uc-nonfinancial-questionnaire

PROCEDURES FOR IDENTIFYING UNRELATED BUSINESS ACTIVITIES CARRIED ON AT THE UNIVERSITY OF CALIFORNIA

NONFINANCIAL QUESTIONNAIRE

VICE PRESIDENT-- FINANCIAL MANAGEMENT October 7, 2005

TABLE OF CONTENTS PAGE GENERAL INSTRUCTIONS ............................................................................................................

1

NONFINANCIAL QUESTIONNAIRE .............................................................................................

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EXHIBIT A: REVIEW GUIDELINES ............................................................................................ 17 EXHIBIT B: FY 2003-04 LIST OF UNRELATED BUSINESS ACTIVITIES ..........................................................................................

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NONFINANCIAL QUESTIONNAIRE GENERAL INSTRUCTIONS Purpose The following instructions were prepared by Financial Management (FM) to assist campuses in identifying any unrelated business activities carried on at the University of California. Once it has been determined that an activity generates unrelated business income, the activity will be included on the University's consolidated Exempt Organization Business Income Tax Return (Form 990-T), prepared each year by FM for submission to the Internal Revenue Service.

Background Any organization exempt under section 501(c)(3) of the Internal Revenue Code (IRC) must file a Form 990-T if it has gross income from an unrelated trade or business of $1,000 or more. Colleges and universities or other governmental units also are subject to the filing requirement to the extent that they have business income from activities that are unrelated to the purpose for which their exemption was granted.

An activity will be subject to unrelated business income tax if it meets the following criteria: (1) it is a trade or business, (2) it is "regularly carried on", and (3) it is not be substantially related to the organization's exempt purpose (aside from the need of the organization to raise funds).

However, an activity may not be taxable even if it meets all three criteria if one of several exceptions and modifications found in the IRC are satisfied (See Exhibit A).

Reporting Criteria The Nonfinancial Questionnaire provides the basis for establishing the tax status of an activity. The Tax Coordinator or activity director must complete a questionnaire for any of the following types of activities: •

Each "new" activity initiated during the past year with a potential for generating unrelated business income,

•

Any activity reviewed in a prior reporting year that has changed its mode or scope of operations during the past year, and

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•

Highly visible activities (e.g., advertising, facilities usage, joint venture, printing, etc.) that are similar to activities determined to be unrelated at another campus or at other universities.

A Nonfinancial Questionnaire need not be completed for any of the unrelated business activities reported previously (see Exhibit B). These activities will automatically be considered unrelated unless their mode or scope of operations has changed in the last year, to the extent that the activity should now be considered related to the University's exempt purpose. In that case, a new questionnaire must be completed for the activity. Conversely, a new questionnaire need not be completed for any activity reviewed last year that was determined to be related to the University's exempt purpose, unless the activity has changed its mode or scope of operations.

Due Date All completed Nonfinancial Questionnaires (each section of the questionnaire must be completed) should be returned to FM by December 9, 2005.

Review by FM FM will review all questionnaires in consultation with the University's external auditors, PricewaterhouseCoopers. For each unrelated activity conducted during the past year, FM will request that a Financial Worksheet be completed identifying the activity's revenues and expenses. The information provided in these worksheets will be used to prepare the University's consolidated tax return.

If you have any questions, please contact Michael O'Neill at (510) 987-0905 or John Barrett at (510) 987-0903.

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UNIVERSITY OF CALIFORNIA FINANCIAL MANAGEMENT

UNRELATED BUSINESS INCOME

NONFINANCIAL QUESTIONNAIRE A Nonfinancial Questionnaire must be completed for each activity with a potential for generating unrelated business income. The completed questionnaire will be used to determine whether the activity should be included in the University's consolidated Exempt Organization Business Income Tax Return (Form 990-T), filed with the IRS annually. Please refer to the attached Review Guidelines (Exhibit A) for additional information on what constitutes an unrelated business activity.

NOTE: Each section of the questionnaire must be completed for this activity.

CAMPUS:_____________________________________ DEPARTMENT:________________________________ ACTIVITY:_____________________________________________________________________ FUND NUMBER/REVENUE ACCOUNT: _____________ - ____________ _____________ - ____________ _____________ - ____________ _____________ - ____________ _____________ - ____________ _____________ - ____________ _____________ - ____________ _____________ - ____________ _____________ - ____________ _____________ - ____________

CONTACT PERSON: __________________________ PHONE: (____)__________________ DATE PREPARED: ___________________________ OVERALL CAMPUS DETERMINATION: REPORT: ____ EXEMPT:

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____

NONFINANCIAL QUESTIONNAIRE GENERAL A. Trade or Business 1.

Does the activity generate revenue from the sale of goods or the performance of services?

Yes_____ No_____

2.

Approximately how much revenue was generated during the year by the unrelated portion of the activity? $_______________

3.

Fully describe the activity performed by the unit. Please include a description of the goods or services and the reason(s) for offering these goods or services for sale. ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________

4.

Describe the reason(s) for the establishment of this activity. ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ __________________________________________________________________

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5.

Was this activity a new activity or was it an outgrowth or offshoot of an existing or previously conducted activity? If yes, please explain. ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________

6.

At the time the activity was being established, was it expected that the activity would lose money, break even, or make a profit? Please provide as much detail as possible. ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________

7.

Did the institution of this activity involve the acquisition or development of assets that were expected to appreciate in value over time? If yes, please explain. ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________

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8.

Were any campus or other approvals required before this activity could be conducted?

If yes, please describe the approval process. ___________________________________________________________________ __________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________

9.

Are separate books and records maintained for this activity?

Yes______ No______

B. Regularly Carried On 1.

Is the revenue-producing activity conducted on a "regular" (i.e., year-round, seasonal, etc.) basis?

Yes_____ No_____

2.

Indicate the frequency with which the activity is performed. ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________

3.

Is the revenue-producing activity conducted on an infrequent, casual, or sporadic basis?

Yes_____ No_____

4.

If yes, explain why the activity is not conducted on a regular basis. ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________

C. Related to the University's Exempt Purpose -6-

1.

Does the activity have a "substantial" causal relationship to the accomplishment of the University's exempt educational or research purpose?

Yes_____ No_____

2.

If yes, explain how the activity enhances, furthers, or in any way relates to the education or research purpose of the University. ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________

3.

Are students participating in the activity as part of a required learning experience?

Yes_____ No_____

4.

If yes, describe the instructional nature of the duties and tasks assigned to the students, and the number of students involved. ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________

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STATUTORY EXCEPTIONS A. Volunteer Labor 1.

Are unpaid volunteers (students or non-students) participating in the revenue generating activity?

Yes_____ No_____

2.

If yes, describe the duties or tasks assigned to the volunteers and indicate the percentage of total effort attributable to the volunteer activity.

Percentage ________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________

B. Convenience of University Members 1.

Is the activity performed for the convenience of University students, faculty, staff or patients?

Yes_____ No_____

2.

Indicate the percentage of total sales attributable to each group of users: Percentage

Users University students University faculty/staff employees University patients University alumni General public Other (specify) ___________________________________ TOTAL 3.

______ ______ ______ ______ ______ ______ 100%

Is the activity conducted in a remote location that is relatively inaccessible to the general public?

Yes_____ No_____ -8-

4.

If yes, please explain. ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________

C. Donated Merchandise 1.

Does the activity involve the sale of donated goods?

Yes_____ No_____

2.

If yes, indicate the percentage of total revenue attributable to the sale of donated articles.

Percentage ________

MODIFICATIONS TO INCOME A. Royalties 1.

Does the activity generate revenue from royalties?

Yes_____ No_____

2.

If yes, please explain the basis for determining the royalty payment (e.g., production, gross income, net profits, etc.) ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________

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3.

Is the royalty income derived in part from the performance of services?

Yes_____ No_____

4.

If yes, please explain. ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________

B. Rents 1.

Real Property Rents a.

Does the activity generate revenue solely from the rental of real property?

Yes_____ No_____

2.

Real and Personal Property Rents a.

Does the activity generate revenue from a combination of real and personal property?

Yes_____ No_____

b.

If yes, indicate the percentage of total rents received attributable to the real and personal property: Property

Percentage

Real Property Personal Property

_________ _________ 100 %

Total c.

Describe the type of real and personal property rented. _____________________________________________________________ _____________________________________________________________ _____________________________________________________________ - 10 -

3.

Rendering of Services a.

Does the activity provide for any services in connection with the rental of real property?

Yes_____ No_____

b.

If yes, describe the nature and extent of the services (e.g., maid, food, janitorial, security, etc.) rendered to the tenants. _____________________________________________________________ _____________________________________________________________ _____________________________________________________________ _____________________________________________________________ _____________________________________________________________

C. Research 1.

Does the activity involve the performance of research under a clinical trial or product testing agreement with a commercial entity?

Yes_____ No_____

2.

If yes, please attach a copy of the research agreement.

SPECIAL CIRCUMSTANCES A.

Technically Advanced or Unique 1.

Are the goods, services, or facilities offered technically advanced, unique or unavailable within a reasonable distance?

Yes_____ No_____

2.

If yes, please explain. _____________________________________________________________ _____________________________________________________________ _____________________________________________________________ _____________________________________________________________ - 11 -

HOSPITAL SERVICES A.

Shared Services Among Hospitals 1.

Are hospital services (i.e., data processing, purchasing, warehousing, billing and collection, food, personnel, etc.) provided to another tax-exempt hospital?

Yes_____ No_____

2.

If yes, provide the following information: a.

Are the services provided at a fee that does not exceed actual costs?

Yes_____ No_____

b.

Estimate the maximum capacity of inpatients served by the hospital: (1-99)_______ (100 or more)______

c.

Are the services related to the recipient hospital's exempt purpose if performed by the recipient hospital on its own behalf?

Yes_____ No_____

ADVERTISING A.

Commercial Advertising Sales 1.

Does the activity involve the sale of commercial advertisements in a University publication?

Yes_____ No_____

2.

Do the advertisements contribute importantly to the educational or research purpose of the publication?

Yes_____ No_____

3.

If yes, please attach a copy of the advertisement(s).

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B.

Corporate Sponsorship Income 1.

Is a corporate sponsor provided with messages or other programming materials that are broadcast or otherwise transmitted, published, displayed, or distributed in exchange for sponsorship of a sporting, fundraising, or other event; radio or television coverage of an event; underwriting of campus radio or television programs; game program advertising; etc.?

Yes_____ No_____

2.

If yes, does the message or programming material include any of the following: a.

Qualitative or comparative language related to the sponsor's company, product, services, or facilities?

Yes_____ No_____

b.

Price information or other indications of savings or value associated with a product or service?

Yes_____ No_____

c.

A "call to action" requesting that participants patronize the sponsor?

Yes_____ No_____

d.

An endorsement of the sponsor's company, product, services, or facilities?

Yes_____ No_____

e.

An inducement to buy, sell, rent, or lease the sponsor's product or services?

Yes_____ No_____

Is the amount of the payment contingent, by contract or otherwise, upon such factors as broadcast ratings or attendance at an event?

Yes_____ No_____

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3.

Does the sponsor receive a substantial return benefit in exchange for the payment? Please indicate whether the sponsor, in exchange for the payment, receives: (a)

Goods or services, such as tickets or donor receptions, exceeding in value 2 percent of the payment?

Yes_____ No_____

(b)

An exclusive provider arrangement, specifying that products or services competing with the sponsor's products or services will not be sold or provided in connection with the activity?

Yes_____ No_____

4.

Please describe the type of event conducted and provide an explanation for any question with a yes answer in 2a-e and 3a-b above. _____________________________________________________________ _____________________________________________________________ _____________________________________________________________ _____________________________________________________________ _____________________________________________________________ _____________________________________________________________ _____________________________________________________________

JOINT VENTURES A.

Partnership with Non-Exempt Entity 1.

Does the activity involve a joint venture or partnership with a taxable organization?

Yes_____ No_____

2.

If yes, please attach a copy of the partnership agreement.

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RELIEF OF GOVERNMENT BURDEN A.

Identification of Government Burden 1.

Does the activity involve the performance of an essential government service?

Yes_____ No_____

2.

If yes, please answer the following: a.

Was the activity previously undertaken by the governmental unit?

Yes_____ No_____

b.

Will the governmental unit be exercising any on-going supervision of the activity?

Yes_____ No_____

c.

Have there been formal legislative or other official actions of the governmental unit recognizing the University as acting on behalf of the government?

Yes_____ No_____

d.

Is the activity an integral part of a larger government program?

Yes_____ No_____

3.

Please provide an explanation for any of the questions in 2a-d above with a yes answer. _____________________________________________________________ _____________________________________________________________ _____________________________________________________________ _____________________________________________________________ _____________________________________________________________

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OVERALL DETERMINATION:

Report _______ Exempt _______

Briefly explain the reason(s) why the activity should be reported or exempt. _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________

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EXHIBIT A REVIEW GUIDELINES The University of California is tax-exempt both as a charitable educational organization under Internal Revenue Code (IRC) Section 501(c)(3) and as an instrumentality of the State of California.

The University's stated purpose is to provide education, research, and public service. Public service, however, does not in itself provide the basis for the University's tax exemption. Therefore, each activity that is public service oriented must be scrutinized to determine whether an educational or research purpose is also being served.

Three elements must be present for an activity to be considered unrelated to the University's taxexempt purposes of education and research. The activity must be 1) a trade or business, 2) "regularly carried on," and 3) not substantially related to the University's exempt purpose.

GENERAL A.

Trade or Business - Generally, a trade or business for unrelated business income tax purposes is any activity that is carried on for the production of income from the sale of goods or the performance of services. However, an activity will not lose its identity as a trade or business merely because it is carried on within a larger framework of activities that may relate to an organization's exempt purpose. In addition, the regulations state that where an activity carried on for the production of income constitutes an unrelated trade or business, no part of the trade or business shall be excluded from such classification merely because it does not result in a profit (Reg. 1.513-1(b)).

B.

Regularly Carried On - The regulations consider the frequency and continuity of the activity and the manner in which it is pursued. Thus, the unrelated business income tax applies only to a business activity that is "regularly carried on" as distinguished from commercial transactions that are sporadic or infrequent. However, the conduct of a year-round business activity for one day each week would constitute the regular carrying on of a trade or business (Reg. 1.513-1(c)(2)(i)).

Short-term activities conducted by an exempt organization are not considered "regular" 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. The conduct of activities on a seasonal basis is considered regular where the activities are of a kind normally undertaken by commercial organizations on a similar basis (Reg. 1.513-1(c)(2)(ii)).

C.

Related to University Exempt Purpose - To be related to the University's education or research exempt purposes, there must be a substantial causal relationship to the achievement of those purposes, i.e., the activity must contribute importantly to the accomplishment of the exempt purposes (other than the University's need to produce income) (Reg. 1.513-1(d)(2)).

1.

Size and Extent - Particular emphasis is placed on the size and extent of an activity. If - 17 -

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 (Reg. 1.513-1(d)(3)).

2.

Dual Use of Facilities or Personnel - The use of facilities or personnel for both exempt and commercial purposes will not exempt the income derived from the commercial use unless the commercial activity "contributes importantly" to the accomplishment of an organization's exempt purposes (Reg. 1.513-1(d)(4) (iii)).

STATUTORY EXCEPTIONS Even if an activity meets the definition of an unrelated trade or business, it may not be subject to tax if it meets one of the following criteria: A.

Volunteer Labor - Any activity in which substantially all the work of the trade or business (probably 85%) is performed without compensation is immune from tax. In assessing the contribution made by volunteers, such factors as the monetary value of the services rendered, the number of hours worked, the intrinsic importance of the volunteer work performed, and the degree of reliance placed upon volunteers should be considered (Reg. 1.513-1(e)(1)).

B.

Convenience of University Members - Any unrelated activity conducted primarily for the convenience of University students, faculty, staff or patients is exempt from tax. The convenience exception applies only to members of the University. Any sales to nonmembers, e.g., the general public, are taxable unless the sales are not regularly carried on (Reg. 1.5131(e)(2)).

The IRS has ruled that alumni should be treated the same as members of the general public since there is no stipulation in the IRC that alumni should be treated otherwise (PLR 8020010).

C.

Donated Merchandise - Any unrelated activity involving the sale of merchandise, substantially all (probably 85%) of which was received as gifts or contributions, is exempt regardless of whether the labor to operate the activity is paid or volunteer (Reg. 1.5131(e)(3)).

MODIFICATIONS TO INCOME The IRC contains several modifications that have the effect of exempting various kinds of income from the unrelated business income tax. These include income from dividends, interest, annuities, royalties, rents from real property, and certain forms of research. The modifications, however, generally do not apply to income derived from debt-financed property.

A.

Royalties - A royalty is defined as a tax, duty, or compensation paid to owners of a patent or copyright for the use or right to act under such patent or copyright. The royalty exclusion includes overriding royalties and royalty income received from licenses accorded the University as the legal and beneficial owner of patents assigned to it by inventors (IRC 512(b)(2) and Reg. 1.512(b)-1(b)).

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However, where the royalty income is derived in part from the performance of services, the payment will not constitute royalty income (Rev. Rul. 73-193).

B.

Rents - The rules covering rents vary depending on whether the rents are derived from real or personal property or from a mixed lease of both real and personal property (Reg. 1.512(b)1(c)).

1.

Real Property - Rents from real property are excludable from income (Reg. 1.512(b)1(c)(ii)(a)).

2.

Personal Property - Rents from personal property are 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:

3.

a.

10% or less is considered incidental and not subject to tax;

b.

11-50% is considered taxable in proportion to the percent of personal property rents to the total rents;

c.

51% or more is considered 100% taxable (Reg. 1.512(b)-1(c)(ii)(b)).

Rendering of Services - Amounts paid for the occupancy of space do not qualify as excludable rents if the owner of the property renders services for the convenience of the occupant. Services are considered rendered to the occupant if they are primarily for his/her convenience and are other than those usually rendered in connection with the rental of rooms or other space for occupancy only (Reg. 1.512(b)-1(c)(5)).

For example, the supplying of maid or linen services constitutes such services whereas the furnishing of heat and light, cleaning of public entrances, exits, stairways, or lobby does not.

The IRS has determined that the rental of parking spaces to the general public is not considered rent from real property, regardless of whether any services are being provided.

4.

Debt-Financed Property - The IRC contains an exception to the debt-financed property rules for the acquisition of real estate by "qualified organizations," including educational institutions. The term "acquisition indebtedness" does not include debt incurred by a qualified organization to purchase real property where the following conditions are present: a.

The purchase price is a fixed amount;

b.

The amount of an indebtedness, and the time for payment of such - 19 -

indebtedness, is not dependent on revenue, income, or profits derived from the real property;

5.

C.

c.

The real property is not leased back to the seller or a party related to the seller; and

d.

The real property is held by a partnership and one or more of the partners is not a qualified organization. In such a case, allocations to the partners must be qualified allocations or must not have as a principal purpose the avoidance of income tax (IRC 514(c)(9)).

Percentage - Rents dependent on profits or income derived from real property do not qualify for the exclusion unless they are based on a fixed percentage of gross receipts or sales. Rents based on a percentage of net profits are taxable (Reg. 1.512(b)-1 (c)(2)(iii)).

Research - Income from certain research grants or contracts may be exempt from the unrelated business income tax depending on the type of research. The following types of research are exempt: 1.

Research performed for any level of government (IRC 512(b)(7));

2.

Research performed by a college, university, or hospital "for any person" (IRC 512(b)(8)); and

3.

Research performed for any person in the case of an organization operated primarily for the purpose of carrying on "fundamental" research (as distinguished from "applied" research), the results of which are made available freely to the general public (IRC 512(b)(9)).

The regulations further limit these exclusions by defining research as activities other than those of a type ordinarily carried on as an incident to commercial or industrial operations.

The ordinary testing and inspection of products or materials is not exempt (Reg. 1.512 (b)1(f)(4)).

SPECIAL CIRCUMSTANCES The conduct of an unrelated business activity may be recognized as serving an exempt purpose due to the presence of unique or special circumstances. Whether such circumstances exist must be decided on a case-by-case basis (Rev. Rul. 85-110). Examples of special circumstances include the provision of the following: A.

Services or facilities otherwise unavailable in the community that fulfill an important community or medical need (see below); and

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B.

Services, facilities, or equipment that are technically advanced or unique.

HOSPITAL SERVICES The promotion of health, including the provision of patient care, is considered to be a charitable purpose exempt under IRC Section 501(c)(3). In examining the sales activities of a hospital, the IRS typically considers the relatedness of such activities to patient care, or the applicability of the convenience exception to a hospital's members, in determining whether the sales income is exempt from tax. However, the IRS considers other factors, such as whether the hospital has exempt educational or scientific purposes, any unique facilities or equipment owned by the hospital, the local health care needs of the community, or other special circumstances. The sales activities of the University's hospitals and clinics may be exempt from tax under one or more of these criteria.

A.

Hospital Patients - In general, the IRC excludes from tax any services provided by an exempt hospital for the convenience of its patients. The following list consists of persons considered to be "patients" of a hospital for purposes of IRC 513(a)(2): Inpatients; outpatients (receiving general or emergency diagnostic, therapeutic, or preventive health services); a former patient refilling a prescription; and a person receiving medical services as part of a hospital administered home care program, or receiving medical care and services in a hospital-affiliated extended care facility.

The IRS has ruled that private patients of doctors who are staff members of a hospital, but engaged in private practice in a nearby building, are to be regarded as the general public (Rev. Rul. 68-375).

B.

Services Provided to Nonpatients - Income generated from a hospital's pharmacy sales to nonpatients and the testing of nonpatient specimens is considered to be income from an unrelated trade or business.

1.

Pharmacies - The sale of pharmaceutical products by an exempt hospital to the general public is considered to be an unrelated trade or business. The IRS has determined that income from pharmacy sales made by an exempt hospital to the private patients of staff physicians represents unrelated business income unless the sales are of a casual nature. Casual sales are defined as sales that are not systematically and consistently promoted, do not occur with frequency, and represent only an insignificant portion of the pharmacy's total sales (Rev. Rul. 68-374).

2.

Lab Testing - As with pharmacy sales, the laboratory testing of referred specimens from nonpatients is considered to be an unrelated trade or business unless the testing is part of an established teaching program (Reg. 1.513-1(b)).

3.

Community Need Exception - An exempt hospital's testing of nonpatient specimens may fulfill an important community medical need and thus serve the hospital's exempt purposes. For example, if testing facilities are otherwise unavailable within a - 21 -

reasonable distance from the area served by a hospital, or if the available facilities are clearly inadequate to conduct the tests needed by the local community, the furnishing of testing services by a hospital may further its exempt function of promoting community health (Rev. Rul. 85-110).

C.

Services Provided to Another Tax-Exempt Hospital - The IRC provides that the furnishing of certain services by an exempt hospital to another exempt hospital is not taxable provided that the services are: 1.

Furnished solely to hospitals with facilities for not more than 100 inpatients;

2.

Consistent with the recipient hospital's exempt purpose; and

3.

Performed at no more than actual cost (IRC 513(e)).

The list of such exempt services includes the following: data processing, purchasing, warehousing, billing and collection, food, clinical, industrial engineering, laboratory, printing, communications, record center, and personal services (including selection, testing, training, and educational or personnel) (IRC 501(e)(1)(A)).

However, the exception does not apply to services that are not listed above, e.g., laundry services. An exempt hospital performing laundry services for another hospital is engaged in an unrelated trade or business (Rev. Rul. 69-633).

D.

Services Provided to a For-Profit Hospital As with services provided to nonpatients, the provision of services to a hospital that is not tax-exempt represents the conduct of an unrelated trade or business (IRC 513(a)(2)).

ADVERTISING A.

Advertising - The sale of commercial advertising is taxable even though the advertising is published in an exempt organization's periodical (e.g., a newsletter, magazine or scholarly journal) that contains editorial matter related to the exempt purpose of the organization (IRC 513(c)).

1.

Related - Advertising published in a college newspaper as part of an instructional program or advertising which serves an "informational function," as opposed to providing a means of stimulating demand for products, is considered related to the college's exempt purpose.

However, consumer advertising may be regarded as related to the University's exempt purpose if students are actively involved in the solicitation, sale and publication of the advertising under the supervision and instruction of the University.

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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 the University's educational program through the training and participation of the students involved (Reg. 1.513-1 (d)(4)(iv) Example (5)).

2.

Unrelated - The sale of general consumer advertising in an exempt organization's journal is considered to be an exploitation of the organization's exempt purpose. Such advertising is not substantially related to the accomplishment of the purpose that constitutes the basis for the organization's exemption (Reg. 1.513-1(d)(4)(iv)).

However, the publication of advertising in programs for sports events or music or drama performances will not ordinarily be deemed to be the regular carrying on of a trade or business (Reg. 1.513-1(c)(2)(ii)).

B.

Corporate Sponsorship Income - Generally, contributions received by a charitable organization are not considered unrelated business income if the organization does not provide a valuable service or benefit to the donor. However, if an organization goes beyond mere acknowledgement of a contribution and extensively promotes the sponsor of a special event, such as a post-season tournament, bowl game, or fundraiser, the income may be subject to tax because a valuable benefit or service in the form of advertising is being provided in exchange for the contribution. Furthermore, if an organization, in exchange for a payment, agrees that products or services that compete with the sponsor's products or services will not be sold or provided in connection with one or more activities of the organization, the portion of the payment attributable to the exclusive provider arrangement may be considered taxable income (IRC Reg. 1.513-4).

1.

Non-Taxable Acknowledgements. Sponsorship activities that merely acknowledge a corporate sponsorship payment by using the following means of sponsor identification are not considered taxable: a.

The name of the corporation in the title of an event;

b.

Sponsor logos and slogans that do not contain comparative or qualitative descriptions of the sponsor's products, services, facilities, or companies;

c.

Sponsor locations and telephone numbers;

d.

Value neutral descriptions, including displays or visual depictions, of a sponsor's product-line or services; or

e.

Sponsor brand or trade names and product or service listings.

Incidental recognition of a contributor as a benefactor is also not considered taxable advertising. Examples of such acknowledgements include:

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2.

a.

Naming a university professorship, scholarship, or building after a benefactor;

b.

Acknowledging the underwriting of a public radio or television program or museum exhibition; and

c.

Listing a contributor to a fund-raising event or to a performing arts organization in an accompanying program.

Taxable Advertising. Messages or other program materials broadcast or otherwise transmitted, published, displayed, or distributed in connection with a specific sponsored event to promote a company, service, facility, or product in exchange for a corporate sponsorship payment are considered taxable advertising. For example, the presence of the following factors would indicate that an exempt organization is engaged in advertising for a corporate sponsor: a.

Qualitative or comparative language;

b.

Price information or other indications of savings or value associated with a product or service;

c.

A call to action;

d.

An endorsement; or

e.

An inducement to buy, sell, rent, or lease the sponsor's product or service.

(Distribution of a sponsor's products at a sponsored event whether for a fee or free is not considered an inducement to buy.)

In addition, if the amount of a sponsorship payment is contingent, by contract or otherwise, upon such factors as broadcast ratings or attendance at an event, the payment is considered advertising.

JOINT VENTURES Generally, income from a joint venture will not be taxable if the undertaking contributes importantly to the University's exempt purpose or if it is carried on for the convenience of University members.

However, joint venture relationships have been scrutinized by the IRS to ensure that a tax-exempt organization is not serving the private purposes of the for-profit entity.

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RELIEF OF GOVERNMENT BURDEN The Treasury Regulations include the term "lessening the burdens of government" as one of several charitable purposes under which an organization may qualify for tax-exempt status (Reg. Sec. 1.501(c)(3)-1(d)(2)).

To determine whether an activity qualifies for this exemption, it is first necessary to identify the functions that the governmental unit considers to be its burdens and, second, to establish under what conditions an organization's activities are to be recognized as actually "lessening" such burdens (GCM 37401).

A.

Identification of Government Burden - In order for an activity to be considered a government burden, there must be an "objective manifestation" on the part of the government that it considers a particular activity to be one of its burdens. For example, the governmental unit may invite an organization to take part in an activity actually being performed by the government, or act jointly with the organization in the conduct of an activity. However, the fact that an organization is engaged in an activity that is sometimes undertaken by a government or that the government (or one of its officials) expresses approval of the organization and its activities is insufficient to establish that the organization is lessening the burdens of government.

B.

Lessening the Government Burden - In determining that an organization actually lessens a government burden, it is necessary to consider such factors as whether the governmental unit: 1.

Has previously undertaken the activity;

2.

Will be exercising ongoing supervision of the activity;

3.

Has formally recognized by legislative or other official actions that the University is acting on behalf of the government.

A favorable working relationship between the organization and the governmental unit it purports to serve is a strong indication that the activity lessens the burdens of government.

For additional information regarding the tax status of an activity, please refer to the IRC sections, Treasury Regulations, and IRS rulings cited above.

- 25 -

EXHIBIT B UNRELATED BUSINESS ACTIVITIES FY 2003-04 Activity Unit

Activity Description

Berkeley 1.

Business Administration

Sale of advertising space in the Bus Ad Weekly

2.

Business Services

Rental of facilities to non-University users for filming

3.

Computer Center

Sale of computer services to members of the Association for Computer-Assisted Surveys

4.

Haas School of Business

Sale of emblematic items to non-University customers

5.

Parking Services

Sale of parking spaces to the general public

6.

Recreational Sports - Cal Adventures/Cards & Fees

Rental of outdoor recreation equipment and sale of membership cards to the general public

7.

Recreational Sports - & Intercollegiate Athletics

Sale of advertising through affinity card program agreement with MBNA

8

Recreational Sports*

Passport Processing Fees

9.

Resource Development*

Shuttle Bus Ads

10.

Richmond Field Station

Rental of facilities to non-University users

1.

Bookstore

Catalog sales to non-University customers

2.

Computer Center

Sale of computer services to non-University users

Davis

- 26 -

3.

Facility for Advanced Instrumentation

Rental of scientific instruments to nonUniversity users

4.

Memorial Union - Rec Hall

Sale of recreation membership cards to the general public

5.

Memorial Union - Rec Swim

Sale of swimming privilege cards to the general public

6.

Protein Structure Lab

Sale of laboratory services to non-University members

Irvine 1.

Computing Facility

Sale of computing services to non-University users

2.

Medical Center - Pathology Referral Lab

Sale of lab testing services to non-University users

3.

Pediatrics-Genetic Testing

Sale of genetic laboratory testing services to non-University users

4.

Recreation Programs

Sale of recreation membership cards to the general public

Los Angeles 1.

African Studies Center

Sale of advertising space in the African Arts Quarterly

2.

Business Enterprises

Sale of film permits to non-University users

3.

Cultural & Recreational Affairs

Sale of recreation membership cards and rental of lockers to alumni, and use of Aquatic Center

by Alumni

4.

Corporate Sponsorship/Athletics

Sale of advertising in connection with corporate sponsorship agreements

5.

Game Programs

Sale of advertising in athletic game programs

6.

Parking Services

Sale of parking spaces to the general public - 27 -

7.

Public Affairs

Sale of advertising space in the UCLA Monthly

Riverside 1.

Bookstore

Internet sales to non-University customers

2.

Chemistry Shop

Sale of glass products, chemicals and mass spectrometer services to non-University users

3.

Media Resources

Sale of audio-visual services to non-University users

4.

Media Resources

Sale of advertising space in sports media guides

5.

Village Bookstore

Sale of supplies to the general public

San Diego 1.

Associated Students

Sale of advertising space in The Guardian newspaper

2.

Biology - Protein Sequencer Facility

Rental of the sequencer facility to Scripps Clinic and the Research Foundation

3.

Bookstore

Mail order sales to non-University customers

4.

Mt. Soledad Tower

Rental of space on radio antenna tower

5.

Parking Services

Sale of parking spaces to the general public

6.

School of Medicine-Pediatrics Tissue Culture Facility

Sale of cell culture media and cell culture services to non-University users

7.

Scripps - Marine Science Development Group

Sale of equipment fabrication services to the Scripps Institute and VA Hospital

8.

Storehouse

Sale of supplies to non-University customers

9.

Stuart Collection*

Tour sales to Art patrons

10.

Undergraduate Affairs Athletic Facilities

Sale of recreation membership cards to the l general public and alumni

- 28 -

11.

Undergraduate Affairs Vouchers

Sale of discount tickets and vouchers to University students and employees

12.

Upper Campus Machine Shop

Sale of machine shop services to nonUniversity users

San Francisco 1.

Alumni Affairs

2.

Millberry Convenience Store University

Sale of travel tours to alumni Sale of convenience store items to nonmembers

3.

Millberry Outdoors Unlimited

Rental of equipment to the general public and employees

4.

Millberry Union Recreation

Sale of advertising space in the Millberry Union PRO newsletter

5.

Millberry Union Recreation Facility

Sale of recreation membership cards to the general public and alumni

6.

Parking Operations

Sale of parking spaces to the general public

7.

Reprographics

Sale of reprographics services to the general public and alumni

8.

Student Services

Sale of advertising space in The Synapse newspaper

Santa Barbara 1.

Bookstore

Catalog sales to non-University customers

2.

Recreation

Sale of recreation membership cards to the general public and alumni

3.

Scanning Transmission Electron Microscope (STEM) Facility

Sale of STEM services to non-University users

4.

Athletics

Sale of advertising space in sporting event programs

- 29 -

Santa Cruz 1.

Bay Tree Bookstore

Sale of emblematic items by mail order to the general public and alumni

2.

KZSC Tower – Media Arts

Rental of space on radio antenna tower

3.

KZSC Tower – CATS

Rental of space on radio antenna tower

4.

Physical Education - Rec Cards/Passes

Sale of recreation membership cards and swim passes to the general public and alumni

5.

Physical Education

Sale of advertising space in the Quarterly Recreational

6.

Printing Services

Sale of printing services to non-University users

7.

University Town Inn*

Rental of hotel rooms to the general public

TOTAL ACTIVITIES: 63

*New activities for 2003-04

- 30 -

University of California Vice President­­Financial Management

UBIT Reporting Schedule FY 2004­05

Date

Description

Responsible

10­07­05

Distribute Nonfinancial Questionnaires to campuses and departments in the Office of the President (OP)

FM

10­24­05

File Application for Extension of Time to File (Form 8868) (6­month extension)

FM

11­04­05

Distribute Financial Worksheets for prior year activities to campuses

FM

12­09­05

Nonfinancial Questionnaires due from all campuses and OP departments

Campuses & OP

02­13­06

Send NFQs to Bertrand Harding (BH) for review

BH

02­17­06

Distribute Financial Worksheets for new activities to campuses and OP departments

FM

02­24­06

Financial Worksheets due from all campuses for prior year activities

Campuses & OP

03­17­06

Financial Worksheets due for new activities from campuses and OP departments

Campuses & OP

04­13­06

Issue draft 990­T to campuses, OP, and PwC for review

FM

04­28­06

Comments on draft 990­T due from campuses, OP departments, and PwC

Campuses, OP & PwC

05­15­06

File 990­T with IRS

FM

06­12­06

Distribute final 990­T and supporting schedules to campuses, OP, and PwC

FM

UNRELATED BUSINESS INCOME TAX STATUS AND DETERMINATION GUIDE

UNIVERSITY OF CALIFORNIA VICE PRESIDENT--FINANCIAL MANAGEMENT

OCTOBER 7, 2005

TABLE OF CONTENTS TYPE OF ACTIVITY

PAGE

Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

Bookstore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

Broadcast Tower. . . . . . .. . .. . .. . .. . .. . . . . .. . . .. . .. . . . .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3

Career Services…………………………………………………………………………………………………………….

3

Child Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3

Clinical Trials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3

Computer Center . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4

Debt-Financed Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4

Equipment Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4

Equipment Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4

Facilities Usage - No Lease. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5

Films. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5

Hospitals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6

Joint Ventures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7

Parking Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7

Printing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8

Recreational Memberships. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8

Relief of Government Burden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8

Rents - Lease Basis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9

Research. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10

Royalties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10

Sales (Misc.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10

Services (Misc.). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11

Storehouse. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11

Sports Camps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11

Testing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12

Travel Tours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12

UNIVERSITY OF CALIFORNIA

UNRELATED BUSINESS INCOME TAX STATUS AND DETERMINATION GUIDE

ACTIVITY TYPE

ADVERTISING

BOOKSTORE

DESCRIPTION

TAX STATUS

AUTHORITY

DETERMINATION

Sale of commercial advertising space in campus newspapers, journals, magazines, or other periodicals.

R

IRC 513(c)

The sale of general consumer advertising in an exempt organization's publication is an unrelated trade or business since it does not contribute importantly to the organization's exempt purpose.

Sale of commercial advertising and underwriting time on a campus radio station. Students assist in subscription drives and underwriting and advertising sales programs.

E

Reg. 1.513-1 (d)(4)(iv)

The sale of general consumer advertising and underwriting by students contributes importantly to the University's educational purpose through the training of students.

Sale of advertising space in souvenir programs for sports events (or music or drama performances).

E

Reg. 1.513-1 (c)(2)(ii)

The sale of advertising in programs for sports events (or music or drama performances) is not considered to be regularly carried on.

Sale of commercial advertising in sports media guides. Sales are made by a full-time person throughout the year.

R

TAM 9147007 PLR 9137002

The advertising activity is a sophisticated promotion effort which is rendered over a relatively significant period of time. Moreover, the advertising solicitation is conducted in the same manner as a typical commercial enterprise.

Sale of programming materials distributed in connection with a sponsored event which contain qualitative or comparative language, price information, a call to action, an endorsement or an inducement to buy, sell, rent, or lease the sponsor's product.

R

Reg. 1.513-4 (Proposed)

The payment is considered to be for the promotion or marketing of a company, service, facility, or product and constitutes taxable advertising income.

Furthermore, all related activities in connection with the sponsored event that might otherwise be considered acknowledgments will also be considered advertising.

Sale of books, athletic clothing, general school supplies, computer

E R

Reg. 1.513-1(d)(2) Reg. 1.513-1(e)(2)

The sale of items necessary for courses at an institution is related to the University's exempt purpose.

-1-

UNIVERSITY OF CALIFORNIA

UNRELATED BUSINESS INCOME TAX STATUS AND DETERMINATION GUIDE

ACTIVITY TYPE

BOOKSTORE (Cont.)

DESCRIPTION

TAX STATUS

hardware and software, and items that are low in cost and in recurrent demand to University members and the general public.

AUTHORITY

DETERMINATION

GCM 35811

The sale of other items may be considered for the convenience of students. However, in the absence of clearly established special circumstances, items not directly related to the educational purposes of an institution that have an ordinary useful life of more than one year are not encompassed by the convenience exception. Sales to members of the general public are taxable.

Same as above except the location of the bookstore is relatively inaccessible to the general public to which sales are infrequent.

E

Reg. 1.513-1(c)(2)

The remote location of the bookstore indicates that it is operated primarily for the convenience of University members. Furthermore, the sales to the general public are of a casual nature, indicating that the activity is not regularly carried on.

Sales of computers to students or faculty members.

E

Reg. 1.513-1(e)(2)

The sale of one computer to a student or faculty member is substantially related to exempt purposes; however, the sale of multiple computers, in a single year, to a single student or the sale of a computer to someone who is not a student, officer or employee of the University is not related.

Sale of computers at a discount to other educational institutions.

R

Reg. 1.513-1(d)(2)

The sale of computers to individuals at other educational institutions is not related to the University's exempt purpose.

Sales of audio recordings on magnetic tapes, vinyl records and compact disks.

E

PLR 8004010 PLR 8025222

Listening to phonograph records contributes to the musical education of students. Therefore, these sales, like the sale of books, are related to the exempt purpose of the University.

-2-

UNIVERSITY OF CALIFORNIA

UNRELATED BUSINESS INCOME TAX STATUS AND DETERMINATION GUIDE

ACTIVITY TYPE

DESCRIPTION

TAX STATUS

AUTHORITY

DETERMINATION

BROADCAST TOWER

Rental of space on campus building or freestanding tower to a thirdparty for placement of cellular transmission equipment.

E

IRC 512(b)(3) PLR 200104031

If University allows third party to place its tower on University real estate (either ground or existing building, then income is considered tax exempt rent from real property. If the broadcast tower is owned by the University, and is permanently affixed to either the ground or an existing building, the rental of antenna space on the tower is not eligible for the rental exclusion.

CAREER SERVICES

Career services, such as resume critiquing, interview coordination, and other job placement assistance provided to alumni for a fee.

R

IRC 513(a)(2) TAM 9645004 TAM 8020010

The provision of resume services for alumni is not related to the University’s exempt function.

CHILD CARE

Sale of child care services to the children of faculty/staff employees, students and the general public.

E

IRC 501(k)

The provision of care for children away from their homes is considered an educational purpose if substantially all of the care provided by the organization is for the purpose of enabling individuals to be gainfully employed, and the services provided are available to the general public.

CLINICAL TRIALS

Sale of clinical testing services to drug manufacturers when the drug under study has FDA approval.

E

RR 68-373

The clinical testing of a drug that already has FDA approval is considered to be "testing for public safety," which is an exempt activity.

Sale of clinical testing services to drug manufacturers, for the purpose of obtaining FDA approval prior to marketing.

The subjects participating in the study are expected to benefit from the eventual marketing of the drug. Residents

E

PLR 8230002

"For benefit" drug testing is related to the exempt purpose of a research hospital. This testing occurs when the drugs are offered to patients who have the disease for which the eventual commercial use of the drug is intended. ("Not for benefit" testing involving patients receiving care for unrelated medical reasons is taxable.) The participation

-3-

UNIVERSITY OF CALIFORNIA

UNRELATED BUSINESS INCOME TAX STATUS AND DETERMINATION GUIDE

ACTIVITY TYPE

DESCRIPTION

TAX STATUS

AUTHORITY

and interns are also involved in the conduct of the drug studies.

COMPUTER CENTER

of residents and interns in the clinical studies also contributes importantly to the University's educational purpose.

R

PLR 7902019

The sale of computer time to the general public is not related to the University's exempt purpose.

DEBT-FINANCED Rental of apartments to students and PROPERTY non-University members. The apartment building is subject to a mortgage.

E

IRC 514(c)(9) (c)(i)

The rules pertaining to debt-financed property do not apply to the University, a "qualified organization" described under Section 170(b)(1)(A(ii) provided that the terms of the purchase agreement is structured in accordance with the conditions set forth in IRC 514(c)(9).

Thus, these rentals are exempt under the exclusion for real property rents.

EQUIPMENT RENTALS

Rental of equipment (e.g., outdoor recreation equipment, scientific instruments, etc.) to non-University members.

R

Reg. 1.513-1(d)(2)

The rental of equipment to non-University members is not related to the University's exempt purpose.

EQUIPMENT SALES

Sale of electronic equipment, buoys and tracking instruments to nonUniversity members.

R

Reg. 1.513-1(d)(2)

The sale of equipment to non-University members is not related to the University's exempt purpose.

Sale of obsolete equipment to the general public.

E

Reg. 1.512(b)1(d)(1)

Gains and losses from the sale of property are excludable from unrelated business income taxes. However, income from inventory and other stock held for sale is not exempt.

Rental of facilities to non-University

E

PLR 8024001

The use of the University's facilities and services by

FACILITIES

Sale of computer services to nonUniversity members.

DETERMINATION

-4-

UNIVERSITY OF CALIFORNIA

UNRELATED BUSINESS INCOME TAX STATUS AND DETERMINATION GUIDE

ACTIVITY TYPE

USAGE (no lease)

FILMS

FILMS (cont.)

DESCRIPTION

TAX STATUS

members for conferences and symposiums.

AUTHORITY

DETERMINATION

Reg. 1.513-1(d)(2)

outside organizations for conducting educational activities is related to the University's exempt purpose.

Even though the conferences are conducted by outside organizations, the activity is considered to be in furtherance of an educational purpose.

Rental of facilities to film companies and advertising agencies for film or photographic shoots. Supervision, custodial services, electricians, security, parking, and occasionally craftsmen are provided.

R

RR 80-298 PLR 7927015

The services provided are more extensive than those normally provided with real property rentals.

Rental of football stadium to local high schools.

E

GCM 37522

The promotion of sports is an educational activity and is therefore related to the University's exempt purpose.

Use of recreational facilities for classes offered to the general public and alumni.

E

RR 77-365

The conduct of University clinics, lessons, workshops and seminars at recreational areas, to instruct and educate individuals of all ages in a particular sport, is in furtherance of the University's educational purpose.

Use of University-owned golf course by alumni, spouse and guests of students, faculty and staff.

R

PLR 9720035 PLR 200047049

Alumni are not sufficiently distinguishable from the general public. Spouses and guests are also treated as members of general public and do not fall within the convenience exception

The showing of films that are not commercially available. Some films relate to courses offered by the University. The showings are open to the general public.

E

Reg. 1.513-1(d)(2) and RR 75-471

The showing of films designed to educate the public, students of films, and aspiring film makers in new techniques and artistic developments in the film industry is related to the University’s exempt educational purpose.

-5-

UNIVERSITY OF CALIFORNIA

UNRELATED BUSINESS INCOME TAX STATUS AND DETERMINATION GUIDE

ACTIVITY TYPE

HOSPITALS

DESCRIPTION

TAX STATUS

AUTHORITY

DETERMINATION

Rental of films that are related to course curriculums. All rentals are to students.

E

Reg. 1.513-1(d)(2) and Reg. 1.513-1 (e)(2)

The rental of educational films is related to the University's exempt purpose. Moreover, this service is provided solely for the convenience of University members.

Use of cafeteria by non-patients.

E

RR 69-268

The operation of a hospital cafeteria primarily for use by employees and patients is not taxable within the meaning of IRC 513(a)(1). Allowing visitors to use the cafeteria allows them more time to spend with patients, which is considered supportive therapy.

Sale of cafeteria, purchasing, data processing, record center, warehousing, billing and collection, printing, communication, personnel, clinical, laboratory and industrial engineering services to another tax-exempt hospital.

E

IRC 513(e) IRC 501(e)(1)(A)

The furnishing of services to another tax-exempt hospital does not constitute an unrelated trade or business if the services are: 1)

provided at a fee not exceeding actual costs;

2)

furnished solely to hospitals serving not more than 100 inpatients; and

3)

consistent with the recipient hospital's exempt function.

Sale of laundry services to another tax-exempt hospital.

R

RR 69-633

The provision of laundry services to another hospital is an unrelated trade or business since the furnishing of such services is not specifically listed in IRC 501(e)(1)(A).

Provision of laundry and linen services to University patients.

E

RR 55-676

The provision of laundry services for the convenience of patients is exempt.

-6-

UNIVERSITY OF CALIFORNIA

UNRELATED BUSINESS INCOME TAX STATUS AND DETERMINATION GUIDE

ACTIVITY TYPE

DESCRIPTION

TAX STATUS

AUTHORITY

DETERMINATION

Sale of routine medical services (e.g., cell culture, ophthalmology, lab testing, etc.) to non-University members.

R

Reg. 1.513-1(d)(2)

The provision of routine medical and testing services to non-University members is not related to the University's exempt purpose.

Sale of pharmaceutical products to the general public and non-patients.

E

RR 68-374

The sale of pharmacy goods to non-patients is normally considered an unrelated business. However, casual sales are exempt since they are not regularly carried on.

JOINT VENTURES

Sale of patient lithotripsy services through a joint venture with the Kidney Stone Medical Clinic. The clinic is also used for clinical teaching and research.

E

Reg. 1.513-1(d)(2)

The formation of a joint venture between the University and a for-profit entity is not taxable if it contributes importantly to the University's exempt purpose. Joint venture relationships may be scrutinized by the IRS, however, to ensure that the University is not serving the private purpose of the for-profit entity.

PARKING SERVICES

Rental of parking spaces including the provision of security services.

R

IRS 512(b)(3) TAM (Proposed) RR 69-269

The operation of a parking lot for use by the general is considered an unrelated trade or business regardless public of whether any services are provided for the convenience of the occupant. The operation of a parking lot by an exempt organization is conclusively deemed to be the provision of services for the convenience of the occupant, and therefore the income received is not rent.

However, if any exempt organization leases the parking lot operation to a third party, the income would constitute rent depending on the type of services provided. On the other hand, the operation of a parking lot is not taxable if it is in furtherance of the organization's exempt purpose.

For example, the provision of parking services for patients and visitors of an exempt hospital, in an area without adequate parking, is not subject to unrelated business income tax since such an operation is consistent with the

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UNIVERSITY OF CALIFORNIA

UNRELATED BUSINESS INCOME TAX STATUS AND DETERMINATION GUIDE

ACTIVITY TYPE

DESCRIPTION

TAX STATUS

AUTHORITY

DETERMINATION

hospital's exempt purpose.

PRINTING

Sale of library photocopying services.

E

Reg. 1.513-1(d)(2)

The sale of library reproduction services is related to the University's exempt educational purpose since it preserves the University's library materials and disseminates information.

Provision of in-house printing and library bookbinding services for University faculty and associate institutions.

E

Reg. 1.513-1(e)(2)

The provision of printing and bookbinding services for the convenience of University members is exempt.

Sale of printing services to nonUniversity members.

R

Reg. 1.513-1(d)(2)

The sale of printing services to non-University members is not related to the exempt purpose of the University.

RECREATIONAL Sale of recreational membership cards MEMBERSHIPS to the general public and alumni.

R

PLR 8020010

The sale of athletic facility memberships to the general public and alumni is taxable. The use of University facilities by the general public and alumni for their own personal recreational activities does not constitute an activity that furthers educational purposes. The IRS has also taken the position that university alumni are members of the general public.

RELIEF OF GOVERNMENT BURDEN

E

RR 85-2 Reg. 1.501(c) (3)-1(d)(2)

The lessening of a governmental burden satisfies a charitable purpose under which an organization may qualify for tax-exempt status. In applying this exemption, the IRS has determined that it is necessary for an organization to identify the functions that a governmental unit considers to be its burdens and to then determine under what conditions the organization's activities actually "lessen" such burdens. The statutory requirement for the

PRINTING

Provision of case-finding and abstracting services to local hospitals.

The services are furnished under a State mandated regional tumor registry.

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UNIVERSITY OF CALIFORNIA

UNRELATED BUSINESS INCOME TAX STATUS AND DETERMINATION GUIDE

ACTIVITY TYPE

DESCRIPTION

TAX STATUS

AUTHORITY

DETERMINATION

establishment and maintenance of Statewide tumor registries provides the "objective manifestation" that a governmental unit considers a particular activity to be its burden. Moreover, funds for setting up the registry were provided by the State, subject to monitoring by the State.

RENTS (lease basis)

RENTS

Rental of a campus building or space within a building.

E

IRC 512(b)(3)

Rents from real property are exempt.

Rental of athletic facilities and equipment to non-University members.

Revenue is derived from rental of real property (95%) and personal property (5%).

E

Reg. 1.512(b)1(c)(ii)(b)

Rents from personal property are not taxable if there is a mixed lease and the rents attributable to the personal property are "incidental" (10% or less).

Rental of the football stadium to the San Diego Chargers. Significant services are provided, including field maintenance and locker room facilities.

R

RR 80-298

The leasing of a football stadium to a professional football team is not in furtherance of the University's educational purpose. Since the furnishing of substantial services for the convenience of the occupant is beyond those usually rendered in connection with the rental of space for occupancy only, the income is not excluded as rent from real property under Reg. 1.512(b)-1(c)(5).

IRC 512(b)(3)

The real property exclusion is lost if services other than those customarily provided for the convenience of the lessee are provided. Moreover, because the physicians are not University members, the lease arrangement does not further the University's exempt purposes.

IRC 512(b)(9)

The conduct of "fundamental" (as distinguished from

Lease of clinical medical office space (10% personal property) and support services to non-University affiliated physicians for their private practices.

RESEARCH

Sale of research services to Eastman

E

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UNIVERSITY OF CALIFORNIA

UNRELATED BUSINESS INCOME TAX STATUS AND DETERMINATION GUIDE

ACTIVITY TYPE

DESCRIPTION

TAX STATUS

AUTHORITY

Kodak Company under a private grant.

The research results are published in national journals and are made available to the general public.

DETERMINATION

"applied") research performed by a University for "any person," the results of which are made available to the general public, is not taxable.

Sale of research related clinical services including diagnostic procedures and tools developed by the University. All sales are to non-University members. Similar services are available commercially.

R

Reg. 1.513(b)1(f)(4)

The provision of "applied" research services of a type ordinarily carried on as an incident to commercial or industrial operations is a taxable activity.

ROYALTIES

Sale of licensed tangible biological materials and software programs.

E

IRC 512(b)(2)

Income from royalties, however measured, is exempt from the unrelated business income tax.

SALES (Misc.)

Sale of excess crops used in research.

The crops are sold in an "as is" condition when mature.

E

Reg. 1.513-1(d) (4)(ii)

Income derived from the sale of goods which result from the performance of an exempt function is not taxable if the product is sold in substantially the same state it was in upon completion of the exempt function.

SALES

Sale of peptides to non-University members.

No students are involved in the process.

R

Reg. 1.513-1(d)(2)

The sale of peptides is not related to the exempt purpose of the University.

Sale of bikes, bike parts and equipment, and provision of bike repair services to University members.

R E

GCM 35811 IRC 513(a)(2)

The sale of non-educational items with an ordinary useful life of more than one year is not included within the scope of the convenience exception. However, the remote location of the campus suggests that the repair service is operated primarily for the convenience of University members and is therefore an exempt activity.

Sale of emblematic items (T-shirts,

R

GCM 35811

The sale of emblematic items is not substantially related

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UNIVERSITY OF CALIFORNIA

UNRELATED BUSINESS INCOME TAX STATUS AND DETERMINATION GUIDE

ACTIVITY TYPE

DESCRIPTION

TAX STATUS

mugs, caps, pennants, etc.) to alumni (95%) and the general public (5%).

The sales are made by mail order on a regular basis.

AUTHORITY

DETERMINATION

PLR 8025222

to the exempt purpose of the University. Moreover, these sales are not for the convenience of University members since alumni are considered members of the general public.

Sale of clothing and other items to the University community that are embossed with the University seal.

E

PLR 8025222

Bookstore or other on-campus sale of University logo items to members of the University community qualify under the convenience rule of Sec. 513(a). Sales to the general public are considered unrelated business income.

Sale of meter testing services to nonUniversity members.

R

Reg. 1.513-1(d)(2)

The sale of these services is not related to the exempt purpose of the University.

Sale of drug testing services to employers.

R

Reg. 1.513-1(d)(2)

The sale of these services is not related to the exempt purpose of the University.

Sale of library services, including document delivery, to law firms, businesses, and members of the general public.

E

RR 81-29

Providing library services or access to such services to non-exempt users for research purposes is related to the University's exempt purpose.

STOREHOUSE

Sale of storehouse goods to nonprofit agencies.

R

Reg. 1.513-1(d)(2)

The sale of storehouse goods to non-University members is not related to the University's exempt purpose.

SPORTS CAMPS

Conduct of annual summer sports camps by University personnel for the general public and children of University students and employees.

E

PLR 8024001

Instruction of the general public in sports is in furtherance of the University's educational purpose. The University is not limited to instruction in business or related subjects in carrying out an educational program.

Rental of campus facilities to outside

E

RR 77-365

Instruction in sports furthers the educational purpose of

SERVICES (Misc.)

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UNIVERSITY OF CALIFORNIA

UNRELATED BUSINESS INCOME TAX STATUS AND DETERMINATION GUIDE

ACTIVITY TYPE

DESCRIPTION

TAX STATUS

organizations for the conduct of summer sports camps. Services such as meals, linen, and daily maid service are provided.

TESTING

AUTHORITY

DETERMINATION

PLR 7908009

the University. As long as the activity is educational, University involvement in the activity is not required.

Sale of diagnostic and lab testing services involving technically advanced equipment to non-University members.

E

RR 85-110

The provision of lab testing services for non-University members is generally considered an unrelated business.

However, special circumstances can exempt the activity if the services are not available within a reasonable distance, involve technically advanced equipment or emergency care.

Sale of diagnostic and lab testing services to non-University members.

Student participation and instruction is involved.

E

RR 85-109

The provision of lab testing services to non-University members is generally considered an unrelated business.

However, student participation in the lab testing furthers the University's exempt educational purpose.

R

RR 78-43 PLR 9027003

According to the IRS, a tour program is not a substantially related educational activity unless the following factors are present:

TRAVEL TOURS Sale of travel tours to alumni. No formal educational programs are conducted in connection with the tours.

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1)

a bona fide educational methodology in the form of a formal educational program including organized study, reading lists provided in advance, library access, examinations leading to academic credit, and mandatory participation;

2)

the tour is conducted in a highly professional manner, with daily lectures and related classroom studies;

3)

the tour is arranged to allow participants to study the

UNIVERSITY OF CALIFORNIA

UNRELATED BUSINESS INCOME TAX STATUS AND DETERMINATION GUIDE

ACTIVITY TYPE

DESCRIPTION

TAX STATUS

AUTHORITY

DETERMINATION

subject of the tour intensively and receive college credit when appropriate; 4) TRAVEL TOURS Tours of museums for patrons of the campus art collection. Purpose is to educate patrons, promote interest in the collection, and encourage them to be donors.

KEY: E R IRC Reg RR GCM PLR TAM

= = = = = = = =

R

IRC 512 51 AFTR 2d 83-451

EXEMPT REPORTABLE INTERNAL REVENUE CODE TREASURY REGULATION REVENUE RULING GENERAL COUNSEL MEMORANDUM PRIVATE LETTER RULING TECHNICAL ADVICE MEMORANDUM

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the tour is selected for its educational value and the qualifications of the tour leaders.

Although the tours were generally held only once a year, they are conducted for the benefit of outsiders and not the University or its staff.

There is no substantial relation to the exempt purpose of the University.