26 U.S.C. § 512 — Unrelated business taxable income

(a) Definition — For purposes of this title, this subsection defines "unrelated business taxable income" (UBTI) for tax-exempt organizations. (1) General rule: Except as this subsection otherwise provides, UBTI means the gross income an organization gets from any unrelated trade or business (as section 513 defines it) that it regularly carries on, minus the deductions this chapter allows that are directly connected with running that trade or business — both figured using the modifications in subsection (b). (2) Special rule for foreign organizations: For a foreign organization described in section 511, UBTI is the sum of two things: its UBTI from U.S. sources that isn't effectively connected with a U.S. trade or business, plus its UBTI that is effectively connected with a U.S. trade or business. (3) Special rules for organizations described in paragraph (7), (9), or (17) of section 501(c) — these are certain social clubs, voluntary employee beneficiary associations, and similar membership groups: (A) General rule: For these organizations, UBTI means gross income (excluding "exempt function income," defined below), minus the deductions this chapter allows that are directly connected with producing that gross income (also excluding exempt function income) — figured with the modifications in paragraphs (6), (10), (11), and (12) of subsection (b). Deductions under sections 243 and 245, for dividends corporations receive, are treated as not directly connected with producing that income. (B) Exempt function income: This means the gross income from dues, fees, charges, or similar amounts members pay as consideration for goods, facilities, or services the organization provides to members (or their dependents or guests) in furtherance of the purpose that makes the organization exempt. It also means income (other than an amount equal to gross income from any regularly-carried-on unrelated trade or business, figured as under (1)) that is set aside for a purpose listed in section 170(c)(4), or, for a (9) or (17) organization, to pay life, sick, accident, or other benefits, including reasonable administrative costs connected with those purposes. If a set-aside amount is later used for some other purpose during the tax year, it is included in UBTI under (A) for that year. (C) Applicability to certain 501(c)(2) corporations: If a corporation described in section 501(c)(2) pays its income to a (7), (9), or (17) organization, subparagraph (A) applies as if that corporation were the organization receiving the income — but only for a tax year in which the corporation files a consolidated return with that organization. (D) Nonrecognition of gain: If property an organization uses directly for its exempt function is sold, and — starting 1 year before the sale and ending 3 years after — the organization buys and uses other property directly for its exempt function, gain from the sale is recognized only to the extent the sale price exceeds the cost of the replacement property. Destruction, theft, seizure, requisition, or condemnation of the property counts as a "sale" for this rule, and rules similar to old section 1034(b), (c), (e), and (j) (as they read before the Taxpayer Relief Act of 1997) apply. (E) Limitation on the amount that can be set aside, for (9) or (17) organizations: (i) In general, a set-aside under (B) can only be counted up to the account limit set under section 419A (ignoring subsection (f)(6)) for that tax year, not counting any reserve for post-retirement medical benefits described in section 419A(c)(2)(A). (ii) That limit does not apply to income from an existing reserve for post-retirement medical or life insurance benefits — meaning the greater of the assets set aside for those benefits as of the end of the last plan year before the Tax Reform Act of 1984, or as of July 18, 1984. All post-retirement medical or life-insurance payments made in plan years ending on or after the 1984 Act are charged against that reserve, and (except as regulations allow) all of an employer's plans are treated as one plan for this purpose. (iii) This limitation also doesn't apply to an organization if substantially all its contributions come from employers who were tax-exempt under this chapter throughout the preceding 5 tax years. (4) Special rule for organizations described in section 501(c)(19): For these organizations (veterans' organizations), UBTI does not include amounts for life, sick, accident, or health insurance for members or their dependents that are set aside to pay insurance benefits or for a purpose in section 170(c)(4). If a set-aside amount is instead used during the year for some other purpose, it is included in UBTI under paragraph (1) for that year. (5) Definition of payments with respect to securities loans: (A) This term includes all amounts received for a security (as section 1236(c) defines it) that the owner transfers to another person in a transaction covered by section 1058, whether or not title stays with the lender — including amounts equivalent to dividends, interest, or other distributions; fees based on the loan period and the security's fair market value; income from collateral held for the loan; and income from investing that collateral. (B) This only applies to securities transferred under an agreement that requires: reasonable daily procedures making sure the borrower gives collateral worth at least the security's fair market value as of the prior business day's close; the lender's ability to end the loan on no more than 5 business days' notice; and the return of identical securities to the lender when the loan ends. (6) Special rule for an organization with more than one unrelated trade or business: (A) UBTI, including for figuring any net operating loss deduction, is computed separately for each such trade or business, without regard to subsection (b)(12). (B) The organization's total UBTI is the sum of the separately computed amounts, minus one specific deduction under subsection (b)(12). (C) For purposes of (B), the UBTI figured for any one trade or business cannot be less than zero — so a loss from one business cannot be used to offset income from another below that floor. (b) Modifications — In figuring UBTI under subsection (a), these adjustments apply: (1) Exclude all dividends, interest, payments with respect to securities loans (as defined in (a)(5)), amounts received for entering into loan agreements, and annuities, along with all deductions directly connected with that income. (2) Exclude all royalties, including overriding royalties, however measured, along with all directly connected deductions. (3) Rents: (A) Except as (B) provides, exclude rents from real property, and rents from personal property leased along with that real property, if the personal-property rent is an incidental part of the total rent (measured when the personal property was placed in service). (B) That exclusion does not apply if more than 50 percent of the total rent is for the personal property, or if the rent amount depends on the income or profits from the leased property (other than a fixed percentage of receipts or sales). (C) Exclude all deductions directly connected with rents excluded under (A). (4) Despite paragraphs (1), (2), (3), or (5), for debt-financed property (as section 514 defines it), include the amount figured under section 514(a)(1) as gross income from an unrelated trade or business, and allow the deduction figured under section 514(a)(2). (5) Exclude gains or losses from selling, exchanging, or disposing of property, except for (A) inventory-type property, or (B) property held mainly for sale to customers in the ordinary course of business. Also exclude gains or losses, connected to the organization's investment activities, from options to buy or sell securities or real property lapsing or ending, and from forfeited good-faith deposits (consistent with normal business practice) on a real-property purchase, sale, or lease connected to investment activities. This paragraph doesn't apply to timber cutting treated, under section 631, as a sale or exchange. (6) The net operating loss deduction under section 172 is allowed, except that: (A) the NOL, its carryback or carryover amount, and the NOL deduction are figured under section 172 without counting income or deductions excluded under this part; and (B) "preceding taxable year" in section 172 does not include a year the organization wasn't subject to this part. (7) Exclude income from research done for the United States or its agencies or instrumentalities, or for a state or its political subdivision, along with directly connected deductions. (8) For a college, university, or hospital: exclude all income from research performed for any person, and directly connected deductions. (9) For an organization mainly carrying on fundamental research whose results are freely available to the public: exclude all income from research performed for any person, and directly connected deductions. (10) For an organization described in section 511(a): the section 170 charitable-contribution deduction is allowed (whether or not directly connected to the trade or business), but capped at 10 percent of UBTI figured without this deduction. (11) For a trust described in section 511(b): the section 170 deduction is allowed, treating a trust distribution to a section 170 beneficiary as a gift or contribution, limited under section 170(b)(1)(A) and (B) measured against UBTI figured without this deduction (instead of against adjusted gross income). (12) Except when figuring the NOL under section 172 and paragraph (6): allow a specific deduction of $1,000. A diocese, province of a religious order, or convention or association of churches also gets, for each parish, individual church, district, or other local unit, an additional specific deduction equal to the lesser of $1,000 or that local unit's gross income from a regularly-carried-on unrelated trade or business. (13) Special rules for amounts from controlled entities: (A) If a "controlling organization" receives or accrues a "specified payment" from an entity it controls (the "controlled entity"), the controlling organization must include that payment as UBTI to the extent it reduces the controlled entity's net unrelated income (or increases its net unrelated loss), and connected deductions are allowed. (B) "Net unrelated income" means, for a taxable controlled entity, the part of its taxable income that would be UBTI if it were tax-exempt with the same exempt purposes as the controlling organization, or, for an already-exempt controlled entity, its actual UBTI; "net unrelated loss" is figured under similar rules. (C) "Specified payment" means interest, an annuity, a royalty, or rent. (D) "Control" means owning more than 50 percent of a corporation's stock (by vote or value), more than 50 percent of a partnership's profits or capital interests, or more than 50 percent of the beneficial interests in any other entity; section 318's constructive-ownership rules apply for corporate stock, and similar principles apply for other entities. (E) This paragraph applies only to the portion of a "qualifying specified payment" that exceeds what an arm's-length, section 482 transaction would have produced; a 20-percent addition to tax applies to the larger of that excess figured with or without later amended returns; a "qualifying specified payment" is one made under a binding written contract in effect on this paragraph's enactment date, or a substantially similar renewal of one. (F) The Secretary may issue rules to prevent this paragraph's purposes from being avoided through related persons. (14) [Repealed.] (15) Except as paragraph (4) provides: for a trade or business that (A) provides services under a Federal regulatory agency license, (B) is carried on by a religious order, or by a section 170(b)(1)(A)(ii) school that order maintains, and was carried on before May 27, 1959, and (C) uses less than 10 percent of its net income each year for activities unrelated to the religious order's exempt purpose — exclude all gross income and directly connected deductions from that trade or business, as long as the Secretary is satisfied its rates or charges are competitive with those charged by taxable persons for similar services. (16) Real property from failed financial institutions: (A) Despite paragraph (5)(B), exclude gains or losses from selling, exchanging, or disposing of certain real property, if: (i) the organization acquired it from a conservatorship- or receivership-institution described in section 581 or 591(a), or from that institution's conservator, receiver, or a government successor; (ii) within 9 months of acquiring it, the organization designated it as held for sale (limited to at most half, by value, of property acquired in a single transaction); (iii) the sale happens before the later of 30 months after acquisition, or a date the Secretary sets to ensure orderly disposition; and (iv) while the organization held it, improvement and development spending included in its basis didn't exceed 20 percent of the net selling price. (B) Covered property is real property the financial institution held when it entered conservatorship or receivership, or foreclosure property securing debt the institution held at that time; "real property" here includes a mortgage interest. (17) Amounts from foreign corporations: (A) Despite paragraph (1), any amount included in gross income under section 951(a)(1)(A) is treated as UBTI to the extent it's attributable to insurance income (as section 953 defines it) that would be UBTI if the organization earned it directly; directly connected deductions are allowed. (B) This does not apply to income from insuring the organization itself, an exempt affiliate, or a director, officer, or service-performer for that organization or affiliate, if the coverage is mainly for risks tied to performing services for the organization or affiliate. Whether an entity is an "affiliate" follows rules like section 168(h)(4)(B); certain colleges, universities, and similar organizations sharing an insurance arrangement that returns profits to policyholders are treated as affiliates of each other. (C) The Secretary shall issue regulations to carry this paragraph out, including for income passed through multiple entities or chains of entities. (18) Mutual or cooperative electric companies described in section 501(c)(12): exclude income treated as "member income" under that subparagraph. (19) Gain or loss on certain brownfield sites: (A) Despite paragraph (5)(B), exclude gain or loss from a qualified sale, exchange, or other disposition of a qualifying brownfield property by an eligible taxpayer. (B) An "eligible taxpayer" is a tax-exempt organization that acquires a qualifying brownfield property from an unrelated person and pays or incurs eligible remediation expenditures on it exceeding the greater of $550,000 or 12 percent of the property's fair-market value at acquisition (measured as if it weren't contaminated) — except this excludes an organization that is potentially liable under CERCLA section 107 for the property, is affiliated with someone who is (other than through the instruments conveying or financing the property, or a contract for goods or services), or results from reorganizing a business that was potentially liable. (C) "Qualifying brownfield property" is real property that, before the taxpayer incurs any remediation expenditures (other than for a Phase I environmental site assessment), an appropriate state agency certifies as a brownfield site under CERCLA section 101(39); the certification request must include a sworn statement and supporting documentation — including a Phase I assessment and, if applicable, evidence the property appears on a local, state, or federal contaminated-property list. (D) A sale, exchange, or other disposition is "qualified" if the property goes to an unrelated person, and within 1 year the taxpayer gets certification from the EPA or an appropriate state agency that, because of the taxpayer's remediation, the property would no longer be a qualifying brownfield property in the new owner's hands (the agency must first respond to public comments as CERCLA section 117(b) requires); the certification request, made by the transfer date, must include a sworn statement covering: substantially completed remedial actions meeting applicable requirements; that the reasonably anticipated future use is more economically productive or environmentally beneficial than the current use (using the property as a landfill or hazardous-waste facility doesn't count); an implemented remediation plan meeting environmental laws and protecting health and the environment; that the plan is complete or substantially complete, with monitoring, funding, controls, and financial assurances in place if not fully complete; and that public notice and comment (matching CERCLA section 117(a), including publication in a major local newspaper) happened before the request. Copies of these certification requests must be attached to the taxpayer's tax return for the year of the transfer. "Substantially complete" means the necessary physical construction is done, immediate threats are eliminated, and long-term threats are under control. (E) "Eligible remediation expenditures" are amounts paid to an unrelated third party for a Phase I assessment, and amounts paid after the (C) certification for goods and services needed to get the (D) certification — including managing or remediating the contamination, a Phase II assessment, needed regulatory certifications and approvals, and remediation cost-cap, stop-loss, re-opener, or similar insurance or financial-guarantee coverage. It excludes the property's purchase price; certain other insurance costs (legal-defense, owner/operator liability, lender liability, professional liability, and similar coverage); amounts reimbursed or subsidized by government grants, tax-exempt bond financing, or other subsidized financing; and any expenditure before this paragraph's enactment date. (F) Figuring the gain or loss excludes any amount treated as ordinary income under section 1245 or 1250, including recaptured section 198 expense deductions the taxpayer had deducted in figuring UBTI. (G) For an eligible taxpayer that is a partner in a "qualifying partnership" (one meeting section 514(c)(9)(B)(vi) and parallel versions of the (B), (C), (D), and (E) requirements, and not itself disqualified under (B)(ii)) that acquires, remediates, and disposes of a qualifying brownfield property, this paragraph applies to the taxpayer's distributive share of the partnership's gain or loss — but only if the taxpayer was a partner continuously from the first (C) certification through the sale. (H) An eligible taxpayer or qualifying partnership may make a one-time election to apply this paragraph to more than one qualifying brownfield property by averaging the remediation expenditures for properties acquired during an election period; the election, made with a timely filed return, runs until revoked, until 8 years pass, or (for a partnership) until the partnership terminates, whichever comes first, and once revoked cannot be made again for property under that revoked election. (I) If excluded gain or loss later turns out to involve property that fails this paragraph's requirements, the previously excluded amount is included in UBTI for the year the failure occurs, with interest at the section 6621 overpayment rate running from the original return's due date. (J) "Related person" is defined using sections 267(b) and 707(b)(1) with "25 percent" substituted for "50 percent," plus indirect 25-percent control of a nonprofit's governing body. (K) Except for averaging expenditures under (H), this paragraph does not apply to property the eligible taxpayer or qualifying partnership acquired after December 31, 2009. (c) Special rules for partnerships: (1) If a partnership that includes the organization as a member regularly carries on a trade or business that is unrelated to the organization, the organization must include, subject to subsection (b), its share (whether or not distributed) of the partnership's gross income from that business and its share of the connected partnership deductions, when figuring its own UBTI. (2) If the organization's tax year differs from the partnership's, the amounts included or deducted are based on the partnership's tax year that ends within or with the organization's tax year. (d) Treatment of dues of agricultural or horticultural organizations: (1) If a section 501(c)(5) agricultural or horticultural organization requires annual dues of $100 or less to be a member, none of those dues count as UBTI because of member benefits or privileges. (2) For tax years beginning after 1995, the $100 figure is adjusted each year for inflation, using the section 1(f)(3) cost-of-living adjustment (substituting "calendar year 1994" for "calendar year 2016"). (3) "Dues" means any required payment — whatever it's called — needed to be recognized as a member of the organization. (e) Special rules for S corporations: (1) If an organization described in section 1361(c)(2)(A)(vi) or 1361(c)(6) holds stock in an S corporation, that stock interest is treated as an interest in an unrelated trade or business, and all items of income, loss, or deduction passed through under section 1366(a), plus any gain or loss from disposing of the stock, count toward the organization's UBTI. (2) Except as regulations provide, the basis of stock the organization bought is reduced by any dividends it received on that stock. (3) This subsection does not apply to employer securities (as section 409(l) defines them) held by an employee stock ownership plan described in section 4975(e)(7).