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