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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
501(c)(3).6
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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