335,000 10,000,000 113,900 + 34% 335,000
[1] This is based on a total of 1,162,960 exempt
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 organizations reported in the 1997 Internal
18,333,333 -- 35% 0 Revenue Service Data Book, Publication 55B.
98
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
The total excludes Internal Revenue Code their “modified alternative minimum tax”).
section 501(d) religious and apostolic organiza- Also, the foreign tax credit, general business
tions, farmers’ cooperatives, and nonexempt credit, prior-year minimum tax credit, and other
charitable trusts treated as exempt organizations, credits (such as the U.S. possessions tax credit,
none of which reports tax on Form 990-T. Also, nonconventional source fuel credit, and quali-
the total is understated because it excludes fied electric vehicle credit) were subtracted from
churches, exempt under Code section 501(c)(3), unrelated business income tax in computing
which are not required to apply for recognition total income tax. Total applied credits for 1995
of tax exemption unless they desire to obtain an were $3.4 million, and total additional taxes
Internal Revenue Service (IRS) ruling. How- were $4.3 million.
ever, these churches are required to file Form
990-T if they have unrelated business income. The amount of additional taxes is understated
Because of the understatement of the total because Forms 990-T filed solely to report the
number of exempt organizations, the proportion proxy tax (no unrelated business income was
of all exempt organizations that filed Form 990-T reported) were excluded from the SOI sample
may be lower than 3 percent. and, therefore, are not represented in these
statistics. Based on returns in the SOI sample,
[2] Organizations that are recognized as tax exempt the amount of the proxy tax included in total
under section 501(a) of the Internal Revenue income tax was $3.9 million. This amount is
Code, and described in Code sections 401(a), attributable to organizations that had gross UBI
408(e), and 501(c), must file a Federal income above the $1,000 filing threshold and also
tax return (Form 990-T) if they received $1,000 reported the proxy tax. Based on an unpub-
or more of gross income from business activities lished tabulation of data from the IRS Business
that were considered unrelated to the purposes Returns Transaction File, the total amount of
for which they received tax-exempt status. proxy tax reported on all Forms 990-T filed for
Code section 501(d) religious and apostolic Tax Year 1995 was $11.8 million. This amount
organizations, farmers’ cooperatives, and is attributable to 665 organizations, the majority
nonexempt charitable trusts treated as exempt of which filed Form 990-T only for the purpose
organizations file tax forms other than Form of reporting the proxy tax. The proxy tax was
990-T. Returns filed by organizations with required to be reported on Form 990-T and was
gross unrelated business income (UBI) below included in total income tax; however, there was
the $1,000 filing requirement threshold were no connection between the proxy tax and the
excluded from the statistics presented in this taxation of income from an organization’ s
article. Some of these returns were filed inad- unrelated business activities. The proxy tax is
vertently; others were filed for a specific reason, defined in the Explanation of Selected Terms
such as to claim a refund of Form 1099 backup section of this article.
withholding that was withheld erroneously on
interest or dividend payments because the payer [4] The term “charitable” refers to tax-exempt
did not realize that the payee was a tax-exempt organizations with purposes that are charitable,
organization. educational, scientific, literary, or religious in
nature, and also those organizations engaged in
[3] While the largest share of total income tax was activities which foster national or international
the tax on unrelated business income, total amateur sports competition, prevent cruelty to
income tax could have also included the “proxy children or animals, or test for public safety.
tax” on certain lobbying expenditures, “recap-
ture taxes” (such as from recomputation of [5] These percentages are based on deductions
prior-year investment or low-income housing reported only by organizations with gross
credits), the “alternative minimum tax” (AMT), unrelated business income (UBI) over $10,000.
and the environmental tax (an excise tax levied Organizations with UBI between $1,000 (the
on certain corporations, computed based on filing threshold) and $10,000 were required to 99
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
report only a total for their deductions (except category, “Not reported,” fell from 7 percent
for the specific deduction and net operating loss for 1991 to 1 percent for 1995. Better research
carryover, which all organizations reported methods were employed for the 1995 study to
separately). Organizations with gross UBI over determine a primary activity code for organiza-
$10,000 were required to report each deduction tions that did not provide the information on
item separately, as shown in Table 7 at the end Form 990-T. Many returns that would have
of this article. Additional deductions may be been in the “Not reported” category using the
taken as “cost of sales and services,” which are 1991 study techniques were classified in one of
not included in total deductions on Form 990-T. the specific categories for 1995.
For further information, see the definition of
Total Deductions in the Explanation of Selected [10] The total of 160 industry classifications were
Terms section of this article. combined to form the 10 major groupings
shown in Table 5. See Office of Management
[6] For historical tax return data on net income (less and Budget, Standard Industrial Classification
deficit), and other financial items, reported by Manual, 1987, which lists all of the 4-digit
nonfarm sole proprietorships, partnerships, and industry codes used by Form 990-T filers for
corporations, see Statistics of Income Bulletin, 1995, except for the five additional categories
Spring 1998, Volume 17, Number 4, Tables 10, that reflected certain provisions of the Internal
11, and 13, respectively, in the “Selected Revenue Code pertaining to exempt organiza-
Historical and Other Data” section, pp. 212-213 tions.
and 215-216.
[11] When an exempt organization commercially
[7] Resource allocation and other factors affecting “exploits” the goodwill or other intangibles that
nonprofit organizations’ choices regarding are created by its exempt activities, and the
involvement in unrelated business activities are commercial activities do not contribute signifi-
thoroughly examined in Cordes, Joseph J. and cantly to the accomplishment of its exempt-
100 Weisbrod, Burton A., “Differential Taxation of purpose functions, the income generated by the
Nonprofits and the Commercialization of commercial activities is considered “exploited
Nonprofit Revenues,” Journal of Policy Analy- exempt activity income” and is subject to the
sis and Management, Spring 1998, Volume 17, UBI tax. Examples of exploited exempt
Number 2, pp. 195-214. activities would be product endorsements and
the sale of commercial advertising in a publica-
[8] The unrelated business income tax for nonprofit
tion that is printed to promote the exempt
corporations was determined based on the
purpose of an organization. (See the defini-
regular corporate income tax rates in effect for
tions of Advertising Income and Exploited
Tax Year 1995. Nonprofit trusts were generally
Exempt Activity Income in the Explanation of
taxed at the regular individual income tax rates
Selected Terms section.)
established for estates and trusts for Tax Year
1995. Trusts that were eligible for the maxi- [12] Portions of the data in this section on industry
mum 28-percent tax rate on capital gain net subgroups, particularly the types of organiza-
income figured their tax based on Schedule D of tions included in the subgroups, are from
Form 1041, U.S. Income Tax Return for Estates unpublished Statistics of Income tabulations.
and Trusts. The corporate and trust tax-rate
schedules are included in the definition of [13] Improved research methods used to assign
Unrelated Business Income Tax, found in the codes for primary activities when they were not
Explanation of Selected Terms section of this reported on Form 990-T are partly responsible
article. for this increase between 1991 and 1995. See
footnote 9, above.
[9] One factor contributing to the rise in the number
of returns within these four major industrial [14] For the most recent Form 990 annual data on
100 groupings was that the number of returns in the organizations tax-exempt under Internal
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
Revenue Code sections 501(c)(3) (excluding annual data on private foundations, see
private foundations and most religious organi- Arnsberger, Paul, “Private Foundations and
zations) through 501(c)(9), see Hilgert, Cecelia Charitable Trusts, 1995,” Statistics of Income
and Whitten, Melissa, “Charities and Other Bulletin, Winter 1998-1999, Volume 18,
Tax-Exempt Organizations, 1995,” Statistics of Number 3. Also recently published is an article
Income Bulletin, Winter 1998-1999, Volume containing a 20-year review of the finances of
18, Number 3. Private foundations, tax exempt tax-exempt organizations filing Forms 990,
under Code section 501(c)(3), are required to 990-PF, and 990-T. See Meckstroth, Alicia
file Form 990-PF (Return of Private Founda- and Arnsberger, Paul, “A 20-Year Review of
tion or Section 4947(a)(1) Nonexempt Chari- the Nonprofit Sector, 1975-1995,” Statistics of
table Trust Treated as a Private Foundation), Income Bulletin, Fall 1998, Volume 18, Num-
rather than Form 990. Private foundations ber 2.
were required to report taxable income on [15] For additional information on the Form 990 and
Form 990-T, but this type of organization was Form 990-T integrated sample design, see
not included in the integrated sample design. Harte, James M. and Hilgert, Cecelia H.,
“Nonexempt charitable trusts” (described in “Enriching One Sample While Improving
Code section 4947(a)(1)) that filed the Form Another: Linking Differently Stratified
990-PF information return for 1995 were Samples of Documents Filed by Exempt
required to report taxable income on Form Organizations,” Statistics of Income: Turning
1041, U.S. Income Tax Return for Estates and Administrative Systems Into Information
Trusts, not Form 990-T. For the most recent Systems, 1993.
SOURCE: IRS, Statistics of Income Bulletin, Spring
1999
101
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
Appendix
Types of Tax-Exempt Organizations Subject to the Unrelated Business Income Tax Provisions,
by Internal Revenue Code Section
Code
Description of organization General nature of activities
section
401(a) Qualified pension, profit-sharing, or stock bonus plans Fiduciary agent for pension, profit-sharing, or stock
bonus plans
408(e) Individual Retirement Arrangements Fiduciary agent for retirement funds
501(c)(2) Title-holding corporations for exempt organizations Holding title to property for exempt organizations
(3) Religious, educational, charitable, scientific, or literary Activities of a nature implied by the description of
organizations; testing for public safety organizations. the class of organization
Also, organizations preventing cruelty to children or
animals, or fostering national or international amateur
sports competition
(4) Civic leagues, social welfare organizations, and local Promotion of community welfare and activities from
associations of employees which net earnings are devoted to charitable,
educational, or recreational purposes
(5) Labor, agricultural, and horticultural organizations Educational or instructive groups whose purpose is
to improve conditions of work, products, and
efficiency
(6) Business leagues, chambers of commerce, real estate Improving conditions in one or more lines of
boards, and like organizations business
102
(7) Social and recreational clubs Pleasure, recreation, and social activities
(8) Fraternal beneficiary societies and associations Lodge providing for payment of life, health,
accident, or other benefits to members
(9) Voluntary employees' beneficiary associations Providing for payment of life, health, accident, or
(including Federal employees' voluntary beneficiary other benefits to members
associations formerly covered by section 501(c)(10))
(10) Domestic fraternal societies and associations Lodges, societies, or associations devoting their net
earnings to charitable, fraternal, and other specified
purposes, without life, health, or accident benefits to
members
(11) Teachers' retirement fund associations Fiduciary association providing for payment of
retirement benefits
(12) Benevolent life insurance associations, mutual ditch or Activities of a mutually beneficial nature implied by
irrigation companies, mutual or cooperative telephone the description of the class of organization
companies, and like organizations
(13) Cemetery companies Arranging for burials and incidental related activities
(14) State-chartered credit unions and mutual reserve Providing loans to members
funds
102
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
Appendix
Types of Tax-Exempt Organizations Subject to the Unrelated Business Income Tax Provisions,
by Internal Revenue Code Section--Continued
Code
Description of organization General nature of activities
section
501(c)(15) Mutual insurance companies or associations other Providing insurance to members, substantially at
than life, if written premiums for the year do not cost
exceed $350,000
(16) Corporations organized to finance crop operations Financing crop operations in conjunction with
activities of a marketing or purchasing association
(17) Supplemental unemployment benefit trusts Fiduciary agent for payment of supplemental
unemployment compensation benefits
(18) Employee-funded pension trusts (created before June Providing for payments of benefits under a pension
25, 1959) plan funded by employees
(19) Posts or organizations of past or present members of Activities implied by the nature of the organization
the armed forces
(21) Black lung benefit trusts Created by coal mine operators to satisfy their
liability for disability or death due to black lung
disease
(22) Withdrawal liability payment funds Providing funds to meet the liability of employers
withdrawing from a multi-employer pension fund
(23) Associations of past and present members of the Providing insurance and other benefits to veterans
armed forces founded before 1880 or their dependents
(24) Trusts described in section 4049 of the Employee Providing funds for employee retirement income
Retirement Income Security Act of 1974
(25) Title-holding corporations or trusts with no more than Acquiring real property and remitting all income
35 shareholders or beneficiaries and only one class of earned from such property to one or more exempt
stock or beneficial interest organizations; pension, profit-sharing, or stock
bonus plans; or governmental units
NOTE: Prepaid legal service funds, 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.
103
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
Table 1.--Number of Returns, Gross Unrelated Business Income (UBI), Total Deductions, Net Income
(Less Deficit), Deficit, and Total Income Tax, by Internal Revenue Code Section Describing Type of
Tax-Exempt Organization, Tax Year 1995
[All figures are estimates based on samples--money amounts are in thousands of dollars]
Gross Total Net income Total
1,2 4
Number unrelated deductions (less deficit) income tax
Internal Revenue of business Deficit
Code section returns income Number Number Number
(UBI) of Amount of Amount of Amount
returns returns ³ returns
(1) (2) (3) (4) (5) (6) (7) (8) (9)
36,394 6,279,659 36,229
All sections.......................................................................................... 7,253,305 31,529 -973,648 -1,866,621 18,243 277,481
1,136 212,707
401(a).................................................................................................... 1,136 47,372 1,073 165,336 -16,287 963 61,173
4,642 28,855
408(e).................................................................................................... 4,597 26,111 4,560 2,744 -10,819 4,390 3,882
217 42,160
501(c)(2).................................................................................................... 217 78,400 213 -36,239 -38,731 107 679
9,903 3,583,259
501(c)(3).................................................................................................... 9,894 4,625,367 8,539 -1,042,108 -1,244,149 3,187 59,486
1,377 307,193
501(c)(4).................................................................................................... 1,377 356,509 1,107 -49,317 -63,711 313 3,790
2,471 203,753
501(c)(5).................................................................................................... 2,430 291,615 1,926 -87,862 -110,614 935 5,951
6,103 741,791
501(c)(6).................................................................................................... 6,103 900,362 4,927 -158,571 -218,693 2,190 19,279
6,553 372,862
501(c)(7).................................................................................................... 6,502 378,348 5,765 -5,486 -76,725 4,491 13,977
1,081 58,186
501(c)(8).................................................................................................... 1,081 86,589 1,001 -28,402 -33,714 469 867
694 466,634
501(c)(9).................................................................................................... 685 184,125 494 282,509 -9,241 436 99,772
256 10,593
501(c)(10).................................................................................................... 256 13,090 215 -2,497 -3,549 *108 *158
-- --
501(c)(11).................................................................................................... -- -- -- -- -- -- --
136 17,530
501(c)(12).................................................................................................... 136 19,710 135 -2,180 -6,273 39 1,136
*32 *2,210
501(c)(13).................................................................................................... *32 *2,112 *11 *98 *-22 *4 *18
104 *72 *10,294
501(c)(14).................................................................................................... *72 *12,839 *72 *-2,545 *-2,887 *63 *60
** **
501(c)(15).................................................................................................... ** ** ** ** ** ** **
-- --
501(c)(16).................................................................................................... -- -- -- -- -- -- --
** **
501(c)(17).................................................................................................... ** ** ** ** ** ** **
-- --
501(c)(18).................................................................................................... -- -- -- -- -- -- --
1,667 118,205 1,656
501(c)(19).................................................................................................... 142,631 1,438 -24,426 -30,976 499 1,302
5
-- --
501(c)(21) .................................................................................................... -- -- -- -- -- -- --
-- --
501(c)(22).................................................................................................... -- -- -- -- -- -- --
** **
501(c)(23).................................................................................................... ** ** ** ** ** ** **
-- --
501(c)(24).................................................................................................... -- -- -- -- -- -- --
*49 *16,945
501(c)(25).................................................................................................... *49 *3,267 *49 *13,678 *-28 *48 *5,333
*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 $1.7 billion.
² Includes both deductions reported on the main part of the tax return and expense items reported on attached schedules.
³ Excludes returns with net income (less deficit) equal to zero.
4
Total income tax is the regular unrelated business income tax after reduction by any tax credits (foreign tax credit, general business credit, prior-year minimum tax credit, and
other allowable credits), plus taxes from recapture of certain prior-year credits, the "alternative minimum tax," the environmental tax, and the "proxy" tax on nondeductible
lobbying and political expenditures. The proxy tax was reported on Form 990-T and was included in total income 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, total proxy tax was $3.9 million.
5
Prepaid legal service funds, described in section 501(c)(20) of the Internal Revenue Code, were no longer tax exempt beginning with tax years after June 30, 1992.
NOTES: Detail may not add to totals because of rounding. See the Appendix to this article for a listing of the types of tax-exempt organizations, by the Internal Revenue Code
section describing them.
104
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
Table 2.--Number of Returns, Gross Unrelated Business Income (UBI), Total Deductions, Net Income
(Less Deficit), Deficit, and Total Income Tax, by Size of Gross UBI, Tax Year 1995
[All figures are estimates based on samples--money amounts are in thousands of dollars]
Gross Total Net income Total
1,2 4
Number unrelated deductions (less deficit) income tax
Size of gross unrelated of business Deficit
business income (UBI) returns income Number Number Number
(UBI) of Amount of Amount of Amount
returns returns ³ returns
(1) (2) (3) (4) (5) (6) (7) (8) (9)
36,394 6,279,659 36,229
Total................................................................................................................ 7,253,305 31,529 -973,648 -1,866,621 18,243 277,481
5
15,997 62,731
$1,000 under $10,001 ....................................................................... 15,855 97,339 13,638 -34,609 -52,249 9,203 3,326
5
13,665 520,430 13,655
$10,001 under $100,000 ....................................................................... 735,491 11,857 -215,061 -310,933 6,306 19,118
5,029 1,083,496
$100,000 under $500,000.......................................................................5,018 1,480,745 4,520 -397,249 -517,737 2,054 33,267
856 596,065
$500,000 under $1,000,000.......................................................................855 762,043 761 -165,979 -229,782 352 20,425
710 1,411,338 709
$1,000,000 under $5,000,000....................................................................... 1,783,679 631 -372,341 -520,975 263 51,348
137 2,605,599
$5,000,000 or more....................................................................... 137 2,394,009 123 211,590 -234,945 65 149,998
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 $1.7 billion.
² Includes both deductions reported on the main part of the tax return and expense items reported on attached schedules.
³ Excludes returns with net income (less deficit) equal to zero.
4
Total income tax is the regular unrelated business income tax after reduction by any tax credits (foreign tax credit, general business credit, prior-year minimum tax credit, and other
allowable credits), plus taxes from recapture of certain prior-year credits, the "alternative minimum tax," the environmental tax, and the "proxy" tax on nondeductible lobbying and
political expenditures. The proxy tax was reported on Form 990-T and was included in total income 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, total proxy tax was $3.9 million.
5
The gross unrelated business income (UBI) brackets of "$1,000 under $10,001" and "$10,001 under $100,000" reflect the different filing requirements for organizations with gross UBI
of $10,000 or less (only a "partial" return was required) and all other Form 990-T filers (a more detailed "complete" return was required). Organizations with gross UBI below $1,000
were not required to file Form 990-T.
NOTE: Detail may not add to totals because of rounding.
105
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
Table 3.--Number of Returns, Gross Unrelated Business Income (UBI), Total Deductions, Net Income
(Less Deficit), Deficit, and Total Income Tax, by Size of Net Income (Taxable Profit) or Deficit,
Tax Year 1995
[All figures are estimates based on samples--money amounts are in thousands of dollars]
Gross Total Net income Total
1,2 4
Number unrelated deductions (less deficit) income tax
Size of net income of business Deficit
(taxable profit) or deficit returns income Number Number Number
(UBI) of Amount of Amount of Amount
returns returns ³ returns
(1) (2) (3) (4) (5) (6) (7) (8) (9)
36,394 6,279,659 36,229
Total................................................................................................................ 7,253,305 31,529 -973,648 -1,866,621 18,243 277,481
13,373 2,557,634
Deficit...................................................................................... 13,373 4,424,256 13,373 -1,866,621 -1,866,621 283 1,771
5
4,864 624,534
Zero ...................................................................................... 4,864 624,534 -- -- -- 72 313
4,637 36,084 4,637
$1 under $1,000...................................................................................... 33,832 4,637 2,251 -- 4,537 329
8,162 228,462 8,019
$1,000 under $10,000...................................................................................... 198,065 8,162 30,396 -- 8,046 5,272
4,589 639,895 4,579
$10,000 under $100,000...................................................................................... 501,339 4,589 138,555 -- 4,543 26,726
585 384,865 575
$100,000 under $500,000...................................................................................... 263,792 585 121,072 -- 582 40,329
92 139,207 91
$500,000 under $1,000,000...................................................................................... 74,475 92 64,731 -- 88 21,713
92 1,668,979 91
$1,000,000 or more...................................................................................... 1,133,012 92 535,968 -- 92 181,029
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 $1.7 billion.
² Includes both deductions reported on the main part of the tax return and expense items reported on attached schedules.
³ Excludes returns with net income (less deficit) equal to zero.
4
Total income tax is the regular unrelated business income tax after reduction by any tax credits (foreign tax credit, general business credit, prior-year minimum tax credit, and
other allowable credits), plus taxes from recapture of certain prior-year credits, the "alternative minimum tax," the environmental tax, and the "proxy" tax on nondeductible
106 lobbying and political expenditures. The proxy tax was reported on Form 990-T and was included in total income 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, total proxy tax was $3.9 million.
5
Includes "breakeven" returns with equal amounts of gross unrelated business income and total deductions.
NOTE: Detail may not add to totals because of rounding.
106
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
Table 4.--Returns with Positive Net Income (Taxable Profit): Number of Returns, Gross Unrelated
Business Income (UBI), Total Deductions, Net Income (Taxable Profit), and Total Income Tax, by
Size of Gross UBI, Tax Year 1995
[All figures are estimates based on samples--money amounts are in thousands of dollars]
Gross Total Net income Total
1,2
Number unrelated deductions (taxable profit) income tax ³
Size of gross unrelated of business
business income (UBI) returns income Number Number Number
(UBI) of Amount of Amount of Amount
returns returns returns
(1) (2) (3) (4) (5) (6) (7) (8)
18,157 3,097,490
Total................................................................................................................ 17,992 2,204,515 18,157 892,974 17,888 275,397
4
$1,000 under $10,001 ...................................................................................... 9,152
4
9,294 33,483 15,842 9,294 17,640 9,150 3,261
6,175 224,199
$10,001 under $100,000 ......................................................................................6,166 128,326 6,175 95,872 6,085 18,306
2,039 435,510
$100,000 under $500,000...................................................................................... 2,028 315,021 2,039 120,489 2,007 32,850
344 238,950
$500,000 under $1,000,000...................................................................................... 343 175,146 344 63,803 342 20,311
248 471,817 247
$1,000,000 under $5,000,000...................................................................................... 323,183 248 148,634 248 51,197
57 1,693,531
$5,000,000 or more...................................................................................... 57 1,246,997 57 446,535 57 149,471
¹ Excludes cost of sales and services, which was subtracted from gross receipts from sales and services in computing gross profit from sales and services. Gross profit from
sales and services was a component of gross unrelated business income (UBI). Cost of sales and services can include amounts attributable to depreciation, salaries and wages,
and certain other deductible items. For exempt organizations reporting net income (taxable profit), cost of sales and services was $675.1 million.
² Includes both deductions reported on the main part of the tax return and expense items reported on attached schedules.
³ Total income tax is the regular unrelated business income tax after reduction by any tax credits (foreign tax credit, general business credit, prior-year minimum tax credit, and
other allowable credits), plus taxes from recapture of certain prior-year credits, the "alternative minimum tax," the environmental tax, and the "proxy" tax on nondeductible
lobbying and political expenditures. The proxy tax was reported on Form 990-T and was included in total income tax; however, it had no connection to the tax on unrelated
business income or an organization's involvement in unrelated business activities. For exempt organizations reporting positive net income, total proxy tax was $2.2 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 (only a "partial" return was required) and all other Form 990-T filers (a more detailed "complete" return was required). Organizations with gross
UBI below $1,000 were not required to file Form 990-T.
NOTE: Detail may not add to totals because of rounding.
107
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
Table 5.--Number of Returns, Gross Unrelated Business Income (UBI), Total Deductions, Net Income
(Less Deficit), Deficit, and Total Income Tax, by Primary Unrelated Business Activity or Industrial
Grouping, Tax Year 1995
[All figures are estimates based on samples--money amounts are in thousands of dollars]
Gross Total Net income Total
1,2 4
Number unrelated deductions (less deficit) income tax
Primary unrelated business activity of business Deficit
or industrial grouping returns income Number Number Number
(UBI) of Amount of Amount of Amount
returns returns ³ returns
(1) (2) (3) (4) (5) (6) (7) (8) (9)
36,394 6,279,659 36,229
All activities and groupings.......................................................................................................................... 31,529
7,253,305 -973,648 -1,866,621 18,243 277,481
394 21,400 394
Agriculture, forestry, and fishing.......................................................................................................................... 305
50,432 -29,032 -31,606 102 728
171 9,526
Mining..........................................................................................................................171 17,571 146 -8,045 -10,325 132 495
*24 *1,484 *24
Construction.......................................................................................................................... *633 *24 *851 *-3 *23 *319
912 218,475 912
Manufacturing.......................................................................................................................... 263,310 733 -44,835 -81,529 251 12,297
445 102,082 445
Transportation and public utilities.......................................................................................................................... 386
202,570 -100,488 -105,790 157 1,622
89 7,683 89
Wholesale trade.......................................................................................................................... 15,111 65 -7,428 -8,995 *26 *353
3,913 550,153 3,913
Retail trade.......................................................................................................................... 762,224 3,571 -212,072 -263,394 1,498 14,314
15,368 2,460,953 15,252
Finance, insurance, and real estate, total.......................................................................................................................... 303,713
2,157,240 13,832 -331,008 10,800 203,140
Unrelated debt-financed activities,
967 173,875
except rental of real estate......................................................... 952 139,710 923 34,165 -12,213 801 15,007
Investment activities of Code section
3,703 568,790
501(c)(7), (9), and (17) organizations......................................................... 3,659 266,949 3,087 301,841 -8,550 2,908 100,885
877
Rental of personal property......................................................... 46,041 877 76,765 828 -30,724 -36,041 419 1,090
108 Passive income activities with
432
controlled organizations......................................................... 29,133 431 32,180 428 -3,047 -13,361 310 1,883
9,389 1,643,114 9,333
Other finance, insurance, and real estate… … .......................................................... 1,641,636 8,566 1,478 -260,843 6,362 84,275
14,305 2,838,887 14,300
Services.......................................................................................................................... 3,702,516 11,857 -863,630 -1,013,570 4,920 42,157
328 57,132 328 69,168
Exploited exempt activities.......................................................................................................................... 221 -12,036 -16,637 125 1,101
444 11,883 402
Not allocable.......................................................................................................................... 12,529 389 -646 -3,764 210 957
*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 $1.7 billion.
² Includes both deductions reported on the main part of the tax return and expense items reported on attached schedules.
³ Excludes returns with net income (less deficit) equal to zero.
4
Total income tax is the regular unrelated business income tax after reduction by any tax credits (foreign tax credit, general business credit, prior-year minimum tax credit, and
other allowable credits), plus taxes from recapture of certain prior-year credits, the "alternative minimum tax," the environmental tax, and the "proxy" tax on nondeductible
lobbying and political expenditures. The proxy tax was reported on Form 990-T and was included in total income 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, total proxy tax was $3.9 million.
NOTE: Detail may not add to totals because of rounding.
108
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
Table 6.--Sources of Gross Unrelated Business Income (UBI), by Size of Gross UBI, Tax Year 1995
[All figures are estimates based on samples--money amounts are in thousands of dollars]
Sources of gross unrelated business income (UBI) ¹
Gross unrelated Gross profit (less loss) Capital gain
Size of gross unrelated business income (UBI) from sales and services net income
business income (UBI)
Number Number Number
of Amount of Amount of Amount
returns returns returns
(1) (2) (3) (4) (5) (6)
36,394 6,279,659
Total.......................................................................................................................... 14,742 3,238,696 815 300,420
2
15,997 62,731
$1,000 under $10,001 .......................................................................................................................... 3,663 13,130 *250 *1,126
2,3
20,396 6,216,928
$10,001 or more, total .......................................................................................................................... 11,079 3,225,567 565 299,294
13,665 520,430
$10,001 under $100,000 ².......................................................................................................................... 6,833 227,053 342 6,699
5,029 1,083,496
$100,000 under $500,000.......................................................................................................................... 3,203 570,245 131 15,941
856 596,065
$500,000 under $1,000,000.......................................................................................................................... 525 294,662 33 12,132
710 1,411,338 440
$1,000,000 under $5,000,000.......................................................................................................................... 720,253 40 44,687
137 2,605,599
$5,000,000 or more.......................................................................................................................... 78 1,413,354 19 219,834
Sources of gross unrelated business income (UBI) ¹--Continued
Net capital loss Net gain (less loss), Income (less loss)
4
Size of gross unrelated (trusts only) sales of noncapital assets from partnerships
business income (UBI)
Number Number Number
of Amount of Amount of Amount
returns returns returns
(7) (8) (9) (10) (11) (12)
32
Total.......................................................................................................................... -93 362 4,780 5,841 179,627
2
** **
$1,000 under $10,001 .......................................................................................................................... ** ** 4,714 13,386
2,3
** **
$10,001 or more, total .......................................................................................................................... ** ** 1,127 166,241
*9 *-25
$10,001 under $100,000 ².......................................................................................................................... 145 1,834 854 19,904
*13 *-39
$100,000 under $500,000.......................................................................................................................... 94 1,648 148 9,763
3 -9
$500,000 under $1,000,000.......................................................................................................................... 18 500 44 6,374
** **
$1,000,000 under $5,000,000.......................................................................................................................... ** ** 55 16,100
** **
$5,000,000 or more.......................................................................................................................... ** ** 26 114,101
Sources of gross unrelated business income (UBI) ¹-- Continued
Rental Unrelated debt- Investment income
6
5
Size of gross unrelated income financed income (less loss)
business income (UBI)
Number Number Number
of Amount of Amount of Amount
returns returns returns
(13) (14) (15) (16) (17) (18)
3,740 136,591
Total.......................................................................................................................... 2,678 374,780 5,846 378,702
2
1,181 4,528
$1,000 under $10,001 .......................................................................................................................... 788 3,078 2,811 8,801
2,3
2,559 132,063
$10,001 or more, total .......................................................................................................................... 1,890 371,702 3,035 369,901
1,854 35,244
$10,001 under $100,000 ².......................................................................................................................... 1,183 33,603 1,932 29,946
545 42,874
$100,000 under $500,000.......................................................................................................................... 494 63,309 888 58,507
77 18,134
$500,000 under $1,000,000.......................................................................................................................... 90 35,165 115 36,661
70 24,440 100
$1,000,000 under $5,000,000.......................................................................................................................... 90,175 81 94,688
13 11,372
$5,000,000 or more.......................................................................................................................... 23 149,451 19 150,099
Footnotes at end of table.
109
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
Table 6.--Sources of Gross Unrelated Business Income (UBI), by Size of Gross UBI, Tax Year 1995
--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 Exploited exempt activity Advertising Other income
7
Size of gross unrelated controlled organizations income, except advertising income (less loss)
business income (UBI)
Number Number Number Number
of Amount of Amount of Amount of Amount
returns returns returns returns
(19) (20) (21) (22) (23) (24) (25) (26)
1,117 48,354
Total.............................................................................................................. 950 101,192 8,113 1,021,379 5,953 495,231
2
308 753 *239
$1,000 under $10,001 ..........................................................................................................................
*1,073 3,130 12,901 1,479 3,990
2,3
808 47,600 710
$10,001 or more, total ..........................................................................................................................
100,119 4,983 1,008,478 4,474 491,241
568 8,784 301
$10,001 under $100,000 ²..........................................................................................................................
7,589 3,186 93,865 2,846 55,935
161 10,896 280
$100,000 under $500,000..........................................................................................................................
25,964 1,308 190,277 1,210 94,112
33 4,164 59
$500,000 under $1,000,000..........................................................................................................................
13,513 243 115,803 228 58,965
38 16,303 62
$1,000,000 under $5,000,000..........................................................................................................................
39,980 206 242,826 160 121,814
8 7,453 9
$5,000,000 or more..........................................................................................................................
13,074 40 365,708 30 160,415
*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 For definitions of the sources of gross unrelated business income, see the Explanation of Selected Terms section of this article.
² The gross unrelated business income (UBI) brackets of "$1,000 under $10,001" and "$10,001 under $100,000" reflect the different filing requirements for organizations
with gross UBI of $10,000 or less (only a "partial" return was required) and all other Form 990-T filers (a more detailed "complete" return was required). Organizations with
gross UBI below $1,000 were not required to file Form 990-T.
³ All organizations were required to report each income item, as shown in columns 3 through 26. However, only organizations with gross UBI over $10,000 were required to report
each deduction shown in columns 14 through 45, 48, 49, and 54 through 59 of Table 7. A total of gross UBI is shown separately for these larger organizations in order to
110 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.
5
Income from real property and personal property leased with real property.
6
Reported by Internal Revenue Code section 501(c)(7), (9), and (17) organizations only.
7
Annuities, interest, rents, and royalties.
NOTE: Detail may not add to totals because of rounding.
110
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
Table 7.--Types of Deductions, by Size of Gross Unrelated Business Income, Tax Year 1995
[All figures are estimates based on samples--money amounts are in thousands of dollars]
All organizations Organizations with gross
unrelated business income
Total Total (UBI) of $10,000 or less ³
1,2
Size of gross unrelated number deductions Total Net operating Specific
2,4
business income (UBI) of deductions loss carryover deduction
returns Number Number Number Number
of Amount of Amount of Amount of Amount
returns returns returns returns
(1) (2) (3) (4) (5) (6) (7) (8) (9)
36,394
Total......................................................... 36,229 7,253,305 15,855 97,339 2,436 36,330 10,519 9,900
15,997 15,855 97,339 15,855
$1,000 under $10,001 ³.......................................................................................................................... 97,339 2,436 36,330 10,519 9,900
13,665 13,655 735,491 --
$10,001 under $100,000 ³.......................................................................................................................... -- -- -- -- --
5,029 5,018 1,480,745 --
$100,000 under $500,000.......................................................................................................................... -- -- -- -- --
856 855 762,043 --
$500,000 under $1,000,000.......................................................................................................................... -- -- -- -- --
710 709 1,783,679 --
$1,000,000 under $5,000,000.......................................................................................................................... -- -- -- -- --
137 137 2,394,009
$5,000,000 or more.......................................................................................................................... -- -- -- -- -- --
Organizations with gross unrelated business income (UBI) over $10,000 ³
Deductions directly connected with UBI
Total Allocable to Allocable to unrelated Allocable to
2,5
Size of gross unrelated deductions Total rental debt-financed investment
business income (UBI) income 6 income 6
income 6,7
Number Number Number Number Number
of Amount of Amount of Amount of Amount of
returns returns returns returns returns
(10) (11) (12) (13) (14) (15) (16) (17) (18)
Total.........................................................20,374 7,155,966 19,108 6,791,319 1,039 76,194 1,621 368,986 933
-- -- -- --
$1,000 under $10,001 ³.......................................................................................................................... -- -- -- -- --
13,655 735,491 12,565 701,667
$10,001 under $100,000 ³.......................................................................................................................... 711 18,280 979 33,237 448
5,018 1,480,745 4,908 1,420,530
$100,000 under $500,000.......................................................................................................................... 244 30,249 441 64,909 373
855 762,043 832 716,477
$500,000 under $1,000,000.......................................................................................................................... 40 11,401 84 33,055 66
709 1,783,679 674 1,684,712
$1,000,000 under $5,000,000.......................................................................................................................... 36 11,838 96 94,783 38
137 2,394,009 129 2,267,933
$5,000,000 or more.......................................................................................................................... 8 4,425 20 143,002 8
Organizations with gross unrelated business income (UBI) over $10,000 ³--Continued
Deductions directly connected with UBI--Continued
Allocable to Allocable to income Allocable to exploited Direct Compensation of
Size of gross unrelated investment from controlled exempt activity income advertising officers, directors,
6,7 6
business income (UBI) income organizations 6 except advertising 6 costs and trustees
--Continued
Number Number Number Number
Amount of Amount of Amount of Amount of Amount
returns returns returns returns
(19) (20) (21) (22) (23) (24) (25) (26) (27)
41,628
Total......................................................... 366 36,883 619 88,682 4,609 784,228 1,792 41,078
-- -- -- --
$1,000 under $10,001 ³.......................................................................................................................... -- -- -- -- --
1,477 236 6,918 258
$10,001 under $100,000 ³.......................................................................................................................... 5,044 2,932 75,573 1,000 8,588
6,133 89 9,132 238
$100,000 under $500,000.......................................................................................................................... 25,051 1,213 146,537 586 13,064
3,210 18 3,197 57
$500,000 under $1,000,000.......................................................................................................................... 10,364 233 83,487 98 4,453
8,542 57
$1,000,000 under $5,000,000.......................................................................................................................... 36,457 194 189,842 88 7,365
22,266 } 23 17,635 {
$5,000,000 or more.......................................................................................................................... 9 11,765 37 288,789 20 7,607
.
Organizations with gross unrelated business income (UBI) over $10,000 ³--Continued
Deductions directly connected with UBI--Continued
Size of gross unrelated Salaries and wages Repairs Bad debts Interest
business income (UBI)
Number Number Number Number
of Amount of Amount of Amount of Amount
returns returns returns returns
(28) (29) (30) (31) (32) (33) (34) (35)
9,735
Total...................................................................................... 951,606 7,013 61,718 786 24,448 2,475 52,001
--
$1,000 under $10,001 ³...................................................................................... -- -- -- -- -- -- --
5,751 98,043
$10,001 under $100,000 ³...................................................................................... 4,415 10,939 279 238 1,246 3,747
2,997 254,046
$100,000 under $500,000...................................................................................... 1,976 21,556 308 2,105 961 13,504
510 124,343
$500,000 under $1,000,000...................................................................................... 316 7,642 70 1,520 118 3,926
409 254,627
$1,000,000 under $5,000,000...................................................................................... 257 12,700 101 9,517 120 15,667
68
$5,000,000 or more...................................................................................... 220,547 49 8,881 29 11,068 30 15,156
Footnotes at end of table. 111
Unrelated Business Income of Nonprofit Organizations: Highlights of 1995 and a
Review of 1991-1995
Table 7.--Types of Deductions, by Size of Gross Unrelated Business Income, Tax Year 1995--Continued
[All figures are estimates based on samples--money amounts are in thousands of dollars]
Organizations with gross unrelated business income (UBI) over $10,000 ³--Continued
Deductions directly connected with UBI--Continued
Contributions
Size of gross unrelated Taxes and licenses paid deduction Depreciation Depletion to deferred
business income (UBI) compensation plans
Number Number Number Number
of Amount of Amount of Amount of Amount
returns returns returns returns
(36) (37) (38) (39) (40) (41) (42) (43)
Total.........................................................10,531 160,691 7,085 145,597 75 1,705 805 9,909
-- -- --
$1,000 under $10,001 ³.......................................................................................................................... -- -- -- -- --
7,002 29,546 4,206
$10,001 under $100,000 ³..........................................................................................................................
16,279 *55 *374 420 619
2,752 56,867 2,142
$100,000 under $500,000..........................................................................................................................41,609 268 1,698
$500,000 under $1,000,000..........................................................................................................................
412 18,357 354 20,568 } 16 208
{ 48 743
298 23,300 320
$1,000,000 under $5,000,000..........................................................................................................................
36,955 4 1,123 58 2,177
67 32,621 63
$5,000,000 or more.......................................................................................................................... 30,186 -- -- 11 4,671
Organizations with gross unrelated business income (UBI) over $10,000 ³--Continued
Deductions directly connected with UBI--Continued
Deductions not
Contributions Net operating directly connected
Size of gross unrelated to employee loss Other deductions with UBI
business income (UBI) benefit plans carryover
Total
Number Number Number Number
of Amount of Amount of Amount of Amount
returns returns returns returns
(44) (45) (46) (47) (48) (49) (50) (51)
Total......................................................... 4,199 143,768 5,729 1,531,182 12,809 2,271,017 11,162 364,646
-- -- --
$1,000 under $10,001 ³.......................................................................................................................... -- -- -- -- --
2,030 6,309 3,378
$10,001 under $100,000 ³..........................................................................................................................
262,993 8,053 123,461 7,667 33,823
1,501 24,600 1,692
$100,000 under $500,000..........................................................................................................................
428,829 3,561 280,435 2,610 60,215
331 14,325 308
$500,000 under $1,000,000..........................................................................................................................
204,597 611 171,285 447 45,566
112 286 35,675 296
$1,000,000 under $5,000,000..........................................................................................................................
438,290 492 494,225 358 98,966
51 62,858 55
$5,000,000 or more.......................................................................................................................... 196,472 93 1,201,611 81 126,076
Organizations with gross unrelated business income (UBI) over $10,000 ³--Continued
Deductions not directly connected with UBI--Continued
7
Size of gross unrelated Specific deduction Contributions Set-asides Excess exempt
business income (UBI) expense
Number Number Number Number
of Amount of Amount of Amount of Amount
returns returns returns returns
(52) (53) (54) (55) (56) (57) (58) (59)
9,102 8,763
Total................................................................................................................ 1,240 33,992 264 130,447 2,279 191,444
-- -- --
$1,000 under $10,001 ³.......................................................................................................................... -- -- -- -- --
6,434 6,136 766
$10,001 under $100,000 ³..........................................................................................................................5,725 116 3,669 1,379 18,292
2,036 1,997 358
$100,000 under $500,000..........................................................................................................................5,604 76 16,765 597 35,848
336 339 49
$500,000 under $1,000,000..........................................................................................................................
1,425 32 15,693 148 28,109
239 234 46
$1,000,000 under $5,000,000..........................................................................................................................
2,879 35 44,001 128 51,853
58 57 21
$5,000,000 or more.......................................................................................................................... 18,357 5 50,320 27 57,342
* 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 $1.7 billion.
² Includes both deductions reported on the main part of the tax return and expense items reported on attached schedules.
³ Organizations with gross UBI between $1,000 (the filing threshold) and $10,000 were required to report only totals for expenses and deductions (except for the specific deduction
and net operating loss carryover, which all organizations reported separately). Organizations with gross UBI over $10,000 were required to report each expense and deduction item
separately, as shown in columns 14 through 49 and 52 through 59.
4
Excludes $36.8 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 $1.7 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.
112 NOTE: Detail may not add to totals because of rounding.