PLR 1106019: IRS revises unrelated business income rulings for a seminary’s housing activities

Plain-English summary

The IRS reconsidered a 2006 ruling about whether a seminary’s housing revenue was unrelated business taxable income. It revoked or modified parts of the earlier ruling because the original facts did not adequately describe the operations and because later information showed that some requested rulings were too broad. Revenue from housing the seminary’s students was treated as related to the seminary’s educational purpose and not unrelated business taxable income. Revenue from renting hotel-like rooms to members of the general public was treated as unrelated business taxable income. The IRS also granted retroactive relief, allowing the organization to rely on the 2006 ruling for taxable periods ending before the date of this letter.

Ruling snapshot

• Question: Which housing revenues are unrelated business taxable income for the educational organization?
• Outcome: Mixed. Student housing revenue was treated as related, while revenue from rooms rented to the general public was treated as unrelated business taxable income.
• Key authorities: IRC §§ 501, 511, 512, and 513; Treas. Reg. §§ 1.513-1 and 1.501(c)(3)-1; Rev. Proc. 2010-4.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION

Number: 201106019 Contact Person:
Release Date: 2/11/2011

Identification Number:
Date: November 16, 2010

Telephone Number:

No third party contacts Employer Identification Number:
UIL: 512.01-01

Legend:

A =
B =
C =
D =
E =
F =
H =

Dear

We have reconsidered the ruling we issued to you on March 28, 2006, PLR 200625035,
concerning whether income you derive from a variety of activities is “unrelated business taxable
income” within the meaning of section 512(a)(1) of the Internal Revenue Code.

After reviewing the ruling letter, we have determined that Ruling 1 is incorrect in broadly
concluding that revenue from a variety of sources would not constitute unrelated business
taxable income to you under section 512 of the Code. Further, a review of information you
provided in response to subsequent requests for information discloses that PLR 200625035 is
based on facts that do not sufficiently or adequately describe the operations for which the
rulings were requested. Accordingly, pursuant to our authority in section 13.04 of Rev. Proc.
2010-4, 2010-1 I.R.B. 122, 150, this ruling revokes in part and modifies in part PLR 200625035.
In addition, your request for retroactive relief under section 7805(b) of the Code has been
granted. You may rely on the March 28, 2006 ruling letter for taxable periods ending before the
date of this letter.

In PLR 200625035 we ruled as follows:

1. Revenue generated from providing living quarters in buildings that you own to
   your students and faculty; and temporary living quarters to family members of
   your students and faculty; potential students; family members of potential
   students; guests who are speakers at your institution; and guests of other non-
   affiliated non-profit organizations (A-F, above) in your immediate geographic area

who are also speakers or musical performers at your institution does not
constitute unrelated business taxable income under section 512 of the Code.

2. Revenue generated from the renting of rooms to the general public constitutes
   unrelated business taxable income under section 512(a)(1) of the Code.

After reconsideration of your original request and consideration of all additional information
submitted, we rule as follows:

1. Revenue generated from providing living quarters in buildings that you own to your
   students does not constitute unrelated business taxable income under section 512(a)(1)
   of the Code.

2. Revenue generated from the renting of rooms to persons other than your students
   constitutes unrelated taxable income under section 512(a)(1) of the Code.

Facts

You are exempt under section 501(a) of the Code as an organization described in section
501(c)(3) and are classified as an organization that is not a private foundation because you are
an educational organization described in sections 509(a)(1) and 170(b)(1)(A)(ii). You are an
independent, multi-denominational seminary whose mission includes educating leaders for
ministry in churches and related organizations, extending the work of social justice, and
academic teaching and research.

In furtherance of your educational purposes, you arrange for your students and faculty to
participate in various programs with educational and religious institutions located near your
campus. In this regard, you have several academic partnership agreements with A and offer
dual degrees, a Ph.D. program and a Masters Program in Divinity and Social Work. Some of
your senior faculty hold joint appointments in A’s Department of Religion. Participating students
may cross-enroll at either campus without any institutional tuition transfer. You maintain a large
religious/theological research collection and your library facilities are shared by other religious
and secular institutions of higher learning including but not limited to A, B, C, and D. In addition,
your students rely on churches and religious organizations in the area for internships as part of
their professional training. These include the E and its religious tenant, F.

Your campus is often used for meetings of individuals, groups, or institutions of differing
backgrounds but similar purposes. Speakers and musical performers at your institution may
also speak and perform at some of the other institutions, and speakers and musical performers
at the other institutions may also speak and perform at your institution.

In addition to academic buildings, your campus includes dormitory-style and apartment-style
housing for enrolled students and for your full-time faculty. You receive revenue, however, only
from providing housing to students.

In one of the buildings on your campus, known as the H, you offer rooms on an overnight basis.
One substantial use of the H was to temporarily house students waiting for long-term dormitory
assignments to become available. You also offer accommodations, if available, to official
visitors (speakers, performers, etc.) These guests are provided lodging in lieu of a lodging per
diem allowance. You do not limit the rental of rooms in the H to individuals affiliated with your
institution or with any of the other educational institutions located nearby. In fact, the
information you submitted indicates that rooms are offered to the general public on a “first
come-first served” basis and no one is denied lodging if a room is available.

Access to the H is on the inner corridor of the courtyard of your building complex but is open to
the public. Your website indicates it is open 24 hours a day, 365 days per year. Although you do
not post signs on the facility itself, you advertise the availability of rooms on your website,
which mentions H’s convenient location and amenities including: air-conditioning, private bath,
cable television, wireless Internet access, an iron and a hair dryer, a miniature refrigerator, daily
housekeeping services, 24-hour access front-desk security and free local telephone service and
all incoming calls. Other commercial hotels are located in the area. Accommodations at the H
and the rates charged to guests are comparable to other commercial hotels in the area.
However, when the lodger is an official visitor who does not pay for his or her own lodging, the
revenue entry is charged to the host department. When the H is used to provide temporary
housing for your students, the rate is the daily portion of the student housing fee.

Law

Section 501(c)(3) of the Internal Revenue Code provides exemption from federal income tax for
an organization organized and operated exclusively for religious, charitable or educational
purposes, if no part of the net earnings of the organization inures to the benefit of any private
shareholder or individual.

Section 1.501(c)(3)-1(d)(2) and (3) of the Income Tax Regulations provide that the term
"charitable" is used in section 501(c)(3) in its generally accepted legal sense, and includes the
advancement of religion and education. Further, the term “educational” as used in section
501(c)(3), which relates both to instruction or training of the individual for the purpose of
improving or developing his or her capabilities and instruction of the public on subjects useful to
the individual and beneficial to the community, clearly includes an organization, such as a
college, which has a regular curriculum, a regular faculty, and a regularly enrolled body of
students in attendance at a place where the educational activities are regularly carried on.

Section 511(a)(1) of the Code imposes a tax on the unrelated business taxable income (as
defined in section 512) of organizations described in section 501(c)(3).

Section 512(a)(1) of the Code provides that (except for provisions inapplicable here) the term
“unrelated business taxable income” means the gross income derived by any organization from
any unrelated trade or business (as defined in section 513) regularly carried on by it, less the
deductions allowed by this chapter that are directly connected with the carrying on of such trade
or business, both computed with the modifications provided in subsection (b).

Section 513(a) of the Code defines the term “unrelated trade or business,” in the case of any
organization subject to the tax imposed by section 511, as any 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
the purpose or function constituting the basis for its exemption under section 501 of the Code.

Section 513(a)(2) of the Code provides that the term “unrelated trade or business” does not
include any trade or business which is carried on in the case of an organization described in
section 501(c)(3) primarily for the convenience of its members or employees.

Section 1.513-1(a) of the regulations provides that unless one of the specific exceptions of
section 512 or 513 is applicable, gross income of an exempt organization subject to the tax
imposed by section 511 is includible in the computation of unrelated business taxable income if
(1) it is income from trade or business, (2) such trade or business is regularly carried on by the
organization, and (3) the conduct of such trade or business is not substantially related (other
than through the production of funds) to the organization's performance of its exempt functions.

Section 1.513-1(b) of the regulations provides that for purposes of section 513 of the Code, the
term “trade or business” has the same meaning as it has in section 162, and generally includes
any activity carried on for the production of income from the sale of goods or performance of
services. Activities of producing or distributing goods or performing services from which a
particular amount of gross income is derived do not lose their identity as a trade or business
merely because they are carried on within a larger aggregate of similar activities or within a
larger complex of other endeavors which may, or may not, be related to the exempt purposes of
the organization.

Section 1.513-1(c) of the regulations states that in determining whether a trade or business from
which a particular amount of gross income derives is “regularly carried on,” regard must be had
to the frequency and continuity with which the activities productive of the income are conducted
and the manner in which they are pursued. For example, specific business activities of an
exempt organization will ordinarily be deemed to be “regularly carried on” if they manifest a
frequency and continuity, and are pursued in a manner generally similar to comparable
commercial activities of nonexempt organizations.

Section 1.513-1(d)(2) of the regulations provides that a trade or business is "related" to exempt
purposes only when the conduct of the business activities has a causal relationship to the
achievement of its exempt purposes. It is “substantially related" only if the causal relationship is
a substantial one. To be substantially related, the production or distribution of the goods or the
performance of the services from which the gross income is derived must contribute importantly
to the accomplishment of those purposes.

Section 1.513-1(d)(4) of the regulations provides that gross income derived from charges for the
performance of exempt functions does not constitute gross income from the conduct of
unrelated trade or business.

Section 1.513-1(d)(4)(iii) of the regulations, provides that, with respect to dual use of assets or
facilities, an asset or facility necessary to the conduct of exempt functions may also be
employed in a commercial endeavor. In such cases, the mere fact of the use of the asset or
facility in exempt functions does not, by itself, make the income from the commercial endeavor
gross income from related trade or business. The test, instead, is whether the activities
productive of the income in question contribute importantly to the accomplishment of exempt
purposes.

Section 1.513-1(e)(2) of the regulations specifically states that the term “unrelated trade or
business” does not include any trade or business carried on by an organization described in
section 501(c)(3) primarily for the convenience of its members, students, patients, officers, or
employees.

The Committee Reports accompanying the Revenue Act of 1950 [S Rep. No. 2375, 81st Cong.,
2d Sess. 29 (1950)] explained the operation of section 513 in regard to university activities: "In
the case of an educational institution, income from dining halls, restaurants, and dormitories
operated for the convenience of the students would be considered related income and,
therefore, would not be taxable." Section 1.513-1(e) of the regulations retained this distinction
by excluding from the definition of “unrelated trade or business” the ancillary services (those
provided primarily for the convenience of students) provided in connection with a residential
college community. The example provided is that of a laundry operated by a college for the
purpose of laundering dormitory linens and the clothing of students.

Rev. Rul. 58-194, 1958-1 C.B. 240, holds that an organization formed for the purpose of
operating a book and supply store and a cafeteria and restaurant on the campus of a State
university primarily for the convenience of its student body and faculty is operated exclusively
for educational purposes. The organization was controlled by a board of directors composed of
the president of the university, three elected faculty members and three elected student
members. Membership in the organization was available to university students and employees
for a nominal fee. The facility was open to all students at the university to afford them an
opportunity to obtain their academic supplies without undue inconvenience. By providing these
facilities to the university community in furtherance of its educational program, the organization
is, for all intents and purposes, an integral part of the university. It is operated exclusively for
educational purposes within the meaning of section 501(c)(3) of the Code.

Rev. Rul. 67-217, 1967-2 C.B. 181, holds that an organization formed to provide housing and
food service exclusively for students and faculty of a university that lacks adequate student and
faculty housing in accordance with the rules and regulations of the university and offers the
university an option to acquire the property at any time upon payment of the outstanding
indebtedness qualifies for exemption under section 501(c)(3). The facility is located near the
university and is managed by a commercial firm in accordance with the rules and regulations of
the university and made available to the student body at rates comparable to those charged by

similar facilities. By providing a housing facility under these circumstances, the organization was
fulfilling the ‘charitable’ purpose of advancing education by aiding the university in fulfilling its
educational purposes.

Rev. Rul. 69-69, 1969-1 C.B. 159, describes an organization created to stimulate and foster
public interest in the fine arts by promoting art exhibits, sponsoring cultural events, conducting
educational programs, and disseminating information relative to the fine arts. Its activities were
carried on in a building that contained offices, galleries, music rooms, a library, a dining hall, and
studio apartments where artists lived and worked. The studio apartments were leased only to
artists, a few of whom were members of the organization. However, the apartments were not
made available to the tenants on the basis of membership in the club or any criteria that would
further the exempt purpose of the organization. The organization provided maid and
switchboard services for the tenants similar to those provided to the occupants of rooms in
hotels. The ruling holds that neither the leasing of the studio apartments nor the operation of the
dining hall had a substantial causal relationship to the achievement of the organization's exempt
purposes. Nor were these businesses carried on primarily for the convenience of the members
within the meaning of section 513(a)(2) of the Code.

Rev. Rul. 76-336, 1976-2 C.B. 143, holds that an organization formed by community leaders to
provide housing for students of a particular college unable to provide adequate student housing
is operated exclusively for charitable purposes and qualifies for exemption under section
501(c)(3) of the Code. The organization operated the facility adjacent to the college campus
and in an area where other suitable housing was not available. Only students of the college were
eligible to apply for housing. The organization and the college consulted and cooperated to
ensure that the needs of the college and its students were served by the operation of the
facility. By providing a housing facility under these circumstances, the organization was both
helping the college to fulfill its educational purposes, and aiding the students to attain an
education. Therefore, the activities of the organization are advancing education.

Rev. Rul. 81-19, 1981-1 C.B. 353, concerns an organization formed to assist a university by
receiving contributions for the benefit of the university, assisting the university's academic
departments in problems of financial management, and managing the operation of soft drink
and food vending services as well as operating laundromat facilities on campus. Rev. Rul. 81-
19 holds that these activities are an integral part of the exempt activities of the university, and
the organization furthers the educational program of the university by operating facilities for the
convenience of the university community. It concludes that the operation of the vending
services and laundromat facilities are not unrelated trade or business under section 513 of the
Code because these activities are substantially related to the organization’s exempt purpose of
furthering the university’s educational program by aiding the university in performing its various
administrative functions.

Analysis

Ruling #1:

A. Revenue Generated from Providing Student Housing

When Congress enacted the unrelated business income tax in the Revenue Act of 1950, it
sought to exclude from the definition of “unrelated trade or business’ activities carried on by an
organization described in section 501(c)(3) primarily for the convenience of its members,
students, patients, officers, or employees. As noted above, the committee reports clarified that
this intended for an educational institution’s income from dormitories operated for the
convenience of students to be considered related income. Section 1.513-1(e) of the regulations
effectuates the congressional intent by articulating that unrelated trade or business does not
include the ancillary services provided for the convenience of students in connection with a
residential college community. Your provision of campus housing, whether in the dormitories or
temporarily in H, and related services to students, like those of the organizations described in
the court cases and revenue rulings listed above, contribute importantly to your 'charitable'
purpose of advancing education. Because this activity is substantially related to the purposes
constituting the basis for your exemption under section 501 of the Code, it is not an unrelated
trade or business within the meaning of section 513(a). Accordingly, the revenue generated
from this activity does not constitute unrelated business taxable income within the meaning of
section 512(a)(1).

You initially requested a ruling that revenue generated from providing housing to your faculty did
not constitute unrelated business taxable income under section 512(a)(1) of the Code.

However, you subsequently clarified that you do not earn revenue from such activity and have
not submitted proposals for consideration. Thus, pursuant to section 8.03 of Rev. Proc. 2010-4,
2010-1 I.R.B. 122, 134, we are not ruling on any aspect of your provision of housing to faculty.
As noted in the introduction of this letter, this part of PLR 200625035 is revoked.

B. Revenue Generated by use of the H

You have conceded that you operate the H as a “trade or business” and this activity is “regularly
carried on” within the meaning of section 513 of the Code. You requested rulings that the
income from various categories of guests be excluded from the unrelated business income tax
because their use of the facility is “substantially related” to your exempt purposes within the
meaning of section 1.513-1(d)(2) of the regulations. In addition, you requested rulings that the
income from some categories of guests be excluded from the definition of “unrelated trade or
business” because the activity is carried on primarily for the convenience of your members,
students or employees within the meaning of section 513(a)(2).

Not all uses you described constitute trade or business. Specifically, guests of other
departments, who do not themselves pay for their lodging, but whose costs are charged to the
sponsoring department, do not result in income. For those guests, the lodging expense is a
cost allocation rather than trade or business income. We do not address this issue herein.

a. Revenue from Students

Your use of the H to temporarily house students until their full-time housing becomes available
is a part of your campus housing program. You provide this to students on the same basis as

full-time housing. As indicated in Ruling 1A, above, providing temporary housing for enrolled
students awaiting their dormitory assignments to become available serves the same purpose as
providing the long-term dormitories. Thus, revenue attributable to providing temporary lodging
to your students in the H while they wait for their full-time campus housing to become available
does not constitute unrelated business income within the meaning of section 512(a)(1). This
ruling is affirmed.

b. Revenue from Other Paying Guests

You operate the H similar to a boutique hotel. The accommodations and rates are comparable
to commercial hotels in the area. You advertise the H on your website. Rooms are available for
rent by the general public. You do not limit the rental of rooms in the H to individuals affiliated
with your institution or with any other educational institution located nearby. If there is a
vacancy at the H, no one is denied lodging, whether or not they have any relationship to your
institution. You have made various assertions for the categories of guests that purport to show
that providing hotel accommodations for each is related to your exempt purposes. Although you
may have shown some relatedness to you or other institutions in the area, you have not
established a substantial and causal relationship between the guests’ stays at the H and your
tax-exempt purposes. Further, you provided no explanation how any of the various categories
of paying guests came to the H other than through the general reservation system.

Accordingly, all parts of PLR 200625035 that differ from this analysis are also revoked.

Ruling #2

Revenue generated from renting rooms in the H to members of the general public constituted
unrelated business taxable income under section 512(a)(1).

You provided no information that establishes your operation of the H is part of your educational
program or that providing hotel accommodations to the general public contributes importantly to
the accomplishment of your educational and charitable purposes. Providing hotel
accommodations for the general public is a trade or business regularly carried on and is not
substantially related to your exempt purposes within the meaning of section 1.513-1(d)(2) of the
regulations. This part of PLR 200625035 is affirmed.

Rulings

Ruling #1

Revenue generated from providing housing for your students in your dormitories and the H does
not constitute unrelated business taxable income under section 512(a)(1) of the Code.

Ruling #2

Revenue generated from renting rooms in the H to members of the general public constitutes
unrelated business taxable income under section 512(a)(1). You have not established a
substantial and causal relationship for any of the categories of guests staying at the H and your
tax-exempt purposes. You provided no explanation how any of the various categories of paying
guests came to the H other than through the general reservation system. Accordingly, these
individuals are also treated as members of the general public.

This ruling will be made available for public inspection under section 6110 of the Code after
certain deletions of identifying information are made. For details, see enclosed Notice 437,
Notice of Intention to Disclose. A copy of this ruling with deletions that we intend to make
available for public inspection is attached to Notice 437. If you disagree with our proposed
deletions, you should follow the instructions in Notice 437.

This ruling is directed only to the organization that requested it. Section 6110(k)(3) of the Code
provides that it may not be used or cited by others as precedent.

This ruling is based on the facts as they were presented and on the understanding that there will
be no material changes in these facts. This ruling does not address the applicability of any
section of the Code or regulations to the facts submitted other than with respect to the sections
described. Because it could help resolve questions concerning your federal income tax status,
this ruling should be kept in your permanent records.

If you have any questions about this ruling, please contact the person whose name and
telephone number are shown in the heading of this letter.

In accordance with the Power of Attorney currently on file with the Internal Revenue Service, we
are sending a copy of this letter to your authorized representative.

Sincerely,

Steve Grodnitzky
Manager, Exempt Organizations
Technical Group 1

Enclosure
Notice 437