The following discussion applies to:
- Social clubs described in section
501(c)(7),
- Voluntary employees' beneficiary associations (VEBAs)
described in section 501(c)(9), and
- Supplemental unemployment compensation benefit trusts
(SUBs) described in section 501(c)(17).
These organizations must figure unrelated business taxable
income under special rules. Unlike other exempt organizations, they
cannot exclude their investment income (dividends, interest, rents,
etc.). (See Exclusions under Income, earlier.)
Therefore, they are generally subject to unrelated business income tax
on this income.
The unrelated business taxable income of these organizations
includes all gross income, less deductions directly connected with the
production of that income, except that gross income for this purpose
does not include exempt function income. The dividends
received deduction for corporations is not allowed in computing
unrelated business taxable income because it is not an expense
incurred in the production of income.
Losses from nonexempt activities.
Losses from nonexempt activities of these organizations cannot be
used to offset investment income unless the activities were undertaken
with the intent to make a profit.
Example.
A private golf and country club that is a qualified tax-exempt
social club has nonexempt function income from interest and from the
sale of food and beverages to nonmembers. The club sells food and
beverages as a service to members and their guests rather than for the
purpose of making a profit. Therefore, any loss resulting from sales
to nonmembers cannot be used to offset the club's interest income.
Modifications.
The unrelated business taxable income is modified by any net
operating loss or charitable contributions deduction and by the
specific deduction (described earlier under Deductions.
Exempt function income.
This is gross income from dues, fees, charges or similar items paid
by members for goods, facilities, or services to the members or their
dependents or guests, to further the organization's exempt purposes.
Exempt function income also includes income that is set aside
for qualified purposes.
Income that is set aside.
This is income set aside to be used for religious, charitable,
scientific, literary, or educational purposes or for the prevention of
cruelty to children or animals.In addition, for a VEBA or SUB, it is
income set aside to provide for the payment of life, sick, accident,
or other benefits.
However, any amounts set aside by a VEBA or SUB that exceed the
organization's qualified asset account limit (determined under section
419A) are unrelated business income. Special rules apply to the
treatment of existing reserves for post-retirement medical or life
insurance benefits. These rules are explained in section 512(a)(3)(E).
Income derived from an unrelated trade or business may not be set
aside and therefore cannot be exempt function income. In addition, any
income set aside and later spent for other purposes must be included
in unrelated business taxable income.
Set-aside income is generally excluded from gross income only if it
is set aside in the tax year in which it is otherwise includible in
gross income. However, income set aside on or before the date for
filing Form 990-T, including extensions of time, may, at the
election of the organization, be treated as having been set aside in
the tax year for which the return was filed. The income set aside must
have been includible in gross income for that earlier year.
Nonrecognition of gain.
If the organization sells property used directly in performing an
exempt function and purchases other property used directly in
performing an exempt function, any gain on the sale is recognized only
to the extent that the sales price of the old property exceeds the
cost of the new property. The purchase of the new property must be
made within 1 year before the date of sale of the old property or
within 3 years after the date of sale.
This rule also applies to gain from an involuntary conversion of
the property resulting from its destruction in whole or in part,
theft, seizure, requisition, or condemnation.
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