CRSO - Page 9
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Thus, an organization’s rental activity is not a “trade or
business” for purposes of section 502 if the rents would be
excluded from unrelated business taxable income (UBTI) under
section 512(b)(3).3 Section 512(b)(3) excludes from UBTI “all
rents from real property”, subject to various exceptions that are
not germane here.4 Section 512(b)(4) provides, however, that
“Notwithstanding” this exclusion, rents from “debt-financed
property” (as defined in section 514) are included in UBTI.5
2. The Parties’ Contentions
Respondent contends that petitioner’s only activities are:
(1) Renting and managing two parcels of improved commercial real
estate, and (2) distributing the profits to Chi Rho. Respondent
contends that from 2001 through 2004, over half of petitioner’s
3 Sec. 511 taxes a tax-exempt organization’s “unrelated
business taxable income” (UBTI). Under the general rule of sec.
512(a), UBTI is the gross income that an exempt organization
derives from an “unrelated trade or business” (as defined in sec.
513) that it regularly carries on, less applicable deductions and
subject to modifications contained in sec. 512(b).
4 In general, the exclusion for rents is denied if the rents
depend in whole or part on the income or profits by any person
from the property leased. Sec. 512(b)(3)(B)(ii). Also, the
exclusion is limited if the rents attributable to personalty
leased with real property are more than “incidental”, sec.
512(b)(3)(A)(ii); the exclusion is denied if more than 50 percent
of the rents are attributable to the personalty, sec.
5 Debt-financed property generally means, subject to various
exceptions, any property held to produce income and with respect
to which there is acquisition indebtedness during the taxable
year. Sec. 514(b)(1).
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Last modified: November 10, 2007