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income may be derived is specified in the second sentence of
section 512(a)(3)(B) as all other income (except an amount equal
to the gross income derived from any unrelated trade or
business15 regularly carried on by such organization and computed
as if the organization were subject to section 512(a)(1)). (For
convenience, we shall sometimes refer to the second source of
exempt function income specified in the second sentence of
section 512(a)(3)(B) as non-member income.) However, in order to
qualify as exempt function income, such non-member income speci-
fied in the second sentence of section 512(a)(3)(B) must be set
aside for a purpose described in section 512(a)(3)(B)(i) or (ii),
including reasonable costs of administration directly connected
with any such purpose.
The phrase that appears at the end of the second sentence of
section 512(a)(3)(B), i.e., “including reasonable costs of
administration directly connected with a purpose described in
clause (i) or (ii)”, unambiguously pertains to and modifies both
section 512(a)(3)(B)(i) and (ii). That phrase plainly treats
non-member income (1) set aside to provide for the payment of
reasonable costs of administration directly connected with a
purpose described in section 512(a)(3)(B)(i) as set aside for a
15Sec. 513(a) defines the term “unrelated trade or business”
to mean, in general, any trade or business of the tax-exempt
organization the conduct of which is not substantially related to
the exercise or performance by such organization of its exempt
purposes.
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