CRSO - Page 10

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          rental income was unrelated debt-financed income, which was not             
          excluded by reason of section 512(b)(3).  Consequently,                     
          respondent concludes, petitioner is operated for the primary                
          purpose of carrying on a “trade or business” within the meaning             
          of section 502, so as to preclude tax-exempt status under section           
               Petitioner does not dispute that its real property holdings            
          are debt-financed property within the meaning of section 514 or             
          that its rental income is unrelated debt-financed income, which             
          would give rise to UBTI pursuant to sections 512(b)(4) and                  
          514(a)(1) if petitioner were an exempt organization.  On brief,             
          petitioner concedes that if respondent is correct “that debt                
          financed real estate is, for purposes of Section 502(a), a                  
          prohibited trade or business because of Section 512(b)(4) * * *             
          the organization is a feeder organization and not a Section                 
          501(c)(3) entity”, unless the exception in section 502(b)(1)                
          applies.7  Petitioner asserts, however, that it “does not agree             

               6 Respondent also contends that the facts and circumstances            
          show that petitioner’s ownership and management activities                  
          associated with its commercial leasing activity are properly                
          categorized as a “common law trade or business”, without regard             
          to the UBTI provisions.  Because we base our decision on                    
          respondent’s primary argument described in the text supra, we               
          need not and do not address this alternative argument.                      
               7 According to petitioner’s Forms 990-T, Exempt Organization           
          Business Income Tax Return, for the years 2001 through 2004,                
          petitioner’s average acquisition debt ratios declined from a high           
          of 52.43 percent in 2002 to 49.6 percent in 2004.  Petitioner has           

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Last modified: November 10, 2007