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1. Exclusion of lease from genuine residential or commercial property from unrelated organization gross income

Exclusion of rent from real residential or commercial property from unassociated business taxable earnings

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Rental income from genuine residential or commercial property received by exempt organizations is normally excluded from unrelated service taxable earnings (UBTI). However, rent might not fall under the exemption in various scenarios, such as when considerable personal services are supplied to lessees, if more than 50% of the rent is for the use of individual residential or commercial property, if the residential or commercial property is debt-financed income or leased to a controlled entity, or if the organization is exempt under Sections 501( c)( 7 ), 501( c)( 9) or IRC 501( c)( 17 ).

IRC Section and Treas. Regulation

- IRC Section 512( b)( 3) Rents from real residential or commercial property left out from UBI. - IRC Section 512( b)( 13) Special rules for particular amounts gotten from controlled entities. - IRC Section 514( b)( 1) Definition of debt-financed residential or commercial property. - Treas. Reg. Section 1.512( b) -1( c) Rent adjustment

Resources (lawsuit, Chief Counsel Advice, Revenue Rulings, internal resources)

- Ocean Pines Ass 'n v. Comm' r, 135 T.C. 276 (2010) The Tax Court held that income received by a 501( c)( 4) property owners' association's operation of parking area was not lease from genuine residential or commercial property left out from unrelated business gross income by Section 512( b)( 3 ). - Gundersen Med. Found. v. United States, 536 F. Supp. 556 (W.D. Wis. 1982) A medical academic and research study foundation exempt under area 501( c)( 3) rented some of its buildings, which went through a mortgage, to a personal non-exempt clinic. The court found that the rental earnings from debt-financed residential or commercial property was not unrelated organization income, under Section 514( b)( 1 )( A)( ii), because the clinic's use of the rented real (and personal) residential or commercial property in providing medical services and training medical students was substantially related to the structure's exempt purposes. - Rev. Rul. 69-69, 1969-1 C.B. 159 The leasing of homes and the operation of a dining hall by an exempt organization make up unrelated trades or services where inhabiting the apartments is not mainly for the benefit of its members. - Rev. Rul. 80-297, 1980-2 C.B. 196, amplifying Rev. Rul. 76-402, 1976-2 C.B. 177, holds that an exempt school that uses its tennis centers for ten weeks in the summer season as a public tennis club operated by workers of the school's athletic department is taken part in unassociated trade or service and the earnings earned is not excludable from unassociated business taxable earnings as rent from real residential or commercial property. If, nevertheless, the school rents the tennis centers for a repaired cost to an unrelated person who operates a tennis club for the general public, the school is still engaged in unassociated trade or service, but the lease earnings is omitted from unrelated company taxable income as lease from genuine residential or commercial property. - Rev. Rul. 80-298, 1980-2 C.B. 197 holds that income from the lease of a football arena by a tax-exempt university to an expert football group is not lease from genuine residential or commercial property omitted under Section 512( b)( 3) because the university provided significant services (which did not make up popular services) for the benefit of the group. 1989-B EO CPE Text PDF - Rents from Real Residential Or Commercial Property - Rendering Services

Analysis

According to IRC Section 512( b)( 3 ), leas from genuine residential or commercial property are omitted from unassociated service taxable earnings. Real residential or commercial property is land and any structures or other structures completely connected to land, and consists of any residential or commercial property explained in IRC Section 1245( a)( 3 )( C). However, there are numerous circumstances in which the exemption does not apply. These may include:

Rent, if the rental of facilities includes the provision of services, such as food and drink sales. Rental payments for using rooms or space where services are likewise rendered to the residents does not constitute rent from genuine residential or commercial property. Services are considered rendered to residents if they are mainly for their convenience. Those services usually or usually rendered in connection with the rental are not thought about rendered to occupants. See Treas. Reg. Section 1.512( b) -1( c)( 5 ),

For instance, the supplying of maid service makes up service to the resident, whereas the furnishing of heat and light, the of public locations, and the collection of garbage, are ruled out as services rendered to the occupant. Rental earnings from hotel rooms, storage systems, or parking lots is ruled out lease from real residential or commercial property. See Rev. Rul. 69-69, Rev. Rul. 80-287, and Rev. Rul. 80-298. Similarly, in Ocean Pines Association, Inc., the court held that the income received from car park was not lease from real residential or commercial property and for that reason the earnings underwent UBIT.

Rent from "net revenues" leases. Where the rental income is based upon a percentage of the lessee's sales or earnings, the rental earnings will not receive exemption. See Treas. Reg. Section 1.512( b) -1( c)( 2 )( iii)( b).

Rent from "blended leases." Rent from a lease where more than half of the overall lease is attributable to personal residential or commercial property will not be omitted from unassociated company gross income. Treas. Reg. Section 1.512( b) -1( c)( 2 )( iii)( a). Unrelated income from debt-financed residential or commercial property. Rent from residential or commercial property acquired with acquisition indebtedness, as defined in IRC Section 514( c), unless significantly all of making use of the residential or commercial property is considerably related to exempt purposes. IRC Section 514( b). For instance, in Gundersen Med. Found the court concluded that more than 85% of using the debt-financed residential or commercial property was considerably committed to the exempt purpose of the Foundation and for that reason the lease was not subject to UBIT.

Rent received from a regulated entity. As explained in IRC Section 512( b)( 13 ), rent received from a regulated entity is includable in unrelated business earnings to the level it lowers the net unassociated earnings of the regulated entity.

Rents received by organizations described in Sections 501( c)( 7 ), 501( c)( 9 ), and 501( c)( 17 ), to which special UBIT guidelines use under IRC Section 512( a)( 3 ).
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Issue signs or audit suggestions

- Did the return show rental income and a mortgage? - Tour the facilities. Exist indicators of locations or buildings being rented? Identify which locations or buildings are debt-financed. - Did taxpayer offer documents such as a rent/lease agreement revealing the income was from real residential or commercial property? - Did the documents such as mortgage agreement supplied show if the real residential or commercial property that the EO got earnings from is financial obligation financed? - Did taxpayer offer files such as a service arrangement revealing whether services were offered for the rental income received?
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