October 22, 1998 | Read Time: 3 minutes
The I.R.S. has ruled that a charity owes unrelated-business income tax on some of the revenue it receives from those who rent its fairgrounds property. Non-profit groups must pay the tax, known as UBIT, on commercial operations not related to their tax-exempt purposes. The ruling shows how the government must sort through complex laws to decide when organizations are subject to tax.
The charity, which the I.R.S. did not identify, conducts an annual 17-day agricultural fair that draws more than a million people. The group uses its fairgrounds and buildings for about six weeks each year to stage its fair. During the off-season, the organization rents its facilities to other organizations and individuals, most of whom pay a flat fee.
In its ruling, the I.R.S. said that the charity does not owe unrelated-business income tax on those payments because the law generally gives organizations a break on money they receive when they rent land and buildings.
However, the I.R.S. took a close look at the charity’s income because the group also charges its renters separate fees for a variety of services, including a public-address system, security, and parking, as well as the use of tables and chairs.
Under federal law, charities are subject to tax when they rent space and provide certain services to the “occupant” — services that are primarily for the user’s convenience and not customarily given to those who simply lease space. A charity that supplied a maid would be considered to provide such a service and owe tax, according to federal regulations. But an organization would avoid tax if it cleaned public entrances and exits, collected trash, or furnished heat and light.
Using that rationale, the I.R.S. decided that the charity in question owed tax on income from charges for a public-address system, assistance in setting up equipment for events, and hookups for recreational vehicles, because those were deemed “services for the occupant.” But the charity escapes tax on fees for security, gate attendants, clean-up work, and the use of trash containers, the I.R.S. said, because these services were “not for the benefit of the occupant.”
The charity does not owe tax on income from renting its parking lot because it is “not engaged in the operation of the parking lot but is merely renting it out on an arm’s-length basis,” the revenue service said.
To determine whether the charity owed tax on income from the rental of tables and chairs, the I.R.S. had to review another part of federal law. Federal regulations say that money from the rental of such “personal property” — leased along with land and buildings — is not taxable if the money does not exceed 10 per cent of total payments received from someone renting property.
In this case, the I.R.S. concluded that the charity does owe some tax: The organization acknowledged that in some instances the money collected from renting tables and chairs and other items exceeded 10 per cent of a total payment (Technical Advice Memorandum 9835001).
