Unrelated business income tax returns, 1998 - Statistical Data Included

Statistics of Income Bulletin, Spring, 2002 by Margaret Riley

Organizations classified by the Internal Revenue Service as exempt from Federal income taxation reported a total of $7.6 billion of gross "unrelated business income" (UBI) for Tax Year 1998. While these organizations are generally tax-exempt, they are subject to Federal taxation of income received from commercial and other activities that are not substantially related to their tax-exempt missions. The 46,208 organizations filing a 1998 Form 990-T, Exempt Organization Business Income Tax Return, offset gross UBI with a total of $8.2 billion of deductions, resulting in an overall deficit of $0.6 billion. However, slightly more than half of the filers reported taxable profits (positive net income), which amounted to $1.7 billion.

Income is defined as UBI if it is produced from an activity that is conducted on a regular basis and is not directly related to an organization's tax-exempt mission. The fact that the income may be used for furthering an organization's exempt purposes does not alter the definition. Any profits from an organization's unrelated business activities are taxed at regular corporate or trust income tax rates [1].

Organizations reported $505.9 million of unrelated business income tax liability on Tax Year 1998 Forms 990-T. Total tax liability, which is computed as unrelated business income tax, plus other taxes, minus total credits, was $464.3 million [2]. Much of the total amount of additional taxes reported on Form 990-T for 1998 was the "proxy tax," which was imposed on certain membership dues used for lobbying activities. Figure A shows the computation of total tax liability for 1998.

Proxy Tax

The proxy tax is required to be reported on Form 990-T and is included in total tax, but it has no connection to the unrelated business income tax or an organization's involvement in unrelated business activities. The proxy tax, which was effective beginning with Tax Year 1994, is imposed on a tax-exempt organization's nondeductible lobbying and political expenditures when they are financed with dues collected from organization members, and the organization either fails to notify the members of their shares of dues that were spent on lobbying and political activities, or the organization fails to state the full amount of allocable dues in the notification.

The proxy tax applies only to Internal Revenue Code section 501(c)(4) civic and social welfare organizations, section 501(c)(5) agricultural and labor organizations, and section 501(c)(6) business leagues, chambers of commerce, and real estate boards. (The various types of tax-exempt organizations subject to the unrelated business income tax provisions are described by Internal Revenue Code section in the Appendix to this article.)

Organizations that had no unrelated business income (UBI), yet were required to file Form 990-T to report the proxy tax, were not included in the Statistics of Income (SOI) study sample because they did not meet the $1,000 gross UBI filing threshold, which was a criterion for sample selection. As shown in Figure A, the proxy tax reported on returns selected for the SOI study was $2.9 million. After taking into account the additional Forms 990-T filed solely to report the proxy tax, the total amount of proxy tax reported for 1998 was $10.7 million. It is estimated that about 64 percent of all organizations reporting proxy tax filed Form 990-T solely for that purpose (no income from unrelated business activities was reported) [3].

Selected Financial Data for Tax Years 1997 and 1998

As shown in column 3 of Figure B, both gross unrelated business income (UBI) and total deductions declined by about 3 percent and 4 percent, respectively, between 1997 and 1998. The primary reason for these decreases is the exclusion from the 1998 statistics of Teachers Insurance and Annuity Association of America (TIAA), which reported relatively large amounts of gross UBI and total deductions on Form 990-T for 1997 [4]. The tax-exempt status of TIAA was terminated, effective for Tax Year 1998, under a provision of the Taxpayer Relief Act of 1997. Beginning with Tax Year 1998, TIAA was no longer subject to file Form 990-T for 1998 and later years because it became a for-profit corporation that was taxed at corporate income tax rates.

If the 1997 statistics are adjusted to exclude TIAA, as shown in column 4 of Figure B, the aggregate amounts of gross UBI and total deductions increased by 8 percent and 5 percent, respectively, from 1997 to 1998. The adjusted information presented in Figure B provides a more consistent means for assessing the real change between 1997 and 1998 in aggregate financial data items reported by organizations on Forms 990-T.

Of note in Figure B is the 27-percent rise in the amount of unrelated business income tax liability (UBIT) reported on Forms 990-T between 1997 (adjusted) and 1998. This corresponds to a similar increase in taxable profits realized by organizations for 1998. The 140 organizations having taxable profits of $1,000,000 or more, shown in Table 3 at the end of this article, made up less than half of 1 percent of all filers, yet .they accounted for over three-fourths of UBIT reported for 1998.