Situation: A Basic College (ABC) provides a traditional college education program for its students. ABC operates as a Section 501(c)(3) organization exempt from income tax. Its purpose is to provide an education program to young adults in order to qualify program graduates to obtain careers in industry sectors for which a college degree is required.
ABC also provides a travel program to students and faculty which is also made available to the general public. The travel program allows travelers the opportunity to experience different countries and cultures around the world, provides tour guides and leaders who present narrated talks about peoples, places and customs, and introduces travelers to the basics of various foreign languages. The travel program does not lead to credits toward a degree, and is not part of any particular curriculum of study. It simply constitutes a potentially life-changing and culturally enlightening experience to its travelers.
Dilemma: ABC tends to make a substantial profit from the provision of its travel tour program. It considers its program to be educationally beneficial to its enrollees. Sally Forth, ABC’s controller and tax return preparer is considering whether ABC’s travel tour business constitutes an unrelated trade or business subject to the filing of Form 990-T and the payment of excise taxes in connection with related profits.
Rule: 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. Trade or business generally includes any activity conducted for the production of income from selling goods or performing services with intent to make a profit. A business activity is not substantially related to an organization’s exempt purpose if it does not contribute importantly to accomplishing that purpose
Answer: ABC’s travel tour business does not contribute importantly to ABC’s exempt purpose of preparing students through its degree program to obtain careers. Even though the exercise of a seemingly educational program might appear to fit the definition of a charitable purpose if it were included in an organization’s stated charitable purpose, it doesn’t qualify if it does not fit within the scope of charitable purpose under which the organization applied for its exemption.
If ABC’s travel tour program were modified to constitute a component of one of its degree programs, or if ABC amended its exempt purpose to include within its charitable purpose scope a student travel program, then its travel tour program devoted to student travel would likely constitute a fulfillment of its exempt purpose. However, income and expenses related to providing travel tour experiences to non-students (the general public) would continue to constitute an unrelated trade or business subject to tax, and would need to be separated from the portion of the business devoted to exempt purpose income and expense.
Significance A program whose purpose does not contribute significantly to an organization’s stated exempt purpose, that is regularly carried on with a profit objective, will generally be subject to tax on unrelated business taxable income and related filing requirements. Furthermore, an activity will 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. Therefore, if profit oriented travel offered by ABC to the general public is combined with exempt purpose activity related to its student population, the general public portion of its business will need to be broken out from curriculum oriented travel and subjected to unrelated business taxable income rules and filing requirements.
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