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Free E File

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Free E File

Free e file 1. Free e file   Bona Fide Residence Table of Contents Presence TestDays of Presence in the United States or Relevant Possession Significant Connection Tax HomeExceptions Closer ConnectionException for Year of Move Special Rules in the Year of a MoveYear of Moving to a Possession Year of Moving From a Possession Reporting a Change in Bona Fide ResidenceWho Must File Penalty for Not Filing Form 8898 In order to qualify for certain tax benefits (see chapter 3), you must be a bona fide resident of American Samoa, the CNMI, Guam, Puerto Rico, or the USVI for the entire tax year. Free e file Generally, you are a bona fide resident of one of these possessions (the relevant possession) if, during the tax year, you: Meet the presence test, Do not have a tax home outside the relevant possession, and Do not have a closer connection to the United States or to a foreign country than to the relevant possession. Free e file Special rule for members of the U. Free e file S. Free e file Armed Forces. Free e file   If you are a member of the U. Free e file S. Free e file Armed Forces who qualified as a bona fide resident of the relevant possession in an earlier tax year, your absence from that possession during the current tax year in compliance with military orders will not affect your status as a bona fide resident. Free e file Likewise, being in a possession solely in compliance with military orders will not qualify you for bona fide residency. Free e file Also see the special income source rule for members of the U. Free e file S. Free e file Armed Forces in chapter 2, under Compensation for Labor or Personal Services . Free e file Special rule for civilian spouse of active duty member of the U. Free e file S. Free e file Armed Forces. Free e file   If you are the civilian spouse of an active duty servicemember, under Military Spouses Residency Relief Act (MSRRA) you can choose to keep your prior residence or domicile for tax purposes (tax residence) when accompanying the servicemember spouse, who is relocating under military orders, to a new military duty station in one of the 50 states, the District of Columbia, or a U. Free e file S. Free e file possession. Free e file Before relocating, you and your spouse must have the same tax residence. Free e file If you are a civilian spouse and choose to keep your prior tax residence after such relocation, the source of income for services performed (for example, wages, salaries, tips, or self-employment) by you is considered to be (the jurisdiction of) the prior tax residence. Free e file As a result, the amount of income tax withholding (from Form(s) W-2, Wage and Tax Statement) that you are able to claim on your federal return, as well as the need to file a state or U. Free e file S. Free e file possession return, may be affected. Free e file For more information, consult with state, local, or U. Free e file S. Free e file possession tax authorities regarding your tax obligations under MSRRA. Free e file Presence Test If you are a U. Free e file S. Free e file citizen or resident alien, you will satisfy the presence test for the entire tax year if you meet one of the following conditions. Free e file You were present in the relevant possession for at least 183 days during the tax year. Free e file You were present in the relevant possession for at least 549 days during the 3-year period that includes the current tax year and the 2 immediately preceding tax years. Free e file During each year of the 3-year period, you must be present in the relevant possession for at least 60 days. Free e file You were present in the United States for no more than 90 days during the tax year. Free e file You had earned income in the United States of no more than a total of $3,000 and were present for more days in the relevant possession than in the United States during the tax year. Free e file Earned income is pay for personal services performed, such as wages, salaries, or professional fees. Free e file You had no significant connection to the United States during the tax year. Free e file Special rule for nonresident aliens. Free e file   Conditions (1) through (5) above do not apply to nonresident aliens of the United States. Free e file Instead, nonresident aliens must meet the substantial presence test discussed in chapter 1 of Publication 519. Free e file In that discussion, substitute the name of the possession for “United States” and “U. Free e file S. Free e file ” wherever they appear. Free e file Disregard the discussion in that chapter about a Closer Connection to a Foreign Country. Free e file Days of Presence in the United States or Relevant Possession Generally, you are treated as being present in the United States or in the relevant possession on any day that you are physically present in that location at any time during the day. Free e file Days of presence in a possession. Free e file   You are considered to be present in the relevant possession on any of the following days. Free e file Any day you are physically present in that possession at any time during the day. Free e file Any day you are outside of the relevant possession in order to receive, or to accompany any of the following family members to receive, qualifying medical treatment (see Qualifying Medical Treatment , later). Free e file Your parent. Free e file Your spouse. Free e file Your child, who is your son, daughter, stepson, or stepdaughter. Free e file This includes an adopted child or child lawfully placed with you for legal adoption. Free e file This also includes a foster child who is placed with you by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction. Free e file Any day you are outside the relevant possession because you leave or are unable to return to the relevant possession during any: 14-day period within which a major disaster occurs in the relevant possession for which a Federal Emergency Management Agency (FEMA) notice of a federal declaration of a major disaster is issued in the Federal Register, or Period for which a mandatory evacuation order is in effect for the geographic area in the relevant possession in which your main home is located. Free e file   If, during a single day, you are physically present: In the United States and in the relevant possession, that day is considered a day of presence in the relevant possession; or In two possessions, that day is considered a day of presence in the possession where your tax home is located (see Tax Home , later). Free e file Days of presence in the United States. Free e file   You are considered to be present in the United States on any day that you are physically present in the United States at any time during the day. Free e file However, do not count the following days as days of presence in the United States. Free e file Any day you are temporarily present in the United States in order to receive, or to accompany a parent, spouse, or child who is receiving, qualifying medical treatment. Free e file “Child” is defined under item 2c earlier. Free e file “Qualifying medical treatment” is defined later. Free e file Any day you are temporarily present in the United States because you leave or are unable to return to the relevant possession during any: 14-day period within which a major disaster occurs in the relevant possession for which a Federal Emergency Management Agency (FEMA) notice of a federal declaration of a major disaster is issued in the Federal Register, or Period for which a mandatory evacuation order is in effect for the geographic area in the relevant possession in which your main home is located. Free e file Any day you are in the United States for less than 24 hours when you are traveling between two places outside the United States. Free e file Any day you are temporarily present in the United States as a professional athlete to compete in a charitable sports event (defined later). Free e file Any day you are temporarily in the United States as a student (defined later). Free e file Any day you are in the United States serving as an elected representative of the relevant possession, or serving full time as an elected or appointed official or employee of the government of that possession (or any of its political subdivisions). Free e file Qualifying Medical Treatment Such treatment is generally provided by (or under the supervision of) a physician for an illness, injury, impairment, or physical or mental condition. Free e file The treatment generally involves: Any period of inpatient care that requires an overnight stay in a hospital or hospice, and any period immediately before or after that inpatient care to the extent it is medically necessary, or Any temporary period of inpatient care in a residential medical care facility for medically necessary rehabilitation services. Free e file With respect to each qualifying medical treatment, you must prepare (or obtain) and maintain documentation supporting your claim that such treatment meets the criteria to be considered days of presence in the relevant possession. Free e file You must be able to produce this documentation within 30 days if requested by the IRS or tax administrator for the relevant possession. Free e file You must keep the following documentation. Free e file Records that provide: The patient's name and relationship to you (if the medical treatment is provided to a person you accompany); The name and address of the hospital, hospice, or residential medical care facility where the medical treatment was provided; The name, address, and telephone number of the physician who provided the medical treatment; The date(s) on which the medical treatment was provided; and Receipt(s) of payment for the medical treatment. Free e file Signed certification by the providing or supervising physician that the medical treatment met the requirements for being qualified medical treatment, and setting forth: The patient's name, A reasonably detailed description of the medical treatment provided by (or under the supervision of) the physician, The dates on which the medical treatment was provided, and The medical facts that support the physician's certification and determination that the treatment was medically necessary. Free e file Charitable Sports Event A charitable sports event is one that meets all of the following conditions. Free e file The main purpose is to benefit a qualified charitable organization. Free e file The entire net proceeds go to charity. Free e file Volunteers perform substantially all the work. Free e file In figuring the days of presence in the United States, you can exclude only the days on which you actually competed in the charitable sports event. Free e file You cannot exclude the days on which you were in the United States to practice for the event, to perform promotional or other activities related to the event, or to travel between events. Free e file Student To qualify as a student, you must be, during some part of each of any 5 calendar months during the calendar year: A full-time student at a school that has a regular teaching staff, course of study, and regularly enrolled body of students in attendance, or A student taking a full-time, on-farm training course given by a school described in (1) above or by a state, county, or local government agency. Free e file The 5 calendar months do not have to be consecutive. Free e file Full-time student. Free e file   A full-time student is a person who is enrolled for the number of hours or courses the school considers to be full-time attendance. Free e file However, school attendance exclusively at night is not considered full-time attendance. Free e file School. Free e file   The term “school” includes elementary schools, middle schools, junior and senior high schools, colleges, universities, and technical, trade, and mechanical schools. Free e file It does not include on-the-job training courses, correspondence schools, and schools offering courses only through the Internet. Free e file Significant Connection One way in which you can meet the presence test is to have no significant connection to the United States during the tax year. Free e file This section looks at the factors that determine if a significant connection exists. Free e file You are treated as having a significant connection to the United States if you: Have a permanent home in the United States, Are currently registered to vote in any political subdivision of the United States, or Have a spouse or child (see item 2c under Days of presence in a possession , earlier) who is under age 18 whose main home is in the United States, other than: A child who is in the United States because he or she is the child of divorced or legally separated parents and is living with a custodial parent under a custodial decree or multiple support agreement, or A child who is in the United States as a student. Free e file For the purpose of determining if you have a significant connection to the United States, the term “spouse” does not include a spouse from whom you are legally separated under a decree of divorce or separate maintenance. Free e file Permanent home. Free e file   A permanent home generally includes an accommodation such as a house, an apartment, or a furnished room that is either owned or rented by you or your spouse. Free e file The dwelling unit must be available at all times, continuously, not only for short stays. Free e file Exception for rental property. Free e file   If you or your spouse own the dwelling unit and at any time during the tax year it is rented to someone else at fair rental value, it will be considered your permanent home only if you or your spouse use that property for personal purposes for more than the greater of: 14 days, or 10% of the number of days during that tax year that the property is rented to others at a fair rental value. Free e file   You are treated as using rental property for personal purposes on any day the property is not being rented to someone else at fair rental value for the entire day. Free e file   A day of personal use of a dwelling unit is also any day that the unit is used by any of the following persons. Free e file You or any other person who has an interest in it, unless you rent it to another owner as his or her main home under a shared equity financing agreement. Free e file A member of your family or a member of the family of any other person who has an interest in it, unless the family member uses the dwelling unit as his or her main home and pays a fair rental price. Free e file Family includes only brothers and sisters, half-brothers and half-sisters, spouses, ancestors (parents, grandparents, etc. Free e file ), and lineal descendants (children, grandchildren, etc. Free e file ). Free e file Anyone under an arrangement that lets you use some other dwelling unit. Free e file Anyone at less than a fair rental price. Free e file   However, any day you spend working substantially full time repairing and maintaining (not improving) your property is not counted as a day of personal use. Free e file Whether your property is used mainly for this purpose is determined in light of all the facts and circumstances, such as: The amount of time you devote to repair and maintenance work, How often during the tax year you perform repair and maintenance work on this property, and The presence and activities of companions. Free e file   See Publication 527, Residential Rental Property, for more information about personal use of a dwelling unit. Free e file Example—significant connection. Free e file Ann Green, a U. Free e file S. Free e file citizen, is a sales representative for a company based in Guam. Free e file Ann lives with her spouse and young children in their house in Guam, where she is also registered to vote. Free e file Her business travel requires her to spend 120 days in the United States and another 120 days in foreign countries. Free e file When traveling on business, Ann generally stays at hotels but sometimes stays with her brother, who lives in the United States. Free e file Ann's stays are always of short duration and she asks her brother's permission to stay with him. Free e file Her brother's house is not her permanent home, nor does she have any other accommodations in the United States that would be considered her permanent home. Free e file Ann satisfies the presence test because she has no significant connection to the United States. Free e file Example—presence test. Free e file Eric and Wanda Brown live for part of the year in a condominium, which they own, in the CNMI. Free e file They also own a house in Maine where they live for 120 days every year to be near their grown children and grandchildren. Free e file The Browns are retired and their only income is from pension payments, dividends, interest, and social security benefits. Free e file In 2013, they spent only 175 days in the CNMI because of a 70-day vacation to Europe and Asia. Free e file Thus, in 2013, the Browns were not present in the CNMI for at least 183 days, were present in the United States for more than 90 days, and had a significant connection to the United States because of their permanent home. Free e file However, the Browns still satisfied the presence test with respect to the CNMI because they had no earned income in the United States and were physically present for more days in the CNMI than in the United States. Free e file Tax Home You will have met the tax home test if you did not have a tax home outside the relevant possession during any part of the tax year. Free e file Your tax home is your regular or main place of business, employment, or post of duty regardless of where you maintain your family home. Free e file If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. Free e file If you do not fit either of these categories, you are considered an itinerant and your tax home is wherever you work. Free e file Exceptions There are some special rules regarding tax home that provide exceptions to the general rule stated above. Free e file Students and Government Officials Disregard the following days when determining whether you have a tax home outside the relevant possession. Free e file Days you were temporarily in the United States as a student (see Student under Days of Presence in the United States or Relevant Possession, earlier). Free e file Days you were in the United States serving as an elected representative of the relevant possession, or serving full time as an elected or appointed official or employee of the government of that possession (or any of its political subdivisions). Free e file Seafarers You will not be considered to have a tax home outside the relevant possession solely because you are employed on a ship or other seafaring vessel that is predominantly used in local and international waters. Free e file For this purpose, a vessel is considered to be predominantly used in local and international waters if, during the tax year, the total amount of time it is used in international waters and in the waters within 3 miles of the relevant possession exceeds the total amount of time it is used in the territorial waters of the United States, another possession, or any foreign country. Free e file Example. Free e file In 2013, Sean Silverman, a U. Free e file S. Free e file citizen, was employed by a fishery and spent 250 days at sea on a fishing vessel. Free e file When not at sea, Sean lived with his spouse at a house they own in American Samoa. Free e file The fishing vessel on which Sean works departs and arrives at various ports in American Samoa, other possessions, and foreign countries, but was in international or American Samoa's local waters for 225 days. Free e file For purposes of determining bona fide residency of American Samoa, Sean will not be considered to have a tax home outside that possession solely because of his employment on board the fishing vessel. Free e file Year of Move If you are moving to or from a possession during the year, you may still be able to meet the tax home test for that year. Free e file See Special Rules in the Year of a Move , later in this chapter. Free e file Closer Connection You will have met the closer connection test if, during any part of the tax year, you do not have a closer connection to the United States or a foreign country than to the relevant U. Free e file S. Free e file possession. Free e file You will be considered to have a closer connection to a possession than to the United States or to a foreign country if you have maintained more significant contacts with the possession(s) than with the United States or foreign country. Free e file In determining if you have maintained more significant contacts with the relevant possession, the facts and circumstances to be considered include, but are not limited to, the following. Free e file The location of your permanent home. Free e file The location of your family. Free e file The location of personal belongings, such as automobiles, furniture, clothing, and jewelry owned by you and your family. Free e file The location of social, political, cultural, professional, or religious organizations with which you have a current relationship. Free e file The location where you conduct your routine personal banking activities. Free e file The location where you conduct business activities (other than those that go into determining your tax home). Free e file The location of the jurisdiction in which you hold a driver's license. Free e file The location of the jurisdiction in which you vote. Free e file The location of charitable organizations to which you contribute. Free e file The country of residence you designate on forms and documents. Free e file The types of official forms and documents you file, such as Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals), or Form W-9, Request for Taxpayer Identification Number and Certification. Free e file Your connections to the relevant possession will be compared to the total of your connections with the United States and foreign countries. Free e file Your answers to the questions on Form 8898, Part III, will help establish the jurisdiction to which you have a closer connection. Free e file Example—closer connection to the United States. Free e file Marcos Reyes, a U. Free e file S. Free e file citizen, moved to Puerto Rico in 2013 to start an investment consulting and venture capital business. Free e file His spouse and two teenage children remained in California to allow the children to complete high school. Free e file He traveled back to the United States regularly to see his spouse and children, to engage in business activities, and to take vacations. Free e file Marcos had an apartment available for his full-time use in Puerto Rico, but remained a joint owner of the residence in California where his spouse and children lived. Free e file Marcos and his family had automobiles and personal belongings such as furniture, clothing, and jewelry located at both residences. Free e file Although Marcos was a member of the Puerto Rico Chamber of Commerce, he also belonged to and had current relationships with social, political, cultural, and religious organizations in California. Free e file Marcos received mail in California, including bank and brokerage statements and credit card bills. Free e file He conducted his personal banking activities in California. Free e file He held a California driver's license and was also registered to vote there. Free e file Based on all of the particular facts and circumstances pertaining to Marcos, he was not a bona fide resident of Puerto Rico in 2013 because he had a closer connection to the United States than to Puerto Rico. Free e file Closer connection to another possession. Free e file   Generally, possessions are not treated as foreign countries. Free e file Therefore, a closer connection to a possession other than the relevant possession will not be treated as a closer connection to a foreign country. Free e file Example—tax home and closer connection to possession. Free e file Pearl Blackmon, a U. Free e file S. Free e file citizen, is a permanent employee of a hotel in Guam, but works only during the tourist season. Free e file For the remainder of each year, Pearl lives with her spouse and children in the CNMI, where she has no outside employment. Free e file Most of Pearl's personal belongings, including her automobile, are located in the CNMI. Free e file She is registered to vote in, and has a driver's license issued by, the CNMI. Free e file She does her personal banking in the CNMI and routinely lists her CNMI address as her permanent address on forms and documents. Free e file Pearl satisfies the presence test with respect to both Guam and the CNMI. Free e file She satisfies the tax home test with respect to Guam, because her regular place of business is in Guam. Free e file Pearl satisfies the closer connection test with respect to both Guam and the CNMI, because she does not have a closer connection to the United States or to any foreign country. Free e file Pearl is considered a bona fide resident of Guam, the location of her tax home. Free e file Exception for Year of Move If you are moving to or from a possession during the year, you may still be able to meet the closer connection test for that year. Free e file See Special Rules in the Year of a Move , next. Free e file Special Rules in the Year of a Move If you are moving to or from a possession during the year, you may still be able to meet the tax home and closer connection tests for that year. Free e file Year of Moving to a Possession You will satisfy the tax home and closer connection tests in the tax year of changing your residence to the relevant possession if you meet all of the following. Free e file You have not been a bona fide resident of the relevant possession in any of the 3 tax years immediately preceding your move. Free e file In the year of the move, you do not have a tax home outside the relevant possession or a closer connection to the United States or a foreign country than to the relevant possession during any of the last 183 days of the tax year. Free e file You are a bona fide resident of the relevant possession for each of the 3 tax years immediately following your move. Free e file Example. Free e file Dwight Wood, a U. Free e file S. Free e file citizen, files returns on a calendar year basis. Free e file He lived in the United States from January 2007 through May 2013. Free e file In June 2013 he moved to the USVI, purchased a house, and accepted a permanent job with a local employer. Free e file From July 1 through December 31, 2013 (more than 183 days), Dwight's principal place of business was in the USVI and, during that time, he did not have a closer connection to the United States or a foreign country than to the USVI. Free e file If he is a bona fide resident of the USVI during all of 2014 through 2016, he will satisfy the tax home and closer connection tests for 2013. Free e file If Dwight also satisfies the presence test in 2013, he will be considered a bona fide resident of the USVI for the entire 2013 tax year. Free e file Year of Moving From a Possession In the year you cease to be a bona fide resident of American Samoa, the CNMI, Guam, or the USVI, you will satisfy the tax home and closer connection tests with respect to the relevant possession if you meet all of the following. Free e file You have been a bona fide resident of the relevant possession for each of the 3 tax years immediately preceding your change of residence. Free e file In the year of the move, you do not have a tax home outside the relevant possession or a closer connection to the United States or a foreign country than to the relevant possession during any of the first 183 days of the tax year. Free e file You are not a bona fide resident of the relevant possession for any of the 3 tax years immediately following your move. Free e file Example. Free e file Jean Aspen, a U. Free e file S. Free e file citizen, files returns on a calendar year basis. Free e file From January 2010 through December 2012, Jean was a bona fide resident of American Samoa. Free e file Jean continued to live there until September 6, 2013, when she accepted new employment and moved to Hawaii. Free e file Jean's principal place of business from January 1 through September 5, 2013 (more than 183 days), was in American Samoa, and during that period Jean did not have a closer connection to the United States or a foreign country than to American Samoa. Free e file If Jean continues to live and work in Hawaii for the rest of 2013 and throughout years 2014 through 2016, she will satisfy the tax home and closer connection tests for 2013 with respect to American Samoa. Free e file If Jean also satisfies the presence test in 2013, she will be considered a bona fide resident for the entire 2013 tax year. Free e file Puerto Rico You will be considered a bona fide resident of Puerto Rico for the part of the tax year preceding the date on which you move if you: Are a U. Free e file S. Free e file citizen, Are a bona fide resident of Puerto Rico for at least 2 tax years immediately preceding the tax year of the move, Cease to be a bona fide resident of Puerto Rico during the tax year, Cease to have a tax home in Puerto Rico during the tax year, and Have a closer connection to Puerto Rico than to the United States or a foreign country throughout the part of the tax year preceding the date on which you cease to have a tax home in Puerto Rico. Free e file Example. Free e file Randy White, a U. Free e file S. Free e file citizen, files returns on a calendar year basis. Free e file For all of 2011 and 2012, Randy was a bona fide resident of Puerto Rico. Free e file From January through April 2013, Randy continued to reside and maintain his principal place of business in and closer connection to Puerto Rico. Free e file On May 5, 2013, Randy moved and changed his tax home to Nevada. Free e file Later that year he established a closer connection to the United States than to Puerto Rico. Free e file Randy did not satisfy the presence test for 2013 with respect to Puerto Rico, nor the tax home or closer connection tests. Free e file However, because Randy was a bona fide resident of Puerto Rico for at least 2 tax years before he moved to Nevada in 2013, he was a bona fide resident of Puerto Rico from January 1 through May 4, 2013. Free e file Reporting a Change in Bona Fide Residence If you became or ceased to be a bona fide resident of a U. Free e file S. Free e file possession, you may need to file Form 8898. Free e file This applies to the U. Free e file S. Free e file possessions of American Samoa, the CNMI, Guam, Puerto Rico, and the USVI. Free e file Who Must File You must file Form 8898 for the tax year in which you meet both of the following conditions. Free e file Your worldwide gross income (defined below) in that tax year is more than $75,000. Free e file You meet one of the following. Free e file You take a position for U. Free e file S. Free e file tax purposes that you became a bona fide resident of a U. Free e file S. Free e file possession after a tax year for which you filed a U. Free e file S. Free e file income tax return as a citizen or resident alien of the United States but not as a bona fide resident of the possession. Free e file You are a citizen or resident alien of the United States who takes the position for U. Free e file S. Free e file tax purposes that you ceased to be a bona fide resident of a U. Free e file S. Free e file possession after a tax year for which you filed an income tax return (with the IRS, the possession tax authority, or both) as a bona fide resident of the possession. Free e file You take the position for U. Free e file S. Free e file tax purposes that you became a bona fide resident of Puerto Rico or American Samoa after a tax year for which you were required to file an income tax return as a bona fide resident of the CNMI, Guam, or the USVI. Free e file Worldwide gross income. Free e file   Worldwide gross income means all income you received in the form of money, goods, property, and services, including any income from sources outside the United States (even if you can exclude part or all of it) and before any deductions, credits, or rebates. Free e file Example. Free e file You are a U. Free e file S. Free e file citizen who moved to the CNMI in December 2012, but did not become a bona fide resident of that possession until the 2013 tax year. Free e file You must file Form 8898 for the 2013 tax year if your worldwide gross income for that year was more than $75,000. Free e file Penalty for Not Filing Form 8898 If you are required to file Form 8898 for any tax year and you fail to file it, you may owe a penalty of $1,000. Free e file You may also owe this penalty if you do not include all the information required by the form or the form includes incorrect information. Free e file In either case, you will not owe this penalty if you can show that such failure is due to reasonable cause and not willful neglect. Free e file This is in addition to any criminal penalty that may be imposed. Free e file Prev  Up  Next   Home   More Online Publications
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The Free E File

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