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In general

INTRODUCTION

The Subcommittee on Oversight of the House Committee on Ways and Means has scheduled public hearings on June 22, 25, 26, 29, and 30, 1987, on the Federal tax treatment of commercial and other income-producing activities of organizations that have taxexempt status under section 501 of the Internal Revenue Code. These organizations include, among others, charitable, educational, scientific, and religious organizations; social welfare organizations; labor or agricultural organizations; trade associations; social clubs; voluntary employee beneficiary associations; and trusts that are part of qualified pension plans. Since 1969, all exempt organizations have been subject to tax on unrelated business taxable income, subject to specified exceptions, modifications, and special computational rules.

In its press release on the hearings dated May 14, 1987, the Subcommittee stated that the hearings are intended to develop information to assist in determining whether the present-law rules and underlying policy considerations are appropriate. The press release notes that there has been no comprehensive review of the unrelated business income tax rules since 1969, and that "there are many unanswered questions about the scope and nature of tax-exempt organizations' income-producing activities, the administration of the unrelated business income tax by the Internal Revenue Service and the courts, and the extent of compliance with the law." The release also points out that "to date, little factual or statistical data has been available to the Congress for the purpose of evaluating the effect of the unrelated business income tax."

This pamphlet,' prepared in connection with the hearings, contains an overview of the principal statutory and regulatory provisions of the unrelated business income tax (Code secs. 511-514).

Subcommittee framework for review

In a press release on the hearings issued by the Committee on Ways and Means dated September 12, 1986, the following questions were listed to set forth the Subcommittee's framework for review of the tax treatment of income-producing activities of exempt organizations, the impact of present-law rules on both tax-exempt organizations and for-profit businesses, and IRS application of, and taxpayer compliance with, the law.

This pamphlet may be cited as follows: Joint Committee on Taxation Overview of the Unrelated Business Income Tax on Exempt Organizations (JCS-16-87), June 20, 1987.

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I. Profile of Tax-Exempt Organization Activities:

A. What types of income-producing activities-whether considered "active" or "passive"-are carried on by tax-exempt organizations, and how much revenue is produced by such activities? Do different types of tax-exempt organizations tend to engage in different types of investment, commercial, or entrepreneurial activities?

B. How and why have the type, nature, and extent of such income-producing activities changed since 1950? What are the future trends?

C. Are tax-exempt organizations and for-profit businesses competing in the same income-producing activities?

1. To what extent do tax-exempt organizations engage in income-producing activities that are being, or could be, carried on by taxable businesses?

2. To what extent do taxable businesses engage in incomeproducing activities that traditionally have been performed by tax-exempt organizations?

3. Has renewed concern about competition between taxexempt and for-profit organizations arisen because tax-exempt organizations are moving into innovative revenue-raising techniques or because traditional tax-exempt organization activities have recently become profitable?

D. To what extent are tax-exempt organizations engaging in commercial activities with for-profit businesses through joint ventures, limited partnerships, or other means? Is the participation of taxexempt organizations in such commercial ventures inconsistent with their exempt status?

E. To what extent, if any, do current income-producing activities of exempt organizations relate to Federal budget cuts or other government policies?

II. The Purpose of the Law and Its Administration by the Internal Revenue Service and the Courts:

A. What purposes do the unrelated business income tax rules serve? Are these goals being met?

B. Are the "relatedness" and "trade or business" tests appropriate and administrable? What is the relationship between the extent of an organization's related or unrelated trade or business activities and its eligibility for exempt status?

C. What rationales underlie the various exceptions and modifications which permit tax-exempt organizations to engage in certain income-producing activities without taxation? For example, should endowment income be exempt from tax?

D. How is the law relating to unrelated business income being interpreted? Has interpretation of the law changed over time?

E. How does the Internal Revenue Service determine whether a tax-exempt organization's activity generates unrelated business income?

F. Are the current rules unduly burdensome or unreasonably restrictive for tax-exempt organizations?

G. Do the present-law rules permit unfair competition by exempt organizations? If so, how should the rules be changed?

III. Compliance with the Unrelated Business Income Tax:

A. Does the Internal Revenue Service have an adequate, well-balanced enforcement program in this area?

B. What portion of income subject to the unrelated business income tax is reported by recipient organizations on Form 990-T? C. Can tax-exempt organizations that do not report or [that] mischaracterize unrelated business income be readily identified?

D. Are the Forms 990 and 990-T adequate to identify the type of income-producing activity, the degree of "relatedness" of an activity to an organization's tax-exempt purpose, and other compliance issues?

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