The term “trade or business” generally includes any activity carried on to produce income from the sale of goods or from the performance of services. A trade or business activity is one in which a profit is expected to be made. However, if an activity conducted for profit is considered an unrelated trade or business, it remains classified as "for-profit" even if it does not generate a profit in a specific year.

Business activities ordinarily are considered regularly carried on if such activities show a frequency and continuity and are pursued in a manner similar to comparable commercial activities of nonexempt organizations. An activity should not be considered regularly carried on if it is 

1. on a very infrequent basis
2. for a short period of time during the year; or
3. without competitive and promotional efforts. 

Activities over a period of only a few weeks are not "regular" for an exempt organization if the activities are of a kind normally conducted by a nonexempt business on a year-round basis. Intermittent, casual or sporadic activities are generally not regular. However, year-round activities are regular even if they are conducted only one day a week. Furthermore, seasonal activities may be regularly carried on even though they are conducted only for a short period each year.

To be considered exempt (nontaxable) income, there must be a substantial causal relationship between the activity that generates revenue and the exempt purpose of RPI (i.e., the activity must contribute importantly to the accomplishment of RPI’s educational and research purpose other than the need to produce income). 

An activity that generates income which is then used for exempt purposes does not mean that the activity is related to the exempt purposes. In looking at an activity, particular emphasis is placed on the size and extent of the activity. If an activity is conducted on a scale larger than reasonably necessary to carry out the exempt purpose, it is more likely to be treated as unrelated.

Any trade or business which is carried on primarily for the convenience of the organization's members is not an unrelated trade or business. The convenience exception is applicable only for sales to members of RPI (e.g., students, faculty and staff). Any sales to non-members (e.g., the public or alumni) are taxable. The convenience exception normally applies to the operation of on-campus vending machines and the laundering of dormitory linens and student clothing.

Any trade or business in which substantially all the work is performed by volunteers (without compensation) is not an unrelated trade or business. Under this exception, substantially all (approximately 85% or more) of the work of the trade or business is performed without compensation. In assessing the contribution made by volunteers, the IRS considers such factors as the monetary value of the respective services rendered, the number of hours worked, the intrinsic importance of the volunteer work performed, and the degree of reliance placed upon volunteers.

Any trade or business which consists of selling merchandise substantially all of which has been donated to the organization is not an unrelated trade or business. Under this exception, substantially all (approximately 85% or more) of the merchandise sold must have been received as gifts or contributions. In such cases, the income is exempt regardless of whether the labor to operate the activity is paid or volunteered.

There are special circumstances in which an unrelated activity may be recognized as serving an exempt purpose. The IRS makes this determination on a case-by-case basis. The following are examples of special circumstances where the IRS found that the unrelated activity was exempt from taxation:

• Services or facilities otherwise unavailable in the community that fulfill an important community or medical need and
• Services, facilities or equipment that are technically advanced or unique.

A royalty may generally be defined as compensation paid to owners of a patent, copyright, mineral interest, or other property right for the use of it or the right to exploit it. The royalty exclusion includes overriding royalties, net profit royalties and royalty income received from licenses by RPI as the legal and beneficial owner of patents assigned to it by inventors.

(a) Licensing Agreements. The royalty exclusion is commonly used by exempt organizations to exclude licensing fees from UBIT. The IRS generally agrees with this provided that the exempt organization plays a passive role in the licensing arrangement. However, where the exempt organization’s involvement is active, the IRS will not characterize the payment as a royalty and thus the payment will be subject to UBIT. An example of the latter situation is when the exempt organization is providing endorsements or services that are important to the success of the arrangement. In such cases, the IRS views the royalty payment as consideration for services rendered and not a royalty.

Rental UBIT rules vary depending on whether the rent is derived from real property, personal property or from a mix of both real and personal property.

(a) Real Property: As a general rule, rent from real property is excluded from unrelated business income provided all the following are true:

• Additional services are not rendered;
• Rental amount is not based on a percentage of net profits; and
• Property is not debt financed.

Rental income received by RPI does not qualify as excludable if RPI renders services for the convenience of the occupant. Services are considered rendered to the occupant if they are primarily for his or her convenience and are other than those usually rendered in connection with the rental of rooms or other space for occupancy only. Examples of additional services include maid services, security services and catering services.

Rental income received by RPI does not qualify as excludable if the rental amount is based on a percentage of net profits. Rental income is potentially excludable where the rental amount is for a fixed fee or based on a fixed percentage of gross receipts or sales.

The IRC contains an exception to the debt-financed property rules for the acquisition of real property by "qualified organizations” (which includes educational institutions such as RPI). These rules do not apply to debt incurred by a qualified organization to purchase real property where the following conditions are present:

• the purchase price is a fixed amount;
• the amount of indebtedness and the time for payment of such indebtedness is not dependent on revenue, income, or profits derived from the real property;
• the real property is not leased back to the seller or a party related to the seller; and
• if the real property is held by a partnership and one or more of the partners is not a qualified organization, then allocations to the partners must be qualified allocations or must not have as a principal purpose the avoidance of income tax.

(b) Personal Property: Rental income from personal property is excluded only if there is a mixed lease and the rents attributable to the personal property are an "incidental" part of the total rents received under the lease. The following rules apply to personal property rents:

• All of the rental income is excluded if the rent attributable to the personal property is not more than 10% of the total rent under the lease;
• If the rent attributable to personal property is more than 10% but not more than 50% of the total rent, only the rent attributable to the real property is excluded; and
• If the rent attributable to the personal property is more than 50% of the total rent, then none of the rental income is excluded and the entire amount is considered taxable.

The sale of commercial advertising by RPI in publications and athletic programs may be considered unrelated business income. Generally, advertising in a university periodical is regarded as an unrelated business activity even if the publication of the editorial content of the periodical furthers RPI’s exempt purposes. In situations where RPI publishes a periodical with professional staff and the periodical contains advertising, income from advertising less the costs associated with the part of the periodical containing advertising is considered unrelated business income. In situations where RPI contracts with an outside publisher to publish the periodical, the advertising portion of the publication is also unrelated business income if RPI is an active participant in the publication of the periodical.

Consumer advertising may be regarded as related to the exempt purpose if students are actively involved in the solicitation, sale and publication of the advertising under the supervision and instruction of RPI. For example, a campus newspaper operated by students publishes paid advertising. Although the services rendered to the advertisers are of a commercial character, the advertising business contributes importantly to RPI’s educational program through the training and participation of students involved.

However, just because students are involved, the activity is not automatically considered exempt from taxable income. The deciding factor lies with the overall purpose of the program. For example, a university acquires a radio station that serves as a laboratory for training students in the radio industry. The radio station also provides a source of income to the school, serves as a medium for advertising RPI and serves as a medium for adult education. If the greatest portion of time is devoted to the activities conducted by regularly constituted commercial radio stations and not student training, the advertising activity will be deemed taxable.

1. Sponsorship Payments

Unrelated business income does not include the activity of soliciting and receiving “qualified sponsorship payments.” A qualified sponsorship payment is any payment to a tax-exempt organization by a person engaged in a trade or business where there is no arrangement or expectation of any substantial return benefit (other than the use or acknowledgement of that person’s name, logo, or product lines in connection with the activities of the tax-exempt organization). A substantial return benefit is defined as any benefit received by the payor which exceeds 2% of the fair market value of the payment.

The term "use or acknowledgement" includes logos and slogans that do not feature qualitative or comparative descriptions of the payor’s products or services. It also encompasses lists of the payor’s locations, telephone numbers, and internet addresses, as well as value-neutral descriptions (such as displays or visual depictions) of the payor’s product line, services, brand, or trade names. The purpose of an acknowledgement is to identify the sponsor rather than to promote their products, services, or facilities. For example, “RPI is proud to have XXX as our sponsor” is a statement of recognition; whereas “RPI suggests that you buy from XXX” is advertising. The display or sale of the sponsor’s product by the sponsor at a sponsored event is not considered an inducement to buy, sell or use the sponsor’s product and does not affect the determination of whether a payment is a qualified sponsorship payment.

Acknowledgement of an exclusive sponsorship of RPI’s activity generally does not, by itself, result in a substantial return benefit. However, if RPI agrees to perform substantial services in connection with an exclusive provider arrangement, income received by RPI may be included in unrelated business income. Examples of substantial services include guaranteeing that coaches make promotional appearances on behalf of the company (for example, to attend photo shoots, to film commercials and to appear at retail stores), assisting the company in developing marketing plans, and participating in joint promotional opportunities. These activities are unlikely to be substantially related to RPI’s exempt purposes and are likely to constitute a regularly carried on trade or business.

Exclusive provider arrangements which limit the sale, distribution, availability of use of competing services, products or facilities are generally considered a substantial return benefit and subsequently subject to UBIT. For example, if XYZ Company has an agreement with RPI whereby only XYZ products are used on campus, then these rights are potentially a substantial return benefit if its value exceeds 2% of the fair market value of the payment.

The term “qualified sponsorship payment” does not include a payment which is contingent upon the level of attendance, broadcast ratings, or other factors indicating the degree of public exposure to the sponsored activity.

Presentation of performing arts, such as acting, singing, and dancing by students even where RPI derives gross income from admission charges for the performances, is not an unrelated activity. The students' participation in performances before audiences is an essential part of their training. Since the income realized from the performances derives from activities which contribute importantly to RPI's exempt purposes, it does not constitute gross income from unrelated trade or business activities.

When RPI sponsors the appearance of professional theater companies and symphony orchestras, which present drama and musical performances for students, faculty members, and the general public, such activities may also be related. Although RPI derives gross income from the conduct of such performances, the presentation of the performances makes use of an intangible generated by RPI's exempt educational purposes. The presence of the student body and faculty and the presentation of such drama and music events contribute importantly to RPI's overall educational and cultural purposes. Therefore, the income which RPI receives does not constitute gross income from the conduct of an unrelated trade or business activity.

The IRS determines whether the income derived from professional entertainment events is considered unrelated business income by looking at the content of the event. Each entertainment event is analyzed separately, and a determination is made as to whether the activity is related or unrelated based on the extent to which it is operated in substantially the same manner as a commercial operation. Therefore, each event needs to be reviewed separately to determine several variables, including, but not limited to, the involvement of students/faculty, if the event was conducted in a commercial manner, and if the event contributes importantly to RPI's missions.

Auditors will review contracts with performance artists to determine if they were consummated for related educational purposes. The IRS is specifically looking for events that are produced by institutions that are not distinguishable from those efforts of a commercial promoter and arena.

Generally, income from a joint venture will not be taxable if it contributes importantly to an exempt purpose or if it is carried on for the “convenience” of RPI members. However, joint venture relationships have been scrutinized by the IRS to ensure that a tax-exempt organization is not serving the private purpose of the for-profit entity.

With respect to parking facilities, RPI owned parking facilities used by faculty, staff and students are not subject to unrelated business income tax. However, if RPI operates a parking facility that is used by members of the general public, parking fees are taxable, as this activity is not substantially related to RPI’s exempt purpose and parking fees are not treated as rent from real property. If RPI enters into a lease with a third party who operates RPI’s parking facility and pays rent to RPI, such payments are not considered unrelated business income as these payments constitute rent from real property.

In most cases the use of athletic or recreational facilities by students, faculty, and staff is for the “convenience” of the member of the tax-exempt organization and, therefore, not subject to UBIT. On the other hand, if membership fee income is collected from spouses, dependents, alumni, guests, or the general public then that income may be subject to UBIT. However, where RPI does more than merely open up the facilities and, for instance, provides lessons as well, the activity may be considered educational and related to RPI’s exempt purposes. For example, the operation of a summer sports camp provides instruction to individuals in a sports skill. The instruction of individuals, of any age, in a sport develops that person’s capabilities and is, therefore, educational. Since the operation of a summer sports camp in this situation is an educational activity, it is substantially related to RPI’s exempt purposes.

The following types of research are exempt:

• Scientific research carried on in the public interest. Scientific research is considered in the public interest even though an individual may retain the exclusive right to the use of a patent, copyright, process or formula if the granting of such exclusive right is the only practical manner in which the patent, copyright, process or formula can be utilized to benefit the public, and only if it is carried on for a charitable purpose such as aiding in the scientific education of college or university students;
• Research performed for the United States, its agencies, or any State or political subdivision of a state;
• Research performed “for any person” by a college, university, or hospital; and
• Research performed “for any person” by an organization operated primarily for the purpose of carrying on fundamental research. Such research may be performed “for any person,” but the results must be made freely available to the general public. Whether an organization is operated primarily for the purpose of carrying on fundamental, as opposed to applied, research is a question of fact to be determined based on all the facts and circumstances. A determination that the research is conducted in the public interest and research results made available to the general public includes an analysis of how, when and on what terms research results are published.

The term “research” does not include activities of a type ordinarily carried on as an incident to commercial or industrial operations, for example, the ordinary testing or inspection of materials or products or the designing or construction of equipment or buildings. The IRS has defined testing as those activities where “a standard procedure is used, no intellectual questions are posed, the work is routine and repetitive, and the procedure is merely a matter of quality control.” There is a presumption that a project is “ordinary testing” if the work is performed to satisfy a federal or state regulation requiring such an evaluation before a product may be marketed. Therefore, any income from such sources would constitute unrelated business income, if regularly carried on and not related to exempt purposes.

(a) Sale of By-Products.

The sale of products resulting from research activities may or may not be exempt from UBIT. If the product is sold in substantially the same state it is in on completion of the research, the sale does not constitute unrelated business income. However, if further manufacture or processing of the product occurs, the gross income is considered unrelated business income.

An example of this distinction is as follows: An experimental dairy herd maintained for scientific purposes by a research organization produces milk and cream in the ordinary course of operation of the project. The sale of the milk and cream would not be gross income from conduct of unrelated trade or business. On the other hand, if the research organization were to utilize the milk and cream in the further manufacture of food items such as ice cream, pastries, etc., the gross income from the sale of such products would be from the conduct of unrelated trade or business unless:

• the manufacturing activities themselves contribute importantly to the accomplishment of the exempt purpose of the organization (i.e. education of students); or
• the research produces more raw milk than can be sold as milk in its normal period of shelf life. This causes further processing to be done of the excess raw milk to obtain products that have a longer shelf life to avoid spoilage.

Service department's primary users should be internal RPI departments. Use by private organizations should be secondary or incidental to the operation of the service department. Service departments should not compete with established community businesses for private customers or users. If sales of goods and/or services to individuals or non-RPI entities occur, the activities should be reviewed for UBIT considerations.

Events held on campus which include external users (the public, alumni) must be carefully examined to determine if there are any UBIT implications. If an event held an educational component; for example, a science conference hosted by an RPI faculty member, then it might be considered exempt from unrelated business income due to being related to RPI’s exempt function. However, even if an event is not subject to unrelated business income tax, it might be subject to NYS sales tax. To this end, all creators of external events on campus should fill out the “External Events on Campus Form” and submit it to accounting for review.