Managing Business Activities and UBIT Liability
Caplin & Drysdale
Managing Business Activities and UBIT Liability

As nonprofit organizations search for new opportunities to raise revenue, the potential for Unrelated Business Income Tax (UBIT) liability grows. For example, UBIT questions often arise when renting mailing lists, licensing other intangibles such as names or logos, generating income from debt-financed property or affinity credit cards, and establishing links with or providing content for web-based businesses. With careful planning, your organization can engage in these activities without creating tax liability or threatening your tax exemption. For some business ventures, you may be able to conduct the activity inside the nonprofit by structuring the payments you earn as royalties, rents, interest, or certain other kinds of favorable payments. In other instances, you will need to conduct the business activity through a for-profit subsidiary, thereby protecting the nonprofit's tax-exempt status.

Caplin & Drysdale regularly helps exempt organizations evaluate and structure a variety of business options. Our current work in this area includes numerous matters involving electronic commerce and other internet business strategies. We also have successfully litigated UBIT issues in the Tax Court and in other federal courts and have resolved numerous UBIT disputes at the IRS appeals level.

Representative Engagements

  1. A web company approaches a nationally known charitable organization about building a relationship that would produce revenue for the charity. Although clearly interested, the charity is concerned about UBIT consequences.

    Result: Caplin & Drysdale reviews the proposed contract and revises the terms to best protect the charity and its donors, and to minimize any UBIT that might arise.

  2. A state university owns valuable patents to medical technology. The inventor, a member of the faculty, proposes that these patents be licensed for commercial development through his private foundation to a taxable research organization he helped establish. The university is uncertain about the implications of this novel proposal for the university.

    Result: Caplin & Drysdale works with the university and its outside intellectual property counsel to develop a series of licensing arrangements that protect the university's tax-exempt status, avoid UBIT for the university, and avoid penalty taxes on the inventor.

  3. A charity has developed a highly valuable database and is interested in exploring both nonprofit and for-profit options for generating substantial income from the database to support future operations.

    Result: Caplin & Drysdale helps the charity understand the tax and other legal pros and cons of the nonprofit and for-profit options and works closely with the charity's business advisers to determine the optimum legal structure for realizing the economic potential of the database.

Our Services

    • Structuring licenses and other royalty arrangements
    • Evaluating the special consequences of having controlled subsidiaries
    • Reviewing contracts and other business arrangements with Internet companies
    • Planning for nonprofit participation in start-up companies
    • Advising on cost allocation
    • Assisting in filing the UBIT return (Form 990-T)
    • Defending against IRS claims of UBIT liability

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