July 16, 1998 | Read Time: 2 minutes
The I.R.S. has ruled that a housing and community-renewal charity stepped beyond its mission when it acquired two temporary-storage businesses and must therefore pay taxes on the income from those facilities.
The charity, which rents housing to low- and moderate-income families, first notified the I.R.S. of its plans to purchase a storage facility in its application for tax exemption. The organization told the revenue service that such a facility was needed because tenants were improperly, and in some cases illegally, keeping personal belongings in spaces not intended for such use. The charity said that it intended to rent at least one-fifth of the storage spaces to its own housing tenants.
In early 1991, the charity acquired a storage company with 577 units. During that year, only seven of those units — or 1.2 per cent — were rented by tenants of the charity’s housing. The next year, the number had increased to only 10, despite the fact that the charity offered its tenants discounts and transportation services to the units. The rest of the storage spaces continued to be advertised to and rented by the general public.
In September of 1991, the charity borrowed money to buy a second temporary-storage business that included 457 units and that also remained open to the general public. None of the units in the second facility were rented by the charity’s housing tenants during 1991 or 1992. The charity subsequently sold both storage properties after it realized that they were not being used extensively by its tenants. But it maintained that it should not be required to pay taxes on the income from those businesses because, at the time it purchased them, it believed that the storage centers were essential to its housing work.
The I.R.S., however, disagreed. It ruled that the storage operations failed to qualify for exemption from the unrelated-business income tax, in part because the charity acquired far more storage than was needed by its housing tenants. “To make the income from such an activity exempt, it must contribute importantly to the accomplishment of some exempt purpose,” the revenue service said. As is its custom, the I.R.S. did not identify the charity involved in the ruling (Technical Advice Memorandum 9816197).
