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financed property, would be subject to UBTI pursuant to section
512(b)(4). Petitioner suggests, however, that the operation of
section 512(b)(4) is irrelevant for purposes of establishing
eligibility for the section 502(b)(1) exclusion. We disagree.
Section 512(b)(4) provides that “Notwithstanding” the
various exclusions from UBTI contained in section 512(b)(1), (2),
(3), and (5), unrelated debt-financed income is included in UBTI.
Section 512(b)(4) thereby “nullifies these exclusions for income
derived from ‘debt-financed property’”. Bartels Trust v. United
States, 209 F.3d 147, 149 (2d Cir. 2000). Consequently, “if
section 512 applied to the organization”, as section 502(b)(1)
provides, then section 512(b)(4) would preclude petitioner’s
exclusion of its rents from UBTI under section 512(b)(3). Hence,
petitioner does not satisfy the requirements of the section
502(b)(1) exclusion.
Conclusion
Petitioner’s rental activity constitutes a “trade or
business” within the meaning of section 502(a); the exclusion
under section 502(b)(1) does not apply. Consequently, petitioner
is not operated exclusively for charitable or other exempt
purposes and so is not entitled to exemption under section
501(c)(3).
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