Opinion ID: 411167
Heading Depth: 1
Heading Rank: 3

Heading: the guiding light: statutory and regulatory background

Text: 22 The complexity of tax legislation is so pervasive that one is tempted to observe that most of it is ghostwritten by Henry Clay. The unrelated business income tax provisions are no exception. Section 501(a) provides the basic exemption from tax for organizations described in section 501(c)(6). 13 The tax exemption provided by section 501(a) is limited, however, by section 501(b), which cautions that otherwise tax-exempt organizations may be subject to tax to some extent. Sections 511 through 514 amplify section 501(b), for they govern the taxation of business income of tax-exempt institutions. 23 Section 511(a)(1) imposes a tax on the unrelated business taxable income of certain tax-exempt organizations. The term unrelated business taxable income is defined in section 512(a) as the gross income derived by any organization from any unrelated trade or business ... regularly carried on by it, less the deductions allowed by this chapter which are directly connected with the carrying on of such trade or business, computed with some modifications not pertinent here. Unrelated trade or business is defined in yet another Code section, section 513: 24 [A]ny 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 under section 501 25 is deemed unrelated for purposes of the tax on unrelated business income. I.R.C. Sec. 513(a). 26 The term trade or business carries us further into the definitional maze of the Code. Section 513(c) states that the term 'trade or business' includes any activity which is carried on for the production of income from the sale of goods or the performance of services. The regulations barely amplify this statement by noting that the term trade or business for purposes of section 513 has the same meaning that it does in the more familiar context of section 162. Treas.Reg. Sec. 1.513-1(b). 27 The quoted definitions are not particularly technical or convoluted, but by the same token they leave much to the imagination. Thankfully, the regulations provide an analytical framework in which to examine the issues. 14 Section 1.513-1(a) of the Treasury Regulations sets out three inquiries to be used in determining whether amounts received by a tax-exempt organization constitute unrelated business taxable income. The court must ask if: 28 (1) the income is from a trade or business; 29 (2) the trade or business is regularly carried on by the organization; and 30 (3) the conduct of the trade or business is not substantially related to the organization's performance of its exempt functions (other than through the production of funds). 31 With this three-point approach in mind, we turn to an analysis of the parties' arguments. 32