Does a tax-exempt social club owe New York's Article 13 minimum tax on unrelated business income when its federal unrelated business taxable income is zero?

Plain-English summary

The Polish American Citizens Club of Rochester, a federally exempt section 501(c)(7) social club, had $549 of unrelated business income (interest from investment activity, an unrelated trade or business under IRC section 513). For federal purposes, after deductions its unrelated business taxable income was zero, so no federal unrelated-business income tax was imposed. It asked whether it still owes New York's Article 13 tax.

The Department held yes. Section 290(a) imposes the Article 13 tax on every organization carrying on an unrelated trade or business in New York and sets a minimum tax of $250. Because the club carries on an unrelated trade or business (its investment activity), it is subject to the Article 13 tax -- and the $250 minimum applies even though its federal UBTI was zero and no federal tax was due. The club must file Form CT-13 and pay the $250 minimum tax for the year.

What this means for you

Zero federal UBTI does not mean zero New York tax

New York's Article 13 imposes a $250 minimum tax on an exempt organization that carries on an unrelated trade or business in New York. That minimum is owed even when federal deductions reduce federal UBTI to zero and no federal unrelated-business tax is due.

Having any unrelated trade or business triggers the filing

The trigger is carrying on an unrelated trade or business -- here, investment activity generating interest. Once an exempt organization has that, it must file Form CT-13 in New York and pay at least the $250 minimum, regardless of the federal bottom line.

Social clubs in particular

501(c)(7) clubs commonly have investment income that is unrelated business income. They should expect a New York CT-13 filing and the $250 minimum even in years their federal unrelated-business tax is zero.

Common questions

Q: Does a 501(c)(7) club owe New York tax if its federal UBTI is zero? A: Yes. If it carries on an unrelated trade or business in New York, it owes the Article 13 $250 minimum tax even with zero federal UBTI.

Q: What triggers the Article 13 tax?
A: Carrying on an unrelated trade or business in New York -- here, investment activity producing interest income.

Q: What does the club have to do?
A: File Form CT-13 and pay the $250 minimum tax for the year.

Citations and references

Statutes, regulations, and authorities:

• Tax Law section 290(a) (Article 13 tax on unrelated business taxable income; minimum tax)
• Internal Revenue Code section 511 (tax on unrelated business income)
• Internal Revenue Code section 501(c)(7) (social clubs)
• The Polish American Citizens Club of Rochester, New York, Inc., TSB-A-04(14)C (July 22, 2004)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2004.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a04_14c.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-04(14)C
Corporation Tax
July 22, 2004

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C040420A

On April 20, 2004, a Petition for Advisory Opinion was received from The Polish American Citizens Club of Rochester, New York, Inc., 385 Weaver Street, Rochester, New York 14621-3613. The issue raised by Petitioner, The Polish American Citizens Club of Rochester, New York, Inc., is whether it is subject to the minimum tax that is imposed on unrelated business income under Article 13 of the Tax Law when its federal unrelated business taxable income is zero. Petitioner submits the following facts as the basis for this Advisory Opinion. For federal income tax purposes, Petitioner is an exempt organization pursuant to IRC section 501(c)(7). Pursuant to IRC section 511, Petitioner is subject to tax on its unrelated business income of $549 from its investment activity (which is an unrelated trade or business under IRC section 513), consisting of interest income. However, for federal income tax purposes, Petitioner’s federal unrelated business taxable income for taxable year 2003 was zero, and no federal unrelated income tax was imposed. Applicable law Section 290(a) of Article 13 of the Tax Law imposes the tax on unrelated business income and provides, in part: General. For every taxable year or part thereof, every organization described in paragraph two of subsection (a) of section five hundred eleven of the internal revenue code
... carrying on an unrelated trade or business in New York shall pay a tax at the rate of nine per centum on its unrelated business taxable income for such year, or on the portion thereof allocated to this state, as provided in section two hundred ninety-three, or two hundred fifty dollars, whichever is greater. Section 291 (a) of the Tax Law provides that: Any terms used in this article shall have the same meaning as when used in a comparable context in the laws of the United States relating to federal income taxes, unless a different meaning is clearly required.... Section 292 of the Tax Law provides the rules for determining unrelated business taxable income for purposes of Article 13 of the Tax Law, and provides, in part:

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TSB-A-04(14)C
Corporation Tax
July 22, 2004

(a) The unrelated business taxable income of a taxpayer subject to the tax imposed by section two hundred ninety shall be such taxpayer’s federal unrelated business taxable income, as defined in the laws of the United States for the taxable year, with the
[modifications enumerated in section 292(a) (1) through(6).] IRC section 511(a) provides, in part: Charitable, etc., organizations taxable at corporation rates.–
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(2) Organizations subject to tax. –
(A) Organizations described in sections 401(a) and 501(c). – The tax imposed by paragraph (1) shall apply in the case of any organization ... which is exempt, except as provided in this part ... from taxation under this subtitle by reason of section 501(a). IRC section 513(a) provides that: General Rule. – The term “unrelated trade or business” means, in the case of any organization subject to the tax imposed by section 511, 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 its charitable, educational or other purpose or function constituting the basis for its exemption under section 501 ... except that such term does not include any trade or business – (1) in which substantially all the work in carrying on such trade or business is performed for the organization without compensation; or.... Opinion Section 290(a) of the Tax Law imposes a tax on every organization described in IRC section 511(a)(2) that is carrying on an unrelated trade or business in New York. Pursuant to section 291 of the Tax Law, an unrelated trade or business is such business as defined in IRC section 513. Section 290(a) of the Tax Law requires that each organization carrying on an unrelated trade or business in New York must pay a tax at the rate of nine percent on its unrelated business taxable income, as determined under section 292 of the Tax Law, that is allocated to New York State, or
$250, whichever is greater. Accordingly, a minimum tax of $250 is imposed on an organization carrying on an unrelated trade or business in New York regardless of the amount of its unrelated business taxable income under section 292 of the Tax Law. For purposes of section 292 of the Tax Law, unrelated business taxable income is the organization’s federal unrelated business taxable income with the modifications contained in section 292.

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TSB-A-04(14)C
Corporation Tax
July 22, 2004
In Sciarabba Walker & Co., Adv Op Comm T&F, October 22, 1987, TSB-A-87(27)C, the petitioner’s issue was identical to the issue in this case, and the petitioner’s facts were substantially similar to Petitioner’s facts in this case. In Sciarabba Walker, the entity was an exempt organization under IRC section 501(c)(7), and for federal income tax purposes its unrelated business income was zero. As a result, no federal unrelated business income tax was imposed. The opinion held that the entity was required to file form CT-13 and pay the minimum tax of $250 that is imposed under Article 13 of the Tax Law. In this case, Petitioner is an exempt organization pursuant to IRC section 501(c)(7) and is described in IRC section 511(a)(2). Petitioner states that it is subject to the federal unrelated business income tax imposed under IRC section 511(a)(1), and it is assumed from the facts presented that it is carrying on its unrelated trade or business in New York. However, since its federal unrelated business taxable income for taxable year 2003 was zero, and the modifications contained in section 292 of the Tax Law do not appear to apply, Petitioner does not have unrelated business taxable income for purposes of section 292 of the Tax Law for taxable year 2003. Therefore, pursuant to section 290(a) of the Tax Law, Petitioner is subject to the $250 minimum tax for taxable year 2003.

DATED: July 22, 2004

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.