The Tax Law of Charitable Giving. Bruce R. Hopkins

competitors. Thus, specific business activities of a tax-exempt organization will generally “be deemed ‘regularly carried on’ if they manifest a frequency and continuity, and are pursued in a manner generally similar to comparable commercial activities of nonexempt organizations.”⁵³⁰

When income-producing activities are performed by commercial organizations on a year-round basis, the performance of these activities for a period of only a few weeks does not constitute the regular carrying on of a trade or business.⁵³¹ Similarly, occasional or annual income-producing activities, such as fundraising events, do not constitute a business regularly carried on. The conduct of year-round business activities, such as parking lot rental, for one day each week would, however, constitute the regular carrying on of a business.⁵³² When commercial entities normally undertake income-producing activities on a seasonal basis, the conduct of the activities by a tax-exempt organization during a significant portion of the season is deemed the regular conduct of that activity.⁵³³

A trade or business is regularly carried on if the attributes of the activity are similar to those of commercial activities of nonexempt organizations.⁵³⁴

(d) Concept of Unrelated Business

The term unrelated trade or business is defined to mean “any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption.”⁵³⁵ Thus, a regularly conducted trade or business is subject to tax, unless it is substantially related to accomplishment of the organization's exempt purpose.⁵³⁶ To be substantially related, the activity must have a substantial causal relationship to the achievement of an exempt purpose.⁵³⁷ The fact that an asset is essential to the conduct of an organization's exempt activities does not shield commercial income from taxation when that income was produced by that asset.⁵³⁸ The income-producing activities must still meet the causal relationship test if the income is not to be subject to tax.⁵³⁹ This issue arises when an organization owns a facility or other assets that are put to dual use. For example, the operation of an auditorium as an ordinary motion picture theater for public entertainment in the evening would be treated as an unrelated activity even though the theater is used exclusively for tax-exempt purposes during regular hours.⁵⁴⁰

A related concept is that activities should not be conducted on a scale larger than is reasonably necessary for performance of the exempt functions.⁵⁴¹ Activities in excess of the needs of exempt functions constitute the conduct of an unrelated business.⁵⁴²

(e) Unrelated Business Taxable Income

As indicated, to be subject to the unrelated income rules, an activity must satisfy four tests. The first three of these tests are built into the definition of the phrase unrelated business taxable income. That term is defined as the “gross income derived by any organization from any unrelated trade or business . . . regularly carried on by it, less the deductions allowed . . . [under federal tax law] which are directly connected with the carrying on of such trade or business.”⁵⁴³

Both this gross income and allowable deductions are computed in conformance with the modifications discussed shortly.⁵⁴⁴

Tax-exempt organizations are subject to tax on their unrelated business taxable income at the corporate tax rate (21 percent), or at individual rates if the organization is not incorporated.⁵⁴⁵

(f) Exempted Activities

      Certain business activities conducted by tax-exempt organizations are exempt from unrelated business taxation. These include:

       A trade or business “in which substantially all the work in carrying on such trade or business is performed for the organization without compensation.”⁵⁴⁶

       A trade or business carried on by the organization primarily for the “convenience of its members, students, patients, officers, or employees.”⁵⁴⁷ This exemption is available only to organizations that are charitable entities⁵⁴⁸ or are governmental colleges and universities.⁵⁴⁹

       A trade or business “which is the selling of merchandise, substantially all of which has been received by the organization as gifts or contributions.”⁵⁵⁰

       Qualified public entertainment activities,⁵⁵¹ which are “any entertainment or recreational activity of a kind traditionally conducted at fairs or expositions promoting agricultural and educational purposes, including, but not limited to, any activity one of the purposes of which is to attract the public to fairs or expositions or to promote the breeding of animals or the development of products or equipment.”⁵⁵² This exemption is available only to charitable, social welfare, labor, and agricultural organizations.⁵⁵³

       Qualified convention and trade show activities,⁵⁵⁴ which are “any activity of a kind traditionally conducted at conventions, annual meetings, or trade shows, including, but not limited to, any activity one of the purposes of which is to attract persons in an industry generally (without regard to membership in the sponsoring organization) as well as members of the public to the show for the purpose of displaying industry products or to stimulate interest in, and demand for, industry products or services, or to educate persons engaged in the industry in the development of new products and services or new rules and regulations affecting the industry.”⁵⁵⁵ This exemption is available only to charitable, social welfare, labor, and agricultural organizations and to business leagues.⁵⁵⁶

       In the case of a charitable hospital, the furnishing of certain cooperative services to one or more small hospitals under certain circumstances.⁵⁵⁷

       The conduct