Unrelated business income tax returns, 1998

Unrelated business income tax returns, 1998 – Statistical Data Included

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.

Table 4 at the end of this article presents major financial data items reported by tax-exempt trusts and corporations that had taxable profits for 1998. The aggregate gross income of organizations that had taxable profits for 1998 was 7 percent higher than the amount reported by organizations with taxable profits for 1997 (based on unpublished adjusted statistics). Total deductions reported by these two groups of organizations decreased by 7 percent between the 2 years. Corporations made up 55 percent of the 24,332 organizations reporting taxable profits on Forms 990-T for 1998, but their shares of gross UBI and total deductions were much higher, at 67 percent and 81 percent, respectively. Tax-exempt corporations collectively reported 51 percent of the total $1.7 billion of taxable profits for 1998, and tax-exempt trusts reported the remainder. Additionally, the respective split of corporate and trust total tax liability was 48 percent and 52 percent.

North American Industry Classification System (NAICS)

Beginning with Tax Year 1998, organizations filing Form 990-T were required to report a 6-digit code to classify their primary and secondary (if applicable) unrelated business activities according to the North American Industry Classification System (NAICS). Previously, filers had to classify their unrelated business activities according to the Standard Industrial Classification (SIC) system.

The NAICS was developed as a much needed replacement for the older SIC (developed between 1937 and 1939 and updated periodically) because rapidly emerging changes in national and global economies made the SIC less useful for statistical analysis of industrial composition and organization. NAICS was jointly developed by Canada, Mexico, and the United States (participants in the North American Free Trade Agreement, or NAFTA) and was adopted for use in the United States in 1997.

Three main reasons for developing NAICS were: (1) to expand coverage of the services sector, which has increasingly played a more important role than manufacturing in the U.S. economy in recent years; (2) to give more attention to industries engaged in advanced technologies; and (3) to reflect the changed structure of the economy due to emerging new industries and changes in consumer preferences. As a common classification system for Canada, Mexico, and the United States, NAICS provides a standard for comparative statistical analyses of industrial sectors within the three countries’ respective economies. On a global level, it also serves as a useful tool to assess current and future trade and investment practices, in addition to understanding the effect of international competition on certain industries.

The 1997 U.S. version of NAICS consists of 20 major industrial sectors, with 1,170 industries in the United States [5]. The list of NAICS codes provided with the Form 990-T instructions contains 19 of the 20 major industrial sectors (Public Administration is excluded) and 164 selected industries. In addition, five special codes are provided with the Form 990-T NAICS list that describe specific types of unrelated business activities, which correspond to line-item descriptions in the income statement section of the tax return. These five classifications are “unrelated debt-financed activities, except rental of real estate,” “investment activities of Code section 501(c)(7), (9), or (17) organizations,” “passive income activities with controlled organizations,” “rental of personal property,” and “exploited exempt activities.”

For statistical purposes, the first three of these activities are grouped within the Finance and Insurance sector. Rental of personal property is included in the Real Estate and Rental and Leasing sector. The last special activity is treated as an independent category and is not included in any of the NAICS major industrial sectors. The five special types of activities were listed separately because the tax treatment of income received from these activities is governed by special rules that are applied specifically to Form 990-T filers. Each of the five special classifications is defined in the Explanation of Selected Terms section of this article. Table 5 at the end of this article shows selected financial data distributed by primary unrelated business activity or industrial grouping, as classified under NAICS, and including the five special categories.

Primary Unrelated Business Activity Classifications Using NAICS

While the unrelated business income of tax-exempt organizations is a very small part of national income within the U.S. economy (gross UBI was less than 0.1 percent of gross domestic product for 1998), it is nonetheless of interest to certain Governmental statistical and regulatory agencies, tax practitioners, researchers, and tax-exempt organization administrators [6]. Nearly 75 percent of the total $7.6 billion of gross UBI reported for 1998 was associated with filers having a primary unrelated business activity within one of the service sectors. Twenty-one percent of all organizations reported one of the five special activity codes used specifically for Form 990-T filers, another 78 percent reported a NAICS-based primary activity code, and less than 1 percent did not report any code or other information to allow them to be classified.

The proportions of gross UBI attributed to organizations reporting either a special activity code or one of the NAICS-based codes to describe a primary activity were about 21 percent and 79 percent, respectively, similar to the breakout of the number of organizations reporting the two types of codes. Almost 16 percent, or $1.2 billion, of total gross UBI was reported by organizations that indicated their primary unrelated business activity was “investment activities of Code section 501(c)(7), (9), or (17) organizations,” one of the five special categories [7]. This was the largest amount of aggregate gross UBI ascribed to any one single activity description contained on the Form 990-T list of 169 codes used to describe primary unrelated business activities.

It is important to note that, in addition to providing a code for a primary unrelated business activity, organizations may report another NAICS code to classify a secondary unrelated business activity, if appropriate. However, they are not required to identify the portion of gross UBI associated with each activity. Therefore, the aggregate gross UBI amounts contained in Table 5 and Figures C through H can be attributed to the group of organizations reporting a given primary activity, but cannot be entirely attributed to the primary activity itself. Because 17 percent of all organizations also reported a secondary activity code, it is evident that some part of the aggregate gross UBI amounts contained in Table 5 and Figures C through H would actually be connected to an activity other than that shown as the primary activity.

Rankings of Primary Unrelated Business Activities by Type of Organization

For selected types of tax-exempt organizations, classified by IRC section, Figures C through H contain rankings of primary unrelated business activities (UBA’s). The rankings are based on the size of aggregate gross UBI attributable to the groups of organizations reporting the primary business activities. The top 10 primary UBA’s are provided in Figures C and D for all organizations and for Code section 501(c)(3) charitable organizations, respectively [8]. Figures E through H show the top 5 primary UBA’s of organizations tax-exempt under sections 501(c)(4) through 501(c)(7), respectively. Ten activity rankings are provided for charitable organizations because they are a much larger and more diverse group, compared to the other organizations shown in Figures E through H [9].

For the most part, organizations wishing to supplement income by engaging in an unrelated business activity will choose an ancillary activity that is closely tied to their exempt-program operations [10]. By doing so, they can take advantage of organizational expertise and resources readily available to them. This is clearly the case with section 501(c)(3) charitable organizations that reported “medical and diagnostic laboratories” as their primary unrelated business activity. Virtually all of these organizations were hospitals and medical centers. The same is true of section 501(c)(6) organizations that reported “advertising and related services.” Many of these business leagues, chambers of commerce, real estate boards, and similar organizations reported unrelated business income from paid advertisements displayed in their trade publications.

In other cases, the unrelated income of an organization may not be generated from an active trade or business, but rather from passive activities. Earning investment income from securities purchased with debt-financed funds is one example, as in the case of section 501(c)(3) organizations reporting “securities, commodity contracts, and other intermediation and brokerage” as their primary unrelated business activity. All investment income, whether debt-financed or not, of section 501(c)(7), (9), and (17) organizations is considered unrelated business income, while the investment income of other types of organizations is generally not taxed unless the investment was purchased with borrowed funds.

Unrelated Business Activity Coding Inconsistencies

The self-coding of UBA’s using the list of NAICS codes provided with Form 990-T is imperfect because of the different rationales employed by the return preparers when selecting the code that best describes their activities. In reviewing many of the NAICS code choices made by return preparers, it appears that some preparers selected different codes to describe like activities when there were two or more closely connected activity descriptions on the list. Others selected a code that might not have been the best choice available. A discussion of some of these cases follows.

Several organizations appear to have mistakenly provided NAICS codes for their primary UBA’s that are associated more directly with their related exempt missions than with their unrelated business activities. A number of section 501(c)(3) museums, for example, reported “museums, historical sites, and similar institutions” as their primary unrelated activity. This describes what type of tax-exempt organization they are, rather than identifying a specific unrelated business activity, such as “gift, novelty, and souvenir stores.” Hospitals and medical centers also followed this pattern, with some reporting a code for “hospitals” when they should have been reporting a code to describe the specific activity that produced unrelated business income.

It is also apparent that organizations sometimes choose different NAICS codes to identify like activities, which can diminish the usefulness of the self-coding system for statistical purposes. For example, while many organizations tax-exempt Under sections 501(c)(3), 501(c)(5), and 501(c)(6) reported “periodical publishers” as their primary unrelated activity, perhaps they should have selected the code for “advertising and related services,” because their sole source of income was advertising, and income from a periodical that contains no unrelated advertisements is tax-exempt.

In another example, an organization may choose a NAICS code for one of the broad “catchall” categories, such as “other professional, scientific, and technical services,” which appears in many of the activity rankings in Figures C through H, instead of choosing a code for a more specific description within the same industrial grouping. Better choices might have been “management consulting services,” “accounting, tax preparation, bookkeeping, and pay roll services,” or “custom computer programming services.”

It is possible that the section 501(c)(3) organizations that reported “securities, commodity contracts, and other intermediation and brokerage” should have coded their primary unrelated business activity as “unrelated debt-financed activities, except rental of real estate.” For some of these organizations, the largest source of gross UBI was capital gain net income; for others, it was income from partnerships and S corporations. None of the 501(c)(3) organizations reported the largest source of their gross UBI as debt-financed income.

Form 990-T filers are instructed to include in capital gain net income any net gains on the sale, exchange, or other disposition of debt-financed property. In this case, even though the income is from debt-financed property, it is not reported on the tax return as unrelated debt-financed income, so this results in the reporting of debt-financed income in at least two different lines on the return. In addition, if an exempt organization invested borrowed funds in a partnership carrying on an unrelated business activity, exempt organization’s share of the partnership’s gross income from the unrelated activity would be considered unrelated debt-financed income. Because income from sales and brokerage of investments in securities or commodities contracts is only considered to be UBI when purchased with borrowed funds, it can be argued that perhaps some of the abovementioned 501(c)(3) organizations that reported the largest portion of their gross UBI as income from partnerships and S corporations should have reported it as debt-financed income.

For the 1998 study, an attempt was made to determine a NAICS code when one was not supplied by the filer or the code provided was not a valid code; otherwise the codes provided by the return filer were not changed. The description of an organization’s principal unrelated business activity that is required to be reported on the return and the sources of income reported on the income statement were used during SOI processing in making a determination of a code, when necessary. For example, if the return filer was a section 501(c)(9) voluntary employees’ beneficiary organization, and all or most of its income was reported as investments, then the code with the description” Investment activities of Code section 501(c)(7), (9), or (17) organizations” was used. However, in some cases, taxpayers did not provide the required description, and the income statement did not provide enough information to determine a code. In these cases, the returns were coded as “not allocable.”

Future Plans for Unrelated Business Activity Coding

With the implementation of the NAICS codes for the Tax Year 1998 Statistics of Income study of Forms 990-T, this article has provided the first set of NAICS-based unrelated business activity statistics for analysis. It is apparent that there are some inconsistencies in the way organizations code their activities. The analysis of NAICS coding on Forms 990-T filed for 1998 has provided insight for making improvements in future SOI studies, such as additional testing and correction of the codes during return processing or revising the tax form instructions to provide more comprehensive guidance to the return preparer.

A data-entry system enhancement, effective with the Tax Year 2000 Form 990-T study, involves an automated comparison of the current year’s primary NAICS code with that reported for the prior year, when available. If the two codes are not the same, a determination is made as to which code is more consistent with the organization’s unrelated business activity, based on the activity description and any other information reported on the two returns. In cases where there is sufficient information available to make a determination, a correction is made to the code deemed to be inconsistent or incorrect. Additional testing of NAICS codes is planned for the Tax Year 2001 SOI study of Forms 990-T, which will be initiated in July 2002.

Because the United States NAICS classifications were updated for 2002, and, to a lesser extent, because of the findings from a review of NAICS codes reported on Forms 990-T for 1998, the list provided to filers of Tax Year 2002 Forms 990-T will be revised. SOI is directly involved in recommending changes to the Form 990-T NAICS code list. Certain new codes will be added, mostly within the Information sector, and several existing codes will be deleted altogether or rolled into a more general classification, mostly within the Manufacturing sector, because they were used rarely or not at all. Lessons learned from the 1998 study, along with an update of the codes on the current list, will lead to the improvement of the classification of unrelated business activities of tax-exempt organizations.

Summary

Tax-exempt organizations reported $7.6 billion of aggregate gross income from “unrelated business” activities on their 1998 Forms 990-T, Exempt Organization Business Income Tax Returns. After offsetting income with deductions, about half of the filers reported taxable profits, which collectively amounted to $1.7 billion. The unrelated business income tax (UBIT) liability reported by these filers was $505.9 million.

Figure B compares data from the Tax Year 1998 Form 990-T study with adjusted amounts from the 1997 study. (See the body of the article for details on the 1997 adjustments.) Overall, gross unrelated business income (UBI) and total deductions each rose at moderate rates, which were 8 percent and 5 percent, respectively. Both taxable profits and UBIT liability, however, increased 27 percent between the 2 years.

Beginning with 1998, the use of the North American Industry Classification System (NAICS) was implemented for coding the unrelated business activities of Form 990-T filers. This system replaced the Standard Industrial Classification (SIC) system that had been used previously. Organizations filing Forms 990-T are required to identify a primary unrelated business activity, and they are also permitted to identify a secondary activity, if applicable. Of the $7.6 billion of gross UBI reported for 1998, about 75 percent was associated with filers that reported NAICS-based primary unrelated business activities (UBA’s) within one of the service sectors. Figures C and D in this article present the top-10 primary UBA’s of all Form 990-T filers and Internal Revenue Code (IRC) section 501(c)(3) charitable organizations, respectively. Figures E through H provide the top-5 primary UBA’s for each respective group of IRC section 501(c)(4) through 501(c)(7) organizations. (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.)

Data Sources and Limitations

The statistics in this article are based on a sample of Tax Year 1998 Forms 990-T, Exempt Organization Business Income Tax Returns. The Internal Revenue Service required organizations having accounting periods beginning in 1998 (and, therefore, ending between December 1998 and November 1999, for full-year return filers) to file a 1998 Form 990-T to report unrelated business income of $1,000 (the filing threshold) or more. The associated required filing period for most Tax Year 1998 Forms 990-T generally spanned May 1999 to April 2000, but extensions of time to file beyond this period were granted to many organizations. For all Internal Revenue Code section 220(e), 401(a), 408(e), 408A, and 530(a) trusts, the required accounting period was Calendar Year 1998, and the filing date was April 15, 1999. Returns filed after Calendar Year 2000 were not included in the sample. Because of the various accounting periods of the organizations filing a 1998 return, the financial activities covered in this article span the period January 1998 through November 1999 (although the majority of activities occurred during Calendar Year 1998).

The 1998 Form 990-T study design incorporated a special “integrated” sample to gather information on “related” (tax-exempt) and “unrelated” (taxable) income and expenses for organizations that filed both Form 990, Return of Organization Exempt from Income Tax, and Form 990-T. This integrated sampling program ensured that the Statistics of Income sample of Forms 990-T included unrelated business income tax returns filed by all organizations whose Form 990 information returns were selected for the sample of Internal Revenue Code section 501(c)(3) nonprofit charitable organizations. Organizations exempt under other Code sections were not subjected to the integrated sampling program.

By appending an organization’s Form 990-T data to its Form 990 data, the resulting data set provides the means for consistency in analyzing exempt-function and nonexempt-function income of organizations that are involved in unrelated business activities. Special analyses of related and unrelated income and expenses of matched Forms 990/990-T records were published in past issues of the SOI Bulletin for Tax Years 1993, 1994, and 1997 [11]. Prior to Tax Year 1996, the integrated sample included returns of organizations exempt under sections 501(c)(3) through 501(c)(9). For 1996 and later years, only section 501(c)(3) returns were included in the integrated portion of the Form 990-T sample. An analysis of the combined Forms 990/990-T data has not been included in this article; however, Form 990-T returns from the integrated portion of the sample are represented in the statistics.

The Form 990-T sample included returns that were initially selected based on independent Form 990-T sampling criteria, and additional returns that were not initially selected but were subsequently matched to returns in the Form 990 sample. These matched returns, along with any independently selected Forms 990-T that also had counterparts in the Form 990 sample, formed the “integrated” portion of the Form 990-T sample [12].

The population from which the 1998 Form 990-T sample was drawn consisted of Form 990-T records posted to the IRS Business Master File system during 1999 and 2000. The returns in the sample were stratified based on the size of gross unrelated business income (UBI). A sample of 7,598 returns was selected from a population of 46,307. After excluding returns that were selected for the sample but later rejected, the sample size was 7,577, and the estimated population size was 46,208. Rejected returns included those which had gross UBI below the $1,000 filing threshold; were filed only to claim a refund or report the “proxy tax”; were filed for a part-year accounting period for 1998, and a full-year return was also filed for that year; or were filed for a part-year accounting period that began in a year other than 1998. For example, a final return filed for the short period of January 1999 -June 1999 may have been initially selected for the 1998 sample based on the criterion of an accounting period that ended between December 1998 and November 1999, but it was later rejected because, in actuality, it was a Tax Year 1999 return.

Figure I contains population counts, sample counts, designed sample rates, and achieved sample rates, by size of gross unrelated business income reported on Form 990-T and size of total assets reported on Form 990. The designed sampling rates ranged from a minimum of 3 percent (Form 990-T gross UBI less than $20,000, with either no Form 990 match or a Form 990 match to a Code section 501(c)(3) return with total assets under $1,000,000) to a maximum of 100 percent (either Form 990-T gross UBI of $300,000 or more, or Form 990-T with any amount of gross UBI and a match to a section 501(c)(3) Form 990 with total assets of $30,000,000 or more). Other Forms 990/990-T matches within various ranges of gross UBI, assets, and Internal Revenue Code sections were selected at rates ranging from 6 percent to 45 percent.

The information presented in this article was obtained from returns as originally filed with the IRS. The data were subjected to comprehensive testing and correction procedures in order to improve statistical reliability and validity. In most cases, changes made to the original return as a result of administrative processing, audit procedures, or a taxpayer amendment were not incorporated into the data base.

Because the data are based on a sample, they are subject to sampling error. In order to use these statistics properly, the magnitude of the sampling error, measured by the coefficient of variation (CV), should be taken into account. Figure J shows CV’s for selected financial data. CV’s are not shown for returns with gross UBI of $500,000 or more because they were sampled at a 100-percent rate and, therefore, are not subject to sampling variability. A discussion of the reliability of estimates based on samples and methods for evaluating both the magnitude of sampling and nonsampling error and the precision of sample estimates can be found in the general Appendix, located near the back of this issue of the Bulletin.

Explanation of Selected Terms

In some of the following explanations, tax-exempt organizations are cited by the Internal Revenue Code section under which they are described. The various types of tax-exempt organizations subject to the unrelated business income tax provisions are described by Code section in the Appendix to this article.

Advertising Income.–Gross income realized by a tax-exempt organization from the sale of advertising in a periodical was gross income from an unrelated trade or business activity involving the “exploitation of an exempt activity,” namely, the circulation and readership of the periodical developed by producing and distributing the readership content of that periodical. Advertising income was reported separately from other types of “exploited exempt activity income.” (See the explanation of Exploited Exempt Activity Income, Except Advertising.) Internal Revenue Code section 501(c)(7), (9), and (17) organizations reported gross advertising income, as well as other types of “exploited exempt activity income,” as gross receipts from sales and services. All other organizations reported this income separately.

Capital Gain Net Income.–Generally, organizations required to file Form 990-T (except organizations tax-exempt under Internal Revenue Code sections 501(c)(7), (9), and (17)) were not taxed on net gains from the sale, exchange, or other disposition of property. However, net capital gains on sales of debt-financed property, certain gains on the cutting of timber (section 1231), and gains on sales of certain depreciable property (described in sections 1245, 1250, 1252, 1254, and 1255) were taken into account in computing capital gain net income. Also, any gain or loss passed through from an S corporation or any gain or loss on the disposition of S corporation stock by a qualified tax-exempt (defined in the explanation of Income (Less Loss) from Partnerships and S Corporations) is taxed as a capital gain or loss. (See, also, the explanation of Investment Income (Less Loss) for information regarding investment income of section 501(c)(7), (9), and (17) organizations.)

Contributions.–To the extent permissible under the Internal Revenue Code, a deduction was allowed for contributions or gifts actually paid within the tax year to, or for the use of, another entity that was a charitable or Governmental organization described in Code section 170(c). A tax-exempt corporation was allowed a deduction for charitable contributions up to 10 percent of its unrelated business taxable income (UBTI) computed without regard to the deduction for contributions. A tax-exempt trust was generally allowed a deduction for charitable contributions in the same amounts as allowed for individuals, except the limit on the deduction was determined in relation to UBTI computed without regard to the contributions deduction, rather than in relation to adjusted gross income. Contributions in excess of the respective corporate or trust limitations may be carried over to the next 5 taxable years, subject to certain rules. The contributions deduction was allowed whether or not directly connected with the carrying on of a trade or business.

Deductions Directly Connected With Unrelated Business Income.–These were deductions allowed in computing net income, if they otherwise qualified as income tax deductions under the Internal Revenue Code and if they had a “proximate and primary” relationship to carrying on an unrelated trade or business. Allowable deductions included those directly connected with rental of personal property; those allocable to unrelated debt-financed income; those directly connected with investment income of Internal Revenue Code section 501(c)(7), (9), and (17) organizations; those allocable to interest, annuities, royalties, and rents received from “controlled organizations” (see definition of Income from Controlled Organizations); those allocable to “exploited exempt activity income” other than advertising; direct advertising costs; compensation of officers, directors, and trustees; salaries and wages; repairs; bad debts; interest; taxes; depreciation (unless deducted elsewhere); depletion; contributions to deferred compensation plans; contributions to employee benefit plans; the “net operating loss carryover”; and “other deductions.” Tax-exempt organizations with gross unrelated business income (UBI) above $10,000 were required to report each deduction component separately. Organizations with gross UBI between $1,000 (the filing threshold) and $10,000 reported a single total of the first five types of directly-connected expenses listed above (those described as “allocable to”) and a single total for all other types of deductions (both deductions directly connected with UBI and those not directly connected, each defined elsewhere in this section), except for two items that were required to be reported separately: the “net operating loss carryover” (directly connected) and the “specific deduction” (not directly connected), both also defined below.

Deductions Not Directly Connected With Unrelated Business Income.–The component deductions were “set-asides,” “excess exempt expenses,” charitable contributions, and the “specific deduction.” The specific deduction was reported, when applicable, by all organizations with positive taxable income; the other types of deductions not directly connected with UBI were reported separately, when applicable, only by tax-exempt organizations with gross UBI above $10,000. (See, also, the explanations of Set-Asides, Excess Exempt Expenses, and the Specific Deduction.)

Excess Exempt Expenses.–The two types of “excess” expenses allowed as deductions from unrelated business income were (1) excess exempt expenses attributable to commercial exploitation of exempt activities, and (2) excess exempt expenses attributable to advertising income. In the case of “exploited” exempt activity income (see the explanation of Exploited Exempt Activity Income, Except Advertising, below), if the expenses of the organization’s exempt activity exceeded the income from the exempt activity, then the excess expenses could be used to offset any positive net unrelated business income produced from exploiting the exempt activity, to the extent that it did not result in a loss. Excess expenses of a commercially exploited exempt activity could not be used to offset income from another type of unrelated business activity if the unrelated activity did not exploit that particular exempt activity. In the case of excess exempt expenses attributable to advertising income, if the expenses attributable to producing and distributing the readership content of a periodical exceeded the circulation income, then the excess of readership costs over circulation income could be used to offset any net gain from advertising (gross advertising income less direct advertising costs), to the extent that it did not result in a loss.

Exploited Exempt Activity Income, Except Advertising.–In some cases, exempt activities create goodwill or other intangibles that are capable of being exploited in a commercial manner. When an organization exploited such an intangible in commercial activities that did not contribute importantly to the accomplishment of an exempt purpose, the income it produced was gross income from an unrelated trade or business. An example of this type of activity would be an exempt scientific organization with an excellent reputation in the field of biological research that exploits its reputation regularly by selling endorsements of laboratory equipment to manufacturers. Endorsing laboratory equipment would not have contributed importantly to the accomplishment of any purpose for which tax exemption was granted to the organization. Accordingly, the income from selling such endorsements is gross unrelated business income. Exploited exempt activity income from advertising was reported separately from other types of exploited exempt activity income (see the explanation of Advertising Income). Internal Revenue Code section 501(c)(7), (9), and (17) organizations reported income from exploited exempt activities as part of gross receipts from sales and services. All other organizations reported this income separately.

Gross Profit (Less Loss) from Sales and Services.–This was the gross profit (less loss) from any unrelated trade or business regularly carried on that involved the sale of goods or performance of services. It did not include income from unrelated business activities that were required to be reported separately on any of the tax form’s supporting schedules. For example, an Internal Revenue Code section 501(c)(7) social club would include gross restaurant and bar receipts from nonmembers in the calculation of gross profit (less loss) from sales and services, but would report its investment income from sales of securities on the required supporting schedule. Gross profit (less loss) from sales and services is computed as gross receipts from sales or services, less returns and allowances, minus cost of sales and services.

Gross Unrelated Business Income (UBI).–This was the total gross unrelated business income (see the explanation of Unrelated Business Income), prior to reduction by allowable deductions used in computing unrelated business taxable income. All organizations were required to report detailed sources of gross UBI. The components of gross UBI were gross profit (less loss) from sales and services; capital gain net income; net gain (less loss) from sales of noncapital assets; net capital loss deduction (trusts only); income (less loss) from partnerships and S corporations; rental income; unrelated debt-financed income; investment income (less loss) of Internal Revenue Code section 501(c)(7), (9), and (17) organizations; income (annuities, interest, rents, and royalties) from controlled organizations; “exploited exempt activity” income, except advertising; advertising income; and “other” income (less loss). (For an explanation of these sources of income, see the separate explanations of each component.)

Income from Controlled Organizations.–A new definition of “controlled organization” was effective for tax years beginning after August 5, 1997. However, there was a 2-year grace period for organizations that had a written, binding contract with a controlled organization that was in effect on June 8, 1997. Organizations qualifying for the grace period reported income under the old law. Under both the old and new tax law provisions, all deductions “directly connected” with a Form 990-T filer’s gross controlled-organization income were allowed. The rules for debt-financed property did not apply to passive income (generally, investment income) from controlled organizations. (See the definition of Unrelated Debt-Financed Income.)

For organizations that had tax years beginning on or before August 5, 1997, or were covered by the 2-year grace period: When an exempt organization controls another organization, the gross annuities, interest, rents, and royalties from the controlled organization are included in the gross UBI of the controlling organization at a specified ratio, depending on whether the controlled organization is tax-exempt or not. “Control” meant: (a) for a stock corporation, the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote, and ownership of at least 80 percent of the total number of shares of all other classes of stock of the corporation; or (b) for a nonstock organization, at least 80 percent of the directors or trustees of the organization were either representatives of, or directly or indirectly controlled by, a tax-exempt organization.

For organizations that had tax years beginning after August 5, 1997, and were not covered by the 2-year grace period: When an exempt organization controls another organization, the entire amount of gross annuities, interest, rents, and royalties (termed “specified payments” under the new law) from the controlled organization are included in the gross UBI of the controlling organization, to the extent that the specified payments reduced the net unrelated income (or increased the net unrelated loss) of the controlled organization. “Net unrelated income (or loss)” for an exempt controlled organization was its unrelated business taxable income (or loss). For a nonexempt controlled organization, it was the part of its taxable income (or loss) that would be unrelated business taxable income (or loss) if it were exempt and had the same exempt purpose as the controlling organization. “Control” meant: (a) for a stock corporation, the ownership (by vote or value) of more than 50 percent of the stock; (b) for a partnership, ownership of more than 50 percent of the profits or capital interests; or (c) for any other organization, ownership of more than 50 percent of the beneficial interests.

Income (Less Loss) from Partnerships and S Corporations.–If an organization was a partner in any partnership that carried on an unrelated trade or business, this income item included the organization’s share of partnership gross unrelated business income less its share of partnership deductions that were directly connected with the unrelated income. If an organization was a qualified tax-exempt that held stock in an S corporation, this income item included the income or loss from the stock interest. The stock interest was treated as an unrelated trade or business, and all items of income, loss, or deduction were taken into account in computing unrelated business taxable income. A qualified tax-exempt was an organization described in Internal Revenue Code section 401 (a) (qualified stock bonus, pension, or profit-sharing plan) or section 501(c)(3), and exempt from tax under section 501(a).

Investment Income (Less Loss).–This income was reported only by organizations exempt under Internal Revenue Code sections 501(c)(7), (9), and (17) and included such income as gross unrelated debt-financed income, gross income from the ownership or sale of securities, and set-asides deducted from investment income in previous years that were subsequently used for a purpose other than that for which a deduction was allowed. (See, also, the explanation of Set-Asides.) All gross rents (except those that were exempt-function income) of section 501(c)(7), (9), and (17) organizations were treated as unrelated business income and were reported as “rental income.” Organizations exempt under sections other than 501(c)(7), (9), and (17) did not report “investment income (less loss).” Generally, these organizations’ investment income (dividends, interest, rents, and annuities) and royalty income were not taxed as unrelated business income, unless it was income, other than dividends, from a controlled organization or debt-financed income, or the rents were of the type described in the explanation of rental income. (See explanations of Income from Controlled Organizations, Rental Income, and Unrelated Debt-Financed Income.)

Net Capital Loss (Trusts Only).–If a trust had a net loss from sales or exchanges of capital assets, it was allowed a deduction for the amount of the net loss or $3,000, whichever was lower. (Tax-exempt corporations were not allowed to deduct any excesses of capital losses over capital gains.) Tax-exempt trusts reported the net capital loss deduction on Form 990-T as a negative component of gross unrelated business income.

Net Gain (Less Loss), Sales of Noncapital Assets.–This was the gain or loss from the sale or exchange of business property, as reported on Form 4797, Sales of Business Property. Property other than capital assets generally included property of a business nature, in contrast to personal and investment properties, which were capital assets.

Net Income (Less Deficit).–This was gross income derived from any unrelated trade or business regularly carried on by an exempt organization, less deductions directly connected with carrying on the trade or business and less other allowable deductions not directly connected. On a return-by-return basis, the result of this computation was either positive (net income), negative (deficit), or zero. Net income represented taxable profit, which was subject to the unrelated business income tax. (See, also, explanations of Deductions Directly Connected With Unrelated Business Income and Deductions Not Directly Connected With Unrelated Business Income.)

Net Operating Loss Deduction.–The net operating loss carryover or carryback (as described in Internal Revenue Code section 172) was allowed as a deduction in computing unrelated business taxable income. However, the net operating loss carryover or carryback (allowed only to or from a tax year for which the organization was subject to tax on unrelated business income) was determined without taking into account any amount of exempt-function income or deductions that had been excluded from the computation of unrelated business taxable income. A “net operating loss” represented the excess of deductions over receipts for a specified year for which an organization reported an overall deficit from its unrelated trade or business activities. The statistics in this article represent only the net operating loss carryover because carrybacks from future years would be reported in a later year on an amended return, not on the return as initially filed (which served as the basis for the statistics).

Other Deductions.–This included all types of unrelated business deductions that were not specifically required to be reported elsewhere on the tax return. Examples are fees for accounting, legal, consulting, or financial management services; insurance costs (if not for employee-related benefits); equipment costs; mailing costs; office expenses, such as janitorial services, supplies, or security services; rent; travel expenses; educational expenses; and utilities.

Other Income (Less Loss).–This included all types of unrelated business income that were not specifically required to be reported elsewhere on the tax return. Examples are insurance benefit fees; member support fees; commissions; returned contributions that were deducted in prior years; income from insurance activities that was not properly set aside in prior years; recoveries of bad debts; and refunds of State or local tax payments, if the payments were previously reported as a deduction.

Proxy Tax.–This was a tax on certain nondeductible lobbying and political expenditures paid or incurred after December 31, 1993, by organizations that were tax-exempt under Internal Revenue Code sections 501(c)(4), 501(c)(5), and 501(c)(6). If the organization failed to notify its members regarding their shares of dues to which nondeductible lobbying and political expenditures were allocable, or if the notice did not include the entire amount of dues that was allocable, then the proxy tax was imposed on the organization. It was computed as the aggregate amount of nondeductible lobbying expenditures that was not included in the notices sent to the organization’s members, multiplied by 35 percent. The proxy tax was required to be reported on Form 990-T and was included in total tax; however, there was no connection between the proxy tax and the taxation of income from an organization’s unrelated business activities.

Rental Income.–For organizations tax-exempt under Internal Revenue Code sections other than 501(c)(7), (9), and (17), this was the amount of (1) gross rents from personal property (e.g., computer equipment or furniture) leased with real property, if the rental income from the personal property was more than 10 percent, but not more than 50 percent, of the total rents from all leased property; or (2) gross rents from both real property and personal property leased with real property if the personal property was more than 50 percent of the total rents from all leased property. Except for the second situation covered above, gross rents from real property were generally excluded in computing unrelated business taxable income. In addition, gross rents from personal property that did not exceed 10 percent of the total rents from all leased property were excluded. Any rents excluded from the explanation of “rental income” had to be considered in terms of their taxability as unrelated business income from controlled organizations or unrelated debt-financed income, in that order. For organizations tax-exempt under sections 501(c)(7), (9), and (17), rental income included all gross rents (except those that were exempt-function income), with no exclusions. (See explanations of Income from Controlled Organizations and Unrelated Debt-Financed Income.)

Set-Asides.–This deduction from investment income was allowed to social and recreational clubs (Internal Revenue Code section 501(c)(7)), voluntary employees’ beneficiary associations (section 501(c)(9)), and supplemental unemployment benefit trusts (section 501(c)(17)). The deduction was equal to the amount of passive income (generally, investment income) that these organizations set aside (1) to be used for charitable purposes or (2) to provide payment of life, health, accident, or other insurance benefits (section 501(c)(9) and (17) organizations only). However, any amounts set aside that exceeded the “qualified asset account” limit, as figured under section 419A, were not allowed as a deduction from unrelated business investment income; they were treated as taxable investment income. A section 419A qualified asset account is any account consisting of assets set aside to provide for the payment of disability benefits, medical benefits, severance pay benefits, or life insurance benefits.

Specific Deduction.–The specific deduction was $1,000 or the amount of positive taxable income, whichever was less. The amount deducted was considered “not directly connected” with gross unrelated business income and was allowed to all organizations that had positive taxable income after all other types of deductions were taken. This deduction provided the equivalent benefit of the $1,000 gross unrelated business income filing threshold under which some organizations were exempted from filing a return and paying the unrelated business income tax.

Total Deductions.–Total deductions included both deductions reported on the main part of Form 990-T and expense items reported on any of six supporting schedules, which were also part of the tax form. It excluded cost of sales and services ($2.1 billion for 1998), which was subtracted from gross receipts from sales and services in computing gross profit (less loss) from sales and services. Gross profit (less loss) from sales and services was a component of gross unrelated business income (UBI). Because Form 990-T filing requirements are based on gross UBI, and cost of sales and services is factored into the computation of gross income, the deduction for cost of sales and services is reported in the gross income section of Form 990-T, not the deductions section. Cost of sales and services was reported as a lump-sum total, but may have included depreciation, salaries and wages, and certain other types of deductible items. For this reason, the total amount shown for some of the separately reported components of total deductions, such as “salaries and wages,” may be understated.

Total Tax.–Total tax was unrelated business income tax less the foreign tax credit, general business credit, credit for prior-year minimum tax, and other allowable credits, plus the “proxy tax” on certain lobbying expenditures, the tax from recomputing certain prior-year credits (“recapture taxes”), and the “alternative minimum tax.”

Unrelated Business Income.–This was income of a tax-exempt organization that was from a trade or business which was regularly carried on by the organization and which was not substantially related to the performance of the organization’s exempt purpose or function (other than that the organization needed the profits derived from the unrelated activity). The term “trade or business” generally comprised any activities carried on for the production of income from selling goods or performing services. These activities did not lose their identity as trades or businesses merely because they were carried on within a larger aggregate of similar activities or within a larger complex of other endeavors that may, or may not, have been related to the exempt purposes of the organization. For example, soliciting, selling, or publishing commercial advertising is identified as a trade or business even though the advertising is published in an exempt organization’s periodical that contains editorial matter related to the organization’s exempt purpose.

Unrelated Business Income Tax.–This was the tax imposed on unrelated business net income (taxable profit). It was determined based on the regular corporate or trust income tax rates that were in effect for the 1998 Tax Year, as shown in the following schedules.

Tax Rates for Corporations

Amount of unrelated

business taxable income is:

Of the

But not amount

Over– over– Tax is: over–

$0 $50,000 15% $0

50,000 75,000 $7,500+25% 50,000

75,000 100,000 13,750+34% 75,000

100,000 335,000 22,250+39% 100,000

335,000 10,000,000 113,900+34% 335,000

10,000,000 15,000,000 3,400,000+35% 10,000,000

15,000,000 18,333,333 5,150,000+38% 15,000,000

18,333,333 – 35% 0

Tax Rates for Trusts

Amount of unrelated

business taxable income is:

Of the

But not amount

Over– over– Tax is: over–

$0 $1,700 15% $0

1,700 4,000 $255+28% 1,700

4,000 6,100 899+31% 4,000

6,100 8,350 1,550+36% 6,100

8,350 – 2,360+39.6% 8,350

Unrelated Debt-Financed Income.–Gross income from investment property for which there was acquisition indebtedness outstanding at any time during the tax year was subject to the unrelated business income (UBI) tax. The percentage of investment income to be included as gross UBI was proportional to the ratio of average acquisition indebtedness to the average adjusted basis of the property. Various types of passive income (generally, investment income) were considered to be unrelated debt-financed income, but only if the income arose from property acquired or improved with borrowed funds and if the production of income was unrelated to the organization’s tax-exempt purpose. When any property held for the production of income by an organization was disposed of at a gain during the tax year, and there was acquisition indebtedness outstanding at any time during the 12-month period prior to the date of disposition, the property was considered debt-financed property, and the gain was treated as unrelated debt-financed income. Income from debt-financed property did not include rents from personal property (e.g., computers or furniture) leased with real property, certain passive income (generally, investment income) from controlled organizations, and other amounts that were otherwise included in computing unrelated business taxable income. Internal Revenue Code section 501(c)(7), (9), and (17) organizations reported all debt-financed income as “Investment Income (Less Loss).” All other organizations reported debt-financed income separately.

Appendix

Types of Tax-Exempt Organizations Subject to the Unrelated Business

Income Tax Provisions, by Internal Revenue Code Section

Code

section Description of organization General nature of activities

220(e) Archer Medical Savings Fiduciary agent for accounts

Accounts (MSA’s) used in conjunction with

high-deductible health plans

to save funds for future

medical expenses

401(a) Qualified pension, profit- Fiduciary agent for pension,

sharing, or stock bonus profit-sharing, or stock

plans bonus plans

408(e) Individual Retirement Fiduciary agent for retire-

Arrangements (IRA’s) ment funds

408A Roth Individual Retirement Fiduciary agent for retire-

Arrangements (IRA’s) ment funds; subject to same

rules as traditional IRA’s,

except contributions are not

tax deductible and qualified

distributions are tax free

501(c)(2) Title-holding corporations Holding title to property

for exempt organizations for exempt organizations

(3) Religious, educational, Activities of a nature

charitable, scientific, or implied by the description

literary organizations; of the class of organization

testing for public safety

organizations, Also, organi-

zations preventing cruelty

to children or animals, or

fostering national or inter-

national amateur sports

competition

(4) Civic leagues, social Promotion of community

welfare organizations, and welfare and activities from

local associations of which net earnings are

employees devoted to charitable, edu-

cational, or recreational

purposes

(5) Labor, agricultural, and Educational or instructive

horticultural organizations groups whose purpose is to

improve conditions of work,

products, and efficiency

(6) Business leagues, chambers Improving conditions in one

of commerce, real estate or more lines of business

boards, and like

organizations

(7) Social and recreational Pleasure, recreation, and

clubs social activities

(8) Fraternal beneficiary Lodge providing for payment

societies and associations of life, health, accident,

or other insurance benefits

to members

(9) Voluntary employees’ bene- Providing for payment of

ficiary associations (inclu- life, health, accident, or

ding Federal employees’ other insurance benefits to

voluntary beneficiary asso- members

ciations formerly covered by

section 501(c)(10))

(10) Domestic fraternal benefi- Lodges, societies, or asso-

ciary societies and asso- ciations devoting their net

ciations earnings to charitable,

fraternal, and other speci-

fied purposes, without life,

health, or accident insu-

rance benefits to members

(11) Teachers’ retirement fund Fiduciary associations pro-

associations viding for payment of

retirement benefits

(12) Benevolent life insurance Activities of a mutually

associations, mutual ditch beneficial nature implied by

or irrigation companies, the description of the class

mutual or cooperative tele- of organization

phone companies, and like

organizations

501(c)(13) Cemetery companies Arranging for burials and

incidental related

activities

(14) State-chartered credit Providing loans to members

unions and mutual insurance or providing insurance of,

or reserve funds or reserve funds for, shares

or deposits in certain banks

or loan associations

(15) Mutual insurance companies Providing insurance to

or associations other than members, substantially at

life, if written premiums cost

for the year do not exceed

$350,000

(16) Corporations organized to Financing crop operations in

finance crop operations conjunction with activities

of a marketing or purchasing

association

(17) Supplemental unemployment Fiduciary agent for payment

benefit trusts of supplemental unemployment

compensation benefits

(18) Employee-funded pension Providing for payments of

trusts (created before June benefits under a pension

25, 1959) plan funded by employees

(19) Posts or organizations of Activities implied by the

past or present members of nature of the organization

the armed forces

(21) Black Lung Benefit Trusts Created by coal mine opera-

tors to satisfy their lia-

bility for disability or

death due to black lung

disease

(22) Withdrawal liability payment Providing funds to meet the

funds liability of employers

withdrawing from a multi-

employer pension fund

(23) Associations of past and Providing insurance and

present members of the armed other benefits to veterans

forces founded before 1880 or their dependents

(24) Trusts described in section Providing funds for employee

4049 of the Employee Retire- retirement income

ment Income Security Act of

1974

(25) Title-holding corporations Acquiring real property and

or trusts with no more than remitting all income earned

35 shareholders or benefi- from such property to one or

ciaries and only one class more exempt organizations;

of stock or beneficial pension, profit-sharing, or

interest stock bonus plans; or

governmental units

529(a) Qualified State Tuition State- and agency-maintained

Plans plans that allow individuals

to purchase credits or

certificates, or make con-

tributions to an account, to

pay for future educational

expenses

530(a) Coverdall Education Savings Fiduciary agent for accounts

Accounts created for the purpose of

paying qualified higher

education expenses of a

designated beneficiary

NOTE: Prepaid legal service funds, previously described in section

501(c)(20) of the Internal Revenue Code, were no longer tax exempt

effective with tax years beginning after June 30, 1992.

Figure A

Computation of Total Tax Reported on Exempt

Organization Business Income Tax Returns,

Tax Year 1998

[Money amounts are in thousands of dollars]

Item Amount

Total unrelated business income tax (UBIT) 505,896

Corporate UBIT 261,970

Trust UBIT 243,926

PLUS:

Total additional taxes (1) 3,486

Alternative minimum tax 551

Proxy tax (2) 2,935

MINUS:

Total tax credits 45,094

Foreign tax credit 44,251

General business credit 699

Credit for prior-year minimum tax 73

Other credits 71

EQUALS:

Total tax 464,288

(1) Additional taxes can include “recapture taxes,”

but none were reported on Form 990-T for 1998.

(2) Represents the tax for only those organizations that reported

gross UBI above the $1,000 filing threshold. The total proxy tax

reported on all Forms 990-T was $10.7 million. Some organizations

filed Form 990-T only to report the proxy tax and had no unrelated

businss income.

Figure B

Selected Financial Data from Exempt Organization Business Income

Tax Returns, Tax Years 1997 (Unadjusted and Adjusted) and 1998

[Money amounts are in thousands of dollars]

Item 1997 1998

(1) (2)

Gross unrelated business income 7,808,558 7,584,915

Total deductions (2) 8,494,930 8,181,766

Net income (less deficit) -686,374 -596,853

Net income (taxable profit) 1,374,757 1,669,753

Deficit 2,061,130 2,266,605

Unrelated business income tax 418,431 505,896

Total tax 422,740 464,288

Percentage

change,

1997

to 1997

Item 1998 (adjusted) (1)

(3) (4)

Gross unrelated business income -2.9 7,020,551

Total deductions (2) -3.7 7,767,004

Net income (less deficit) 13.0 -746,454

Net income (taxable profit) 21.5 1,314,676

Deficit 10.0 2,061,130

Unrelated business income tax 20.9 397,403

Total tax 9.8 402,816

Percentage

change,

1997 (adjusted)

to

Item 1998 1998

(5) (6)

Gross unrelated business income 7,584,915 8.0

Total deductions (2) 8,181,766 5.3

Net income (less deficit) -596,853 20.0

Net income (taxable profit) 1,669,753 27.0

Deficit 2,266,605 10.0

Unrelated business income tax 505,896 27.3

Total tax 464,288 15.3

(1) The adjusted 1997 data exclude Teachers Insurance and Annuity

Association of America (TIAA), which filed a return for 1997, but

not for 1998. The tax-exempt status of TIAA, which reported relatively

large amounts of unrelated business income and deductions for 1997,

was terminated under a provision of the Taxpayer Relief Act of 1997.

The termination was effective beginning with Tax Year 1998, at which

time TIAA became a for-profit corporation. The adjusted 1997 data are

being provided with permission from TIAA.

(2) Excludes cost of sales end services, which was subtracted from

gross receipts from sales and services in computing gross profit from

sales and services (GPSS), GPSS is a component of gross unrelated

business income (upon which the filing requirement is based). Cost

of sales and services can include amounts attributable to depreciation,

salaries and wages, and certain other deductible items. Total cost of

sales and services was $2.1 billion for 1998.

NOTES: Detail may not add to totals because of rounding. See the

Explanation of Selected Terms section of this article for definitions

of gross unrelated business income, total deductions, net income

(less deficit), unrelated business income tax, and total tax.

Figure C

Top 10 Primary Unrelated Business Activities of All

Organizations, Ranked by Size of Organizations’

Total Gross Unrelated Business Income (UBI),

Tax Year 1998

[Money amounts are in thousands of dollars]

Number

of

Primary unrelated business activity returns

All organizations, all activities 46,208

Total, top 10 activities 22,223

1. Investment activities of Code section 501(c)(7),

(9) and (17) organizations 3,930

2. Advertising and related services 5,884

3. Medical and diagnostic laboratories 440

4. Securities, commodity contracts, and other

intermediation and brokerage 73

5. Offices of real estate agents and brokers 1,861

6. Other amusement and recreation industries 1,928

7. Other professional, scientific, and technical

services 879

8. Gambling industries 1,719

9. Periodical publishers 954

10. Unrelated debt-financed activities other than

rental of real estate 4,555

Total

gross

Primary unrelated business activity UBI

All organizations, all activities 7,584,915

Total, top 10 activities 4,462,110

1. Investment activities of Code section 501(c)(7),

(9) and (17) organizations 1,194,561

2. Advertising and related services 940,997

3. Medical and diagnostic laboratories 570,715

4. Securities, commodity contracts, and other

intermediation and brokerage 471,340

5. Offices of real estate agents and brokers 264,033

6. Other amusement and recreation industries 240,540

7. Other professional, scientific, and technical

services 238,203

8. Gambling industries 205,956

8. Gambling industries 173,445

10. Unrelated debt-financed activities other than

rental of real estate 162,320

NOTE: Any activity described as “All other …” or “Other …” is a

distinct category within the North American Industrial Classification

System (NAICS). An “other” classification was to be assigned, within

a particular industry group, to an activity that did not correspond

to any of the more specific NAICS activity classifications within the

group.

Figure D

Top 10 Primary Unrelated Business Activities of

Internal Revenue Code (IRC) Section 501(c)(3)

Organizations, Ranked by Size of Organizations’

Total Gross Unrelated Business Income (UBI),

Tax Year 1998

[Money amounts are in thousands of dollars]

Number

of

Primary unrelated business activity returns

IRC section 501(c)(3) charitable

organizations, all activities (1) 10,898

Total, top 10 activities 4,311

1. Medical and diagnostic laboratories 439

2. Securities, commodity contracts, and other

intermediation and brokerage 33

3. Advertising and related services 1,841

4. Lessors of nonresidential buildings, except

miniwarehouses 747

5. Other professional, scientific, and technical

services 270

6. Direct health and medical insurance carriers 4

7. Pharmacies, drug stores 108

8. All other ambulatory healthcare services 151

9. Other amusement and recreation industries 383

10. Gift, novelty, and souvenir stores 335

Total

gross

Primary unrelated business activity UBI

IRC section 501(c)(3) charitable

organizations, all activities (1) 4,127,119

Total, top 10 activities 2,272,077

1. Medical and diagnostic laboratories 567,212

2. Securities, commodity contracts, and other

intermediation and brokerage 451,760

3. Advertising and related services 412,342

4. Lessors of nonresidential buildings, except

miniwarehouses 171,357

5. Other professional, scientific, and technical

services 141,241

6. Direct health and medical insurance carriers 115,953

7. Pharmacies, drug stores 110,042

8. All other ambulatory healthcare services 105,176

9. Other amusement and recreation industries 99,641

10. Gift, novelty, and souvenir stores 97,353

The term “charitable” refers to tax-exempt organizations with

purposes that are charitable, educational, scientific, literary,

or religious in nature, or organizations that test for public

safety or prevent cruelty to children or animals. The term also

covers organizations that otherwise qualified for tax-exempt

status under the Income Tax Regulations issued for Internal

Revenue Code section 501(c)(3).

NOTE: Any activity described as “All other …” or “Other …”

is a distinct category within the North American Industrial

Classification System (NAICS). An “other” classification was

to be assigned, within a particular industry group, to an

activity that did not correspond to any of the more specific

NAICS activity classifications within the group.

Figure E

Top 5 Primary Unrelated Business Activities of

Internal Revenue Code (IRC) Section 501(c)(4)

Organizations, Ranked by Size of Organizations’

Total Gross Unrelated Business Income (UBI),

Tax Year 1998

[Money amounts are in thousands of dollars]

Number

Primary unrelated business activity of

returns

IRC section 501(c)(4) civic leagues, social

welfare organizations, and local

associations of employees, all activities 1,500

Total, top 5 activities 880

1. Advertising and related services 140

2. Gambling industries 514

3. Other amusement and recreation industries 137

4. Other professional, scientific, and technical

services 52

5. Other activities related to real estate 37

Total

Primary unrelated business activity gross

UBI

IRC section 501(c)(4) civic leagues, social

welfare organizations, and local

associations of employees, all activities 263,236

Total, top 5 activities 171,647

1. Advertising and related services 77,612

2. Gambling industries 53,079

3. Other amusement and recreation industries 16,547

4. Other professional, scientific, and technical

services 13,026

5. Other activities related to real estate 11,383

NOTE: Any activity described as “All other …” or “Other …”

is a distinct category within the North American Industrial

Classification System (NAICS). An “other” classification was

to be assigned, within a particular industry group, to an

activity that did not correspond to any of the more specific

NAICS activity classifications within the group.

Figure F

Top 5 Primary Unrelated Business Activities of

Internal Revenue Code (IRC) Section 501(c)(5)

Organizations, Ranked by Size of Organizations’

Total Gross Unrelated Business Income (UBI),

Tax Year 1998

[Money amounts are in thousands of dollars]

Number

of

Primary unrelated business activity returns

IRC section 501(c)(5) labor, agricultural, and

horticultural organizations, all activities 2,497

Total, top 5 activities 1,465

1. All other insurance-related activities 802

2. Advertising and related services 358

3. Other professional, scientific, and technical

services 116

4. Periodical publishers 46

5. Lessons of nonresidential buildings, except

miniwarehouses 143

Total

gross

Primary unrelated business activity UBI

IRC section 501(c)(5) labor, agricultural, and

horticultural organizations, all activities 226,132

Total, top 5 activities 132,119

1. All other insurance-related activities 47,583

2. Advertising and related services 37,441

3. Other professional, scientific, and technical

services 19,344

4. Periodical publishers 14,604

5. Lessons of nonresidential buildings, except

miniwarehouses 13,147

NOTE: Any activity described as “All other …” or “Other …”

is a distinct category within the North American Industrial

Classification System (NAICS). An “other” classification was

to be assigned, within a particular Industry group, to an

activity that did not correspond to any of the more specific

NAICS activity classifications within the group.

Figure G

Top 5 Primary Unrelated Business Activities of

Internal Revenue Code (IRC) Section 501(c)(6)

Organizations, Ranked by Size of Organizations’

Total Gross Unrelated Business Income (UBI),

Tax Year 1998

[Money amounts are in thousands of dollars]

Number

of

Primary unrelated business activity returns

IRC section 501(c)(6) business leagues,

chambers of commerce, real estate boards,

and like organizations, all activities 6,238

Total, top 5 activities 4,530

1. Advertising and related services 3,145

2. Periodical publishers 592

3. Other professional, scientific, and technical

services 350

4. Lessors of nonresidential buildings, except

miniwarehouses 275

5. All other insurance-related activities 168

Total

gross

Primary unrelated business activity UBI

IRC section 501(c)(6) business leagues,

chambers of commerce, real estate boards,

and like organizations, all activities 817,893

Total, top 5 activities 576,008

1. Advertising and related services 386,968

2. Periodical publishers 60,108

3. Other professional, scientific, and technical

services 57,540

4. Lessors of nonresidential buildings, except

miniwarehouses 36,730

5. All other insurance-related activities 34,662

NOTE: Any activity described as “All other …” or “Other …”

is a distinct category within the North American Industrial

Classification System (NAICS). An “other” classification was

to be assigned, within a particular industry group, to an activity

that did not correspond to any of the more specific NAICS activity

classifications within the group.

Figure H

Top 5 Primary Unrelated Business Activities of

Internal Revenue Code (IRC) Section 501(c)(7)

Organizations, Ranked by Size of Organizations’

Total Gross Unrelated Business Income (UBI),

Tax Year 1998

[Money amounts are in thousands of dollars]

Number Total

Primary unrelated business activity of gross

returns UBI

IRC section 501(c)(7) social and

recreational clubs, all activities 6,840 482,213

Total, top 5 activities 5,485 402,558

1. Investment activities of Code section 501(c)(7),

(9), and (17) organizations 3,285 169,566

2. Full-service restaurants 658 95,381

3. Other amusement and recreation industries 1,064 94,070

4. Limited-service eating places 244 27,476

5. Spectator sports (including sports clubs and

racetracks) 234 16,065

NOTE: Any activity described as “All other …” or “Other …” is a

distinct category within the North American Industrial Classification

System (NAICS). An “other” classification was to be assigned, within

a particular industry group, to an activity that did not correspond

to any of the more specific NAICS activity classifications within the

group.

Figure I

Population and Sample Counts, and Designed and Achieved Sample Rates,

by Size of Gross Unrelated Business Income on Form 990-T and Size of

Total Assets on Matching IRC Section 501(c)(3) Form 990, Tax Year 1998

Size of gross unrelated business

Sample Income (UBI) on Form 990-T and

group size of total assets on matching Population Sample

number IRC section 501(c)(3) Form 990 counts counts

(1) (2)

1 Gross UBI $1,000 under $20,000

and total assets under $1,000,000,

or Gross UBI $1,000 under $20,000

and no matching Form 990 26,204 773

2 Gross UBI $1,000 under $20,000 and

total assets $1,000,000 under

$2,500,000, or Gross UBI $20,000

under $60,000 and total assets

under $2,500,000, or Gross UBI

$20,000 under $60,000 and no

matching Form 990 7,650 467

3 Gross UBI $1,000 under $60,000 and

total assets $2,500,000 under

$10,000,000, or Gross UBI $60,000

under $150,000 and total assets

under $10,000,000, or Gross UBI

$60,000 under $150,000 and no

matching Form 990 5,268 698

4 Gross UBI $1,000 under $150,000

and total assets $10,000,000 under

$30,000,000, or Gross UBI $150,000

under $300,000 and total assets

under $30,000,000, or Gross UBI

$150,000 under $300,000 and no

matching Form 990 2,755 1,230

5 Gross UBI $300,000 or more, or

total assets $30,000,000 or more 4,430 4,430

All sample groups (1) 46,307 7,598

Size of gross unrelated business

Sample Income (UBI) on Form 990-T and Designed Achieved

group size of total assets on matching sample sample

number IRC section 501(c)(3) Form 990 rate rate

(3) (4)

1 Gross UBI $1,000 under $20,000

and total assets under $1,000,000,

or Gross UBI $1,000 under $20,000

and no matching Form 990 0.0300 0.0295

2 Gross UBI $1,000 under $20,000 and

total assets $1,000,000 under

$2,500,000, or Gross UBI $20,000

under $60,000 and total assets

under $2,500,000, or Gross UBI

$20,000 under $60,000 and no

matching Form 990 0.0600 0.0610

3 Gross UBI $1,000 under $60,000 and

total assets $2,500,000 under

$10,000,000, or Gross UBI $60,000

under $150,000 and total assets

under $10,000,000, or Gross UBI

$60,000 under $150,000 and no

matching Form 990 0.1300 0.1325

4 Gross UBI $1,000 under $150,000

and total assets $10,000,000 under

$30,000,000, or Gross UBI $150,000

under $300,000 and total assets

under $30,000,000, or Gross UBI

$150,000 under $300,000 and no

matching Form 990 0.4500 0.4465

5 Gross UBI $300,000 or more, or

total assets $30,000,000 or more 1.0000 1.0000

All sample groups (1) N/A N/A

(1) After excluding returns that were originally selected for the

sample but later rejected, the sample size was 7,577, end the

estimated population size was 46,208.

N/A – Not applicable.

Figure J

Coefficients of Variation for Selected Items,

by Size of Gross Unrelated Business Income,

Tax Year 1998

Gross Net

Unrelated Total Income Total

Size of gross unrelated business deductions (taxable) tax

business income income profit)

Coefficient of variation (percentages)

(1) (2) (3) (4)

Total 0.18 0.74 0.42 0.40

$1,000 under $10,001 (1) 2.85 8.16 6.09 7.04

$10,001 under $100,000 (1) 1.75 5.17 5.17 6.25

$100,000 under $500,000 1.17 2.49 2.79 3.01

$500,000 or more N/A N/A N/A N/A

(1) The gross unrelated business income (UBI) brackets of “$1,000 under

$10,001″ end “$10,001 under $100,000” reflect the different filing

requirements for organizations with gross UBI of $10,000 or less (only

a “partial” return was required) and all other Form 990-T filers (a more

detailed “complete” return was required). Organizations with gross UBI

below $1,000 were not required to file Form 990-T.

N/A – Not applicable.

Table 1.–Number of Returns, Gross Unrelated Business Income (UBI),

Total Deductions, Net Income (Less Deficit), Net Income (Taxable

Profit), and Total Tax, by Internal Revenue Code Section Describing

Type of Tax-Exempt Organization, Tax Year 1998

[All figures are estimates based on sample–money amounts are in

thousands of dollars]

Total

deductions (1,2)

Gross

Internal Number unrelated

Revenue of business

Code section returns income Number

(UBI) of Amount

returns

(1) (2) (3) (4)

All sections 46,208 7,584,915 45,918 8,181,766

220(e) — — — —

401(a) 875 205,694 874 138,711

408(e) 12,635 75,443 12,599 44,678

408A * 118 * 1,189 * 118 * 602

501(c)(2) 290 43,045 290 79,362

501(c)(3) 10,898 4,127,119 10,838 5,014,629

501(c)(4) 1,500 263,238 1,465 307,137

501(c)(5) 2,497 226,132 2,496 297,421

501(c)(6) 6,238 817,893 6,238 996,064

501(c)(7) 6,840 482,213 6,754 493,719

501(c)(8) 920 67,283 887 95,091

501(c)(9) 768 1,051,290 759 472,509

501(c)(10) 253 16,318 253 20,852

5o1(c)(11) — — — —

501(c)(12) 186 31,658 185 31,849

501(c)(13) * 59 * 3,013 * 59 * 2,675

501(c)(14) 125 14,975 125 18,411

501(c)(15) ** ** ** **

501(c)(16) — — — —

501(c)(17) ** ** ** **

501(c)(18) — — — —

501(c)(19) 1,961 147,742 1,938 162,384

501(c)(21) (5) — — — —

501(c)(22) ** ** ** **

501(c)(23) — — — —

501(c)(24) ** ** ** **

501(c)(25) ** ** ** **

529(a) — — — —

530(a) — — — —

Net income Total

(less deficit) tax (4)

Internal Net

Revenue Number income Number

Code section of Amount (taxable of Amount

returns (3) profit) returns

(5) (6) (7) (8) (9)

All sections 39,494 -596,853 1,669,753 24,172 464,288

220(e) — — — — —

401(a) 771 66,983 155,899 562 43,524

408(e) 11,279 30,765 32,298 9,707 8,567

408A * 118 * 568 * 588 * 118 * 171

501(c)(2) 235 -36,317 5,871 106 1,821

501(c)(3) 9,416 -887,510 654,792 3,838 174,699

501(c)(4) 1,222 -43,901 7,888 364 1,886

501(c)(5) 2,071 -71,289 23,655 933 6,143

501(c)(6) 5,047 -178,170 70,575 2,158 21,302

501(c)(7) 5,935 -11,506 89,745 4,438 19,532

501(c)(8) 697 -27,807 5,985 392 1,107

501(c)(9) 510 578,781 598,217 438 179,959

501(c)(10) 218 -4,534 662 * 61 * 100

5o1(c)(11) — — — — —

501(c)(12) 147 -191 5,484 58 1,612

501(c)(13) * 25 * 338 * 426 * 17 * 132

501(c)(14) 125 -3,436 1,367 * 85 * 302

501(c)(15) ** ** ** ** **

501(c)(16) — — — — —

501(c)(17) ** ** ** ** **

501(c)(18) — — — — —

501(c)(19) 1,667 -14,642 10,720 888 1,677

501(c)(21) (5) — — — — —

501(c)(22) ** ** ** ** **

501(c)(23) — — — — —

501(c)(24) ** ** ** ** **

501(c)(25) ** ** ** ** **

529(a) — — — — —

530(a) — — — — —

* Estimate should be used with caution because of the small number of

sample returns on which it is based.

** Data deleted to avoid disclosure of information for specific

taxpayers. However, data are included in the appropriate totals.

(1) Excludes cost of sales and services, which was subtracted from

gross receipts from sales and services in computing gross profit from

sales and services. Gross profit from sales and services was a

component of gross unrelated business income (UBI). Cost of sales and

services can include amounts attributable to depreciation, salaries and

wages, and certain other deductible items. For all exempt organizations

reporting gross UBI, cost of sales and services was $2.1 billion.

(2) Includes both deductions reported on the main part of the tax

return and expense items reported on supporting schedules.

(3) Excludes returns with net income (less deficit) equal to zero.

(4) Total tax is the regular unrelated business income tax after

reduction by any tax credits (foreign tax credit, general business

credit, prior-year minimum tax credit, and other allowable credits),

plus taxes from recapture of certain prior-year credits, the

“alternative minimum tax,” and the “proxy” tax on nondeductible

lobbying and political expenditures. The proxy tax was reported on

Form 990-T and was included in total tax; however, it had no connection

to the tax on unrelated business income or an organization’s

involvement in unrelated business activities. For exempt organizations

reporting gross UBI above the $1,000 filing threshold, total proxy tax

was $2.9 million.

(5) Prepaid legal service funds, previously described in section 501(c)

(20) of the Internal Revenue Code, were no longer tax-exempt beginning

with tax years after June 30, 1992. Therefore, these organizations are

not listed in this table.

NOTES: Detail may not add to totals because of rounding. See the

Appendix to this article for a listing of the types of tax-exempt

organizations, by the Internal Revenue Code section describing them.

Table 2.–Number of Returns, Gross Unrelated Business Income (UBI),

Total Deductions, Net Income (Less Deficit), Net Income (Taxable

Profit), and Total Tax, by Size of Gross UBI, Tax Year 1998

[All figures are estimates band on samples–money amounts are in

thousands of dollars]

Gross Total

Number unrelated deductions (1,2)

Size of gross unrelated of business

business income (UBI) returns income Number

(UBI) of Amount

returns

(1) (2) (3) (4)

Total 46,208 7,584,915 45,918 8,181,766

$1,000 under $10,001 (5) 22,124 88,072 21,972 123,954

$10,001 under $100,000 (5) 16,280 590,066 16,166 873,554

$100,000 under $500,000 5,753 1,269,423 5,738 1,707,771

$500,000 under $1,000,000 1,001 693,854 997 867,526

$1,000,000 under $5,000,000 836 1,711,502 833 2,053,544

$5,000,000 or more 214 3,231,998 212 2,555,419

Net income

(less deficit) Net

Size of gross unrelated income

business income (UBI) Number (taxable

of Amount profit

returns (3)

(5) (6) (7)

Total 39,494 -596,853 1,669,753

$1,000 under $10,001 (5) 18,269 -35,883 26,319

$10,001 under $100,000 (5) 14,272 -283,488 107,262

$100,000 under $500,000 5,128 -438,347 161,122

$500,000 under $1,000,000 885 -173,672 84,185

$1,000,000 under $5,000,000 752 -342,042 225,540

$5,000,000 or more 187 676,579 1,065,325

Total

tax (4)

Size of gross unrelated

business income (UBI) Number

of Amount

returns

(8) (9)

Total 24,172 464,288

$1,000 under $10,001 (5) 13,298 4,678

$10,001 under $100,000 (5) 7,497 21,259

$100,000 under $500,000 2,526 43,925

$500,000 under $1,000,000 422 25,501

$1,000,000 under $5,000,000 334 73,329

$5,000,000 or more 95 295,596

(1) Excludes cost of sales and services which was subtracted from

gross receipts from sales and services in computing gross profit from

sales and services. Gross profit from sales and services was a

component of gross unrelated business income (UBI). Cost of sales and

services can include amounts attributable to depreciation, salaries

and wages, and certain other deductible items. For all exempt

organizations reporting gross UBI, cost of sales and services was $2.1

billion.

(2) Includes both deductions reported on the main part of the tax

return and expense items reported on supporting schedules.

(3) Excludes returns with net income (less deficit) equal to zero.

(4) Total tax is the regular unrelated business income tax after

reduction by any tax credits (foreign tax credit, general business

credit, prior-year minimum tax credit, and other allowable credits),

plus taxes from recapture of certain prior-year credits, the

“alternative minimum tax,” and the “proxy” tax on nondeductible

lobbying and political expenditures. The proxy tax was reported on

Form 990-T and was included in total tax; however, it had no connection

to the tax on unrelated business income or an organization’s

involvement in unrelated business activities. For exempt organizations

reporting gross UBI above the $1,000 filing threshold, total proxy tax

was $2.9 million.

(5) The gross unrelated business income (UBI) brackets of “$1,000 under

$10,001″ and “$10,001 under $100,000” reflect the different filing

requirements for organizations with gross UBI of $10,000 or less (only

a “partial” return was required) and all other Form 990-T filers (a

more detailed “complete” return was required). Organizations with gross

UBI below $1,000 were not required to file Form 990-T.

NOTE: Detail may not add to totals because of rounding.

Table 3.–Number of Returns, Gross Unrelated Business Income (UBI),

Total Deductions, Net Income (Less Deficit), and Total Tax, by Size

of Net Income (Taxable Profit) or Deficit, Tax Year 1998

[All figures are estimates based on samples–money amounts are in

thousands of dollars]

Total

Gross deductions (1,2)

unrelated

Size of net income Number business Number

(taxable profit) of income of

or deficit returns (UBI) returns Amount

(1) (2) (3) (4)

Total 46,208 7,584,915 45,918 8,181,766

Deficit 15,162 3,282,002 15,162 5,548,608

Zero (5) 6,714 796,292 6,714 796,292

$1 under $1,000 6,557 61,993 6,557 59,005

$1,000 under $10,000 11,521 300,271 11,369 255,302

$10,000 under $100,000 5,204 704,056 5,089 546,654

$100,000 under $500,000 808 575,050 793 403,035

$500,000 under $1,000,000 102 164,174 98 92,253

$1,000,000 or more 140 1,701,076 135 480,617

Net income Total

(less deficit) tax (4)

Size of net income Number Number

(taxable profit) of of

or deficit returns (3) Amount returns Amount

(5) (6) (7) (8)

Total 39,494 -596,853 24,172 464,288

Deficit 15,162 -2,266,605 178 1,129

Zero (5) — — 31 521

$1 under $1,000 6,557 2,988 6,518 445

$1,000 under $10,000 11,521 44,969 11,269 7,900

$10,000 under $100,000 5,204 157,402 5,135 29,863

$100,000 under $500,000 808 172,014 799 54,821

$500,000 under $1,000,000 102 71,921 102 24,211

$1,000,000 or more 140 1,220,459 140 345,399

(1) Excludes cost of sales and services, which was subtracted from

gross receipts from sales and services in computing gross profit from

sales and services. Gross profit from sales and services was a

component of gross unrelated business income (UBI). Cost of sales and

services can include amounts attributable to depreciation, salaries and

wages, and certain other deductible items. For all exempt organizations

reporting gross UBI, cost of sales and services was $2.1 billion.

(2) Includes both deductions reported on the main part of the tax

return and expense items reported on supporting schedules.

(3) Excludes returns with net income (less deficit) equal to zero.

(4) Total tax is the regular unrelated business income tax after

reduction by any tax credits (foreign tax credit, general business

credit, prior-year minimum tax credit, and other allowable credits),

plus taxes from recapture of certain prior-year credits, the

“alternative minimum tax,” and the “proxy” tax on nondeductible

lobbying and political expenditures. The proxy tax was reported

on Form 990-T and was included in total tax; however, it had no

connection to the tax on unrelated business income or an

organization’s involvement in unrelated business activities.

For exempt organizations reporting gross UBI above the $1,000

filing threshold, total proxy tax was $2.9 million.

(5) Includes “breakeven” returns with equal amounts of gross

unrelated business income and total deductions.

NOTE: Detail may not add to totals because of rounding.

Table 4.–Returns with Positive Net Income (Taxable Profit):

Number of Returns, Gross Unrelated Business Income (UBI),

Total Deductions, Net Income (Taxable Profit), and Total Tax,

by Type of Organization and Size of Gross UBI, Tax Year 1998

[All figures are estimates based on samples–money amounts are

in thousands of dollars]

Gross

Type of organization and Number unrelated

size of gross unrelated of business

business income (UBI) returns income

(UBI)

(1) (2)

ALL ORGANIZATIONS

Total 24,332 3,506,620

$1,000 under $10,001 (4) 13,467 54,501

$10,001 under $100,000 (4) 7,524 252,405

$100,000 under $500,000 2,525 560,515

$500,000 under $1,000,000 421 291,536

$1,000,000 under $5,000,000 313 648,101

$5,000,000 or more 81 1,699,562

TAX-EXEMPT CORPORATIONS

Total 13,288 2,339,196

$1,000 under $10,001 (4) 4,205 19,049

$10,001 under $100,000 (4) 6,099 215,948

$100,000 under $500,000 2,319 512,455

$500,000 under $1,000,000 375 260,217

$1,000,000 under $5,000,000 252 519,376

$5,000,000 or more 38 812,151

TAX-EXEMPT TRUSTS

Total 11,044 1,167,424

$1,000 under $10,001 (4) 9,262 35,453

$10,001 under $100,000 (4) 1,425 36,457

$100,000 under $500,000 206 48,060

$500,000 under $1,000,000 46 31,319

$1,000,000 under $5,000,000 61 128,725

$5,000,000 or more 43 887,411

Total

Type of organization and deductions (1,2)

size of gross unrelated

business income (UBI) Number

of

returns Amount

(3) (4)

ALL ORGANIZATIONS

Total 24,042 1,836,866

$1,000 under $10,001 (4) 13,316 28,182

$10,001 under $100,000 (4) 7,410 145,143

$100,000 under $500,000 2,511 399,393

$500,000 under $1,000,000 417 207,351

$1,000,000 under $5,000,000 310 422,561

$5,000,000 or more 79 634,237

TAX-EXEMPT CORPORATIONS

Total 13,047 1,480,476

$1,000 under $10,001 (4) 4,087 7,730

$10,001 under $100,000 (4) 5,985 133,234

$100,000 under $500,000 2,314 389,538

$500,000 under $1,000,000 373 201,095

$1,000,000 under $5,000,000 250 405,296

$5,000,000 or more 38 343,582

TAX-EXEMPT TRUSTS

Total 10,995 356,391

$1,000 under $10,001 (4) 9,228 20,452

$10,001 under $100,000 (4) 1,425 11,908

$100,000 under $500,000 197 9,855

$500,000 under $1,000,000 44 6,255

$1,000,000 under $5,000,000 60 17,265

$5,000,000 or more 41 290,655

Total tax (3)

Type of organization and Net

size of gross unrelated income

business income (UBI) (taxable Number

profit) of Amount

returns

(5) (8) (7)

ALL ORGANIZATIONS

Total 1,669,753 23,963 462,639

$1,000 under $10,001 (4) 26,319 13,297 4,678

$10,001 under $100,000 (4) 107,262 7,405 20,742

$100,000 under $500,000 161,122 2,461 43,473

$500,000 under $1,000,000 84,185 408 25,348

$1,000,000 under $5,000,000 225,540 312 73,053

$5,000,000 or more 1,065,325 81 295,345

TAX-EXEMPT CORPORATIONS

Total 858,720 12,987 221,801

$1,000 under $10,001 (4) 11,319 4,102 1,632

$10,001 under $100,000 (4) 82,713 5,980 12,832

$100,000 under $500,000 122,917 2,254 30,148

$500,000 under $1,000,000 59,122 362 17,262

$1,000,000 under $5,000,000 114,081 251 37,538

$5,000,000 or more 468,569 38 122,388

TAX-EXEMPT TRUSTS

Total 811,033 10,976 240,838

$1,000 under $10,001 (4) 15,000 9,194 3,046

$10,001 under $100,000 (4) 24,549 1,425 7,910

$100,000 under $500,000 38,205 206 13,325

$500,000 under $1,000,000 25,064 46 8,085

$1,000,000 under $5,000,000 111,460 61 35,515

$5,000,000 or more 596,756 43 172,958

(1) Excludes cost of sales and services, which was subtracted from

gross receipts from sales and services in computing gross profit from

sales and services. Gross profit from sales and services was a

component of gross unrelated business income (UBI). Cost of sales end

services can include amounts attributable to depreciation, salaries

and wages, and certain other deductible items. For exempt organizations

reporting net income (taxable profit), cost of sales end services was

$714.0 million, of which $701.3 million were attributable to tax-exempt

corporations.

(2) Includes both deductions reported on the main part of the tax

return and expense items reported on supporting schedules.

(3) Total tax is the regular unrelated business income tax after

reduction by any tax credits (foreign tax credit, general business

credit, prior-year minimum tax credit, and other allowable credits),

plus taxes from recapture of certain prior-year credits, the

“alternative minimum tax,” and the “proxy” tax on nondeductible

lobbying and political expenditures. The proxy tax was reported on

Form 990-T and was included in total tax; however, it had no

connection to the tax on unrelated business income or an

organization’s involvement in unrelated business activities.

For exempt organizations reporting positive net income (taxable

profit), total proxy tax was $1.9 million, all of which was

attributable to tax-exempt corporations.

(4) The gross unrelated business income (UBI) brackets of “$1,000

under $10,001″ and “$10,001 under $100,000” reflect the different

filing requirements for organizations with gross UBI of $10,000 or

less (only a “partial” return was required) end all other Form

990-T filers (a more detailed “complete” return was required).

Organizations with gross UBI below $1,000 were not required to

file Form 990-T.

NOTE: Detail may not add to totals because of rounding.

Table 5.–Number of Returns, Gross Unrelated Business Income (UBI),

Total Deductions, Net Income (Less Deficit), Net Income (Taxable

Profit), and Total Tax, by Primary Unrelated Business Activity or

Industrial Grouping, Tax Year 1998

[All figures are estimates based on samples–money amounts are in

thousands of dollars]

Gross

Number unrelated

Primary unrelated business activity of business

or industrial grouping returns income

(UBI)

(1) (2)

All activities and groupings 46,208 7,584,915

Agriculture, forestry, hunting,

and fishing 314 27,324

Mining 131 15,581

Utilities 65 22,869

Construction * 35 * 4,599

Manufacturing 299 57,043

Wholesale trade 84 10,636

Retail trade 1,344 332,610

Transportation and warehousing 47 5,755

Information 1,985 408,675

Finance and insurance, total 18,984 2,369,744

Unrelated debt-financed activities,

other than rental of real estate 4,555 162,320

Investment activities of Code section

501(c)(7), (9), and (17) organizations 3,930 1,194,561

Passive income activities with

controlled organizations 476 87,871

Other finance and insurance 10,023 924,992

Real estate and rental and leasing, total 5,186 610,380

Rental of personal property 501 48,069

Other real estate and rental and leasing 4,685 562,311

Professional, scientific, and

technical services 7,200 1,392,248

Management of companies and enterprises 32 10,840

Administrative and support and waste

management and remediation services 722 193,081

Educational services 194 99,486

Healthcare and social assistance 1,173 870,280

Arts, entertainment, and recreation 4,192 508,763

Accommodation and food services 3,159 434,078

Other services 494 109,388

Exploited exempt activities 326 83,711

Not allocable 242 17,823

Total

deductions (1,2)

Primary unrelated business activity

or industrial grouping Number

of Amount

returns

(3) (4)

All activities and groupings 45,918 8,181,766

Agriculture, forestry, hunting,

and fishing 314 50,549

Mining 131 9,103

Utilities 64 34,327

Construction * 35 * 3,202

Manufacturing 295 85,832

Wholesale trade 84 13,613

Retail trade 1,336 526,808

Transportation and warehousing 47 7,353

Information 1,985 512,982

Finance and insurance, total 18,868 1,231,152

Unrelated debt-financed activities,

other than rental of real estate 4,554 119,959

Investment activities of Code section

501(c)(7), (9), and (17) organizations 3,888 584,419

Passive income activities with

controlled organizations 441 74,403

Other finance and insurance 9,985 452,371

Real estate and rental and leasing, total 5,177 856,501

Rental of personal property 501 56,621

Other real estate and rental and leasing 4,676 799,880

Professional, scientific, and

technical services 7,199 1,711,802

Management of companies and enterprises 32 4,727

Administrative and support and waste

management and remediation services 721 247,418

Educational services 194 136,141

Healthcare and social assistance 1,169 1,235,927

Arts, entertainment, and recreation 4,107 635,770

Accommodation and food services 3,135 556,984

Other services 459 206,856

Exploited exempt activities 326 104,440

Not allocable 241 10,281

Net income

(less deficit)

Primary unrelated business activity

or industrial grouping Number

of Amount

returns (3)

(5) (6)

All activities and groupings 39,494 -596,853

Agriculture, forestry, hunting,

and fishing 312 -23,225

Mining 129 6,478

Utilities 64 -11,458

Construction * 33 * 1,397

Manufacturing 263 -28,789

Wholesale trade 49 -2,977

Retail trade 1,263 -194,198

Transportation and warehousing 21 -1,598

Information 1,455 -104,306

Finance and insurance, total 16,529 1,138,592

Unrelated debt-financed activities,

other than rental of real estate 4,513 42,361

Investment activities of Code section

501(c)(7), (9), and (17) organizations 3,308 610,142

Passive income activities with

controlled organizations 462 13,468

Other finance and insurance 8,247 472,621

Real estate and rental and leasing, total 4,507 -246,121

Rental of personal property 477 -8,553

Other real estate and rental and leasing 4,030 -237,569

Professional, scientific, and

technical services 5,498 -319,554

Management of companies and enterprises 32 6,113

Administrative and support and waste

management and remediation services 670 -54,336

Educational services 188 -36,656

Healthcare and social assistance 1,053 -365,648

Arts, entertainment, and recreation 3,710 -127,007

Accommodation and food services 2,789 -122,906

Other services 449 -97,468

Exploited exempt activities 273 -20,729

Not allocable 207 7,543

Total

tax (4)

Net

Primary unrelated business activity income

or industrial grouping (taxable Number

profit) of Amount

returns

(7) (8) (9)

All activities and groupings 1,669,753 24,172 464,288

Agriculture, forestry, hunting,

and fishing 3,625 183 998

Mining 8,932 113 2,674

Utilities 2,291 * 60 * 812

Construction * 1,517 * 29 * 400

Manufacturing 9,221 79 2,578

Wholesale trade 259 4 77

Retail trade 22,531 453 6,772

Transportation and warehousing 211 * 11 * 36

Information 29,582 488 6,983

Finance and insurance, total 1,284,164 13,857 358,342

Unrelated debt-financed activities,

other than rental of real estate 75,237 4,348 20,978

Investment activities of Code section

501(c)(7), (9), and (17) organizations 632,126 3,012 186,566

Passive income activities with

controlled organizations 29,289 369 7,931

Other finance and insurance 547,512 6,127 142,867

Real estate and rental and leasing, total 75,620 2,417 20,037

Rental of personal property 4,849 305 1,028

Other real estate and rental and leasing 70,771 2,112 19,009

Professional, scientific, and

technical services 83,283 2,266 25,784

Management of companies and enterprises 8,046 29 2,654

Administrative and support and waste

management and remediation services 12,176 182 3,351

Educational services 4,465 79 1,341

Healthcare and social assistance 33,642 401 10,097

Arts, entertainment, and recreation 38,638 1,912 8,390

Accommodation and food services 29,915 1,143 6,899

Other services 4,008 217 856

Exploited exempt activities 9,169 153 2,484

Not allocable 8,456 96 2,724

* Estimate should be used with caution because of the small number of

sample returns on which it is based.

(1) Excludes cost of sales and services, which was subtracted from

gross receipts from sales and services in computing gross profit from

sales and services. Gross profit from sales and services was a

component of gross unrelated business income (UBI). Cost of sales and

services can include amounts attributable to depreciation, salaries

and wages, and certain other deductible items. For all exempt

organizations reporting gross UBI, cost of sales and services

was $2.1 billion.

(2) Includes both deductions reported on the main part of the tax

return and expense items reported on supporting schedules.

(3) Excludes returns with net income (less deficit) equal to zero.

(4) Total tax is the regular unrelated business income tax after

reduction by any tax credits (foreign tax credit, general business

credit, prior-year minimum tax credit and other allowable credits),

plus taxes from recapture of certain prior-year credits, the

“alternative minimum tax,” and the “proxy” tax on nondeductible

lobbying and political expenditures. The proxy tax was reported on

Form 990-T and was included in total tax; however, it had no

connection to the tax on unrelated business income or an

organization’s involvement in unrelated business activities.

For exempt organizations reporting gross UBI above the $1,000

filing threshold, total proxy tax was $2.9 million.

NOTE: Detail may not add to totals because of rounding.

Table 6.–Sources of Gross Unrelated Business Income (UBI), by

Size of Gross UBI, Tax Year 1998

[All figures are estimates based on samples–money amounts are

in thousands of dollars]

Size of gross unrelated Gross unrelated

business income (UBI) business income (UBI)

Number

of

returns Amount

(1) (2)

Total 46,208 7,584,915

$1,000 under $10,001 (2) 22,124 88,072

$10,001 or more, total (2,3) 24,084 7,496,843

$10,001 under $100,000 (2) 16,280 590,066

$100,000 under $500,000 5,753 1,269,423

$500,000 under $1,000,000 1,001 693,854

$1,000,000 under $5,000,000 836 1,711,502

$5,000,000 or more 214 3,231,998

Sources of gross unrelated

business income (UBI)

Size of gross unrelated Gross profit (less loss)

business income (UBI) from sales and services

Number

of

returns Amount

(3) (4)

Total 15,984 3,326,781

$1,000 under $10,001 (2) 3,039 11,569

$10,001 or more, total (2,3) 12,945 3,315,212

$10,001 under $100,000 (2) 7,993 274,449

$100,000 under $500,000 3,624 676,211

$500,000 under $1,000,000 655 368,022

$1,000,000 under $5,000,000 550 867,867

$5,000,000 or more 123 1,128,663

Sources of gross unrelated

business income (UBI)

Size of gross unrelated Capital gain

business income (UBI) net income

Number

of

returns Amount

(5) (6)

Total 877 572,955

$1,000 under $10,001 (2) * 37 * 218

$10,001 or more, total (2,3) 740 572,737

$10,001 under $100,000 (2) 425 8,854

$100,000 under $500,000 158 22,675

$500,000 under $1,000,000 51 18,738

$1,000,000 under $5,000,000 68 72,832

$5,000,000 or more 39 449,639

Sources of gross unrelated

business income (UBI)

Size of gross unrelated Net capital loss

business income (UBI) (trusts only)

Number

of

returns Amount

(7) (8)

Total 28 98

$1,000 under $10,001 (2) — —

$10,001 or more, total (2,3) 28 98

$10,001 under $100,000 (2) — —

$100,000 under $500,000 * 19 * 73

$500,000 under $1,000,000 4 9

$1,000,000 under $5,000,000 5 15

$5,000,000 or more — —

Sources of gross unrelated

business income (UBI)

Size of gross unrelated Net gain (less loss),

business income (UBI) sales of noncapital

assets (4)

Number

of

returns Amount

(9) (10)

Total 314 3,264

$1,000 under $10,001 (2) * 68 * 150

$10,001 or more, total (2,3) 246 3,114

$10,001 under $100,000 (2) 147 1,443

$100,000 under $500,000 54 1,923

$500,000 under $1,000,000 20 443

$1,000,000 under $5,000,000 17 -537

$5,000,000 or more 8 -157

Sources of gross unrelated

business income (UBI)

Size of gross unrelated Income (less loss) from

business income (UBI) partnerships ans S

corporations

Number

of

returns Amount

(11) (12)

Total 13,878 627,537

$1,000 under $10,001 (2) 11,797 41,982

$10,001 or more, total (2,3) 2,080 585,556

$10,001 under $100,000 (2) 1,517 28,747

$100,000 under $500,000 332 42,301

$500,000 under $1,000,000 72 12,568

$1,000,000 under $5,000,000 107 43,813

$5,000,000 or more 53 458,127

Sources of gross unrelated

business income (UBI)

Size of gross unrelated Rental

business income (UBI) income (5)

Number

of

returns Amount

(13) (14)

Total 4,235 171,275

$1,000 under $10,001 (2) 1,256 5,317

$10,001 or more, total (2,3) 2,979 165,958

$10,001 under $100,000 (2) 2,058 40,136

$100,000 under $500,000 727 52,814

$500,000 under $1,000,000 98 21,691

$1,000,000 under $5,000,000 78 38,693

$5,000,000 or more 18 12,624

Sources of gross unrelated

business income (UBI)

Size of gross unrelated Unrelated debt-

business income (UBI) finance income

Number

of

returns Amount

(15) (16)

Total 2,892 334,156

$1,000 under $10,001 (2) 686 2,814

$10,001 or more, total (2,3) 2,205 331,342

$10,001 under $100,000 (2) 1,375 33,523

$100,000 under $500,000 606 82,322

$500,000 under $1,000,000 102 34,866

$1,000,000 under $5,000,000 98 84,971

$5,000,000 or more 24 95,661

Sources of gross unrelated

business income (UBI)

Size of gross unrelated investment income

business income (UBI) (less loss) (6)

Number

of

returns Amount

(17) (18)

Total 6,061 795,020

$1,000 under $10,001 (2) 2,746 9,476

$10,001 or more, total (2,3) 3,315 785,544

$10,001 under $100,000 (2) 1,992 32,713

$100,000 under $500,000 1,013 67,150

$500,000 under $1,000,000 168 46,635

$1,000,000 under $5,000,000 107 121,719

$5,000,000 or more 36 517,327

Sources of gross unrelated

business income (UBI) (1)

Income from Exploited exempt

controlled activity income,

organizations (7) except advertising

Size of gross unrelated Number Number

business income (UBI) of Amount of Amount

returns returns

(19) (20) (21) (22)

Total 1,509 87,846 957 114,414

$1,000 under $10,001 (2) 436 1,169 * 155 * 925

$10,001 or more, total (2,3) 1,073 86,677 802 113,499

$10,001 under $100,000 (2) 709 10,781 417 10,372

$100,000 under $500,000 252 17,131 239 24,159

$500,000 under $1,000,000 41 5,775 66 17,291

$1,000,000 under $5,000,000 57 27,753 68 46,657

$5,000,000 or more 14 25,236 12 15,010

Sources of gross unrelated

business income (UBI) (1)

Advertising Other income

income (less loss)

Size of gross unrelated Number Number

business income (UBI) of Amount of Amount

returns returns

(23) (24) (25) (26)

Total 8,432 1,227,675 5,215 324,088

$1,000 under $10,001 (2) 2,778 10,695 1,173 3,757

$10,001 or more, total (2,3) 5,654 1,218,979 4,042 320,332

$10,001 under $100,000 (2) 3,732 105,891 2,533 43,159

$100,000 under $500,000 1,363 206,047 1,117 76,764

$500,000 under $1,000,000 271 129,016 192 38,817

$1,000,000 under $5,000,000 235 293,484 171 114,265

$5,000,000 or more 53 482,541 30 47,327

* Estimate should be used with caution because of the small number of

sample returns on which it is based.

(1) For definitions of the sources of gross unrelated business income,

see the Explanation of Selected Terms section of this article.

(2) The gross unrelated business income (UBI) brackets of “$1,000 under

$10,001″ and “$10,001 under $100,000” reflect the different filing

requirements for organizations with gross UBI of $10,000 or less (only

a “partial” return was required) and all other Form 990-T filers (a

more detailed “complete” return was required). Organizations with gross

UBI below $1,000 were not required to file Form 990-T.

(3) All organizations were required to report each income item, as

shown in columns 3 through 26. However, only organizations with gross

UBI over $10,000 were required to report each deduction shown in

columns 14 through 45, 48, 49, and 54 through 59 of Table 7. Income

totals for these larger organizations with gross UBI over $10,000 are

shown in order to facilitate comparison with Table 7.

(4) Property other than capital assets generally included property of a

business nature, in contrast to personal and investment property, which

were capital assets.

(5) Income from real property and personal property leased with real

property.

(6) Reported by Internal Revenue Code section 501(c)(7), (9), and (17)

organizations only.

(7) Annuities, interest, rents, and royalties.

NOTE: Detail may not add to totals because of rounding.

Table 7.–Types of Deductions, by Size of Gross Unrelated Business

Income (UBI), Tax Year 1998

[All figures are estimates based on samples–money amounts are in

thousands of dollars]

All organizations

Total

deductions (1,2)

Size of gross unrelated Total

business income (UBI) number Number

of of Amount

returns returns

(1) (2) (3)

Total 46,208 45,918 8,181,768

$1,000 under $10,001 (3) 22,124 21,972 123,954

$10,001 under $100,000 (3) 16,280 16,166 873,554

$100,000 under $500,000 5,753 5,738 1,707,771

$500,000 under $1,000,000 1,001 997 867,526

$1,000,000 under $5,000,000 836 833 2,053,544

$5,000,000 or more 214 212 2,555,419

Organizations with gross

unrelated business income

(UBI) of $1,000 under $10,001 (3)

Total Net operating

deductions (2,4) loss carryover

Size of gross unrelated

Business income (UBI) Number Number

of Amount of Amount

returns returns

(4) (5) (6) (7)

Total 21,972 123,954 6,165 58,894

$1,000 under $10,001 (3) 21,972 123,954 6,165 58,894

$10,001 under $100,000 (3) — — — —

$100,000 under $500,000 — — — —

$500,000 under $1,000,000 — — — —

$1,000,000 under $5,000,000 — — — —

$5,000,000 or more — — — —

Organizations with gross

unrelated business income

(UBI) of $1,000 under $10,001 (3)

Specific Total

deduction deductions (2,5)

Size of gross unrelated

business income (UBI) Number Number

of Amount of Amount

returns returns

(8) (9) (10) (11)

Total 15,765 14,580 23,946 8,087,812

$1,000 under $10,001 (3) 15,765 14,580 — —

$10,001 under $100,000 (3) — — 16,166 873,554

$100,000 under $500,000 — — 5,738 1,707,771

$500,000 under $1,000,000 — — 997 867,526

$1,000,000 under $5,000,000 — — 833 2,053,544

$5,000,000 or more — — 212 2,555,419

Organizations with gross

unrelated business income

(UBI) of $1,000 under $10,001 (3)

Deductions directly connected with UBI

Allocable to

Total rental

income (6)

Size of gross unrelated

business income (UBI) Number Number

of Amount of Amount

returns returns

(12) (13) (14) (15)

Total 22,565 7,338,661 1,293 96,219

$1,000 under $10,001 (3) — — — —

$10,001 under $100,000 (3) 15,037 839,178 875 20,517

$100,000 under $500,000 5,570 1,632,576 311 31,368

$500,000 under $1,000,000 956 801,127 48 13,309

$1,000,000 under $5,000,000 799 1,926,206 47 24,443

$5,000,000 or more 203 2,139,575 11 6,582

Organizations with gross

unrelated business income

(UBI) of $1,000 under $10,001 (3)

Deductions directly connected with UBI

Allocable

to unrelated Allocable to

debt-financed investment

income (6) income (6,7)

Size of gross unrelated

business income (UBI) Number Number

of Amount of Amount

returns returns

(16) (17) (18) (19)

Total 1,923 282,165 984 54,634

$1,000 under $10,001 (3) — — — —

$10,001 under $100,000 (3) 1,174 38,936 393 3,214

$100,000 under $500,000 540 78,323 439 6,115

$500,000 under $1,000,000 96 30,119 77 2,436

$1,000,000 under $5,000,000 93 79,247 54 4,931

$5,000,000 or more 20 55,540 21 37,937

Organizations with gross

unrelated business income

(UBI) of $1,000 under $10,001 (3)

Deductions directly connected with UBI

Allocable

to income Allocable to exploited

from controlled exempt activity income,

organizations (6) except advertisings (6)

Size of gross unrelated

business income (UBI) Number Number

of Amount of Amount

returns returns

(20) (21) (22) (23)

Total 478 61,430 699 102,183

$1,000 under $10,001 (3) — — — —

$10,001 under $100,000 (3) 295 8,320 351 8,693

$100,000 under $500,000 123 9,833 214 21,142

$500,000 under $1,000,000 18 4,475 60 14,396

$1,000,000 under $5,000,000 32 20,600 62 45,049

$5,000,000 or more 10 18,201 11 12,873

Organizations with gross

unrelated business income

(UBI) of $1,000 under $10,001 (3)

Deductions directly connected with UBI

Direct Compensation of

advertising officers, directors,

costs (6) and trustees

Size of gross unrelated

business income (UBI) Number Number

of Amount of Amount

returns returns

(24) (25) (26) (27)

Total 5,218 887,327 2,087 53,348

$1,000 under $10,001 (3) — — — —

$10,001 under $100,000 (3) 3,412 84,049 1,180 12,825

$100,000 under $500,000 1,278 157,706 674 14,639

$500,000 under $1,000,000 258 92,181 103 4,574

$1,000,000 under $5,000,000 221 210,362 99 6,399

$5,000,000 or more 50 343,029 31 14,911

Organizations with gross

unrelated business income

(UBI) of $1,000 under $10,001 (3)

Deductions directly connected with UBI

Salaries and wages Repairs

Size of gross unrelated

business income (UBI) Number Number

of Amount of Amount

returns returns

(28) (29) (30) (31)

Total 10,544 1,171,542 7,089 78,521

$1,000 under $10,001 (3) — — — —

$10,001 under $100,000 (3) 6,045 114,207 4,004 11,791

$100,000 under $500,000 3,329 305,373 2,296 26,309

$500,000 under $1,000,000 564 139,191 393 8,997

$1,000,000 under $5,000,000 500 328,847 326 16,949

$5,000,000 or more 106 284,023 70 14,474

Organizations with gross

unrelated business income

(UBI) of $1,000 under $10,001 (3)

Deductions directly connected with UBI

Bad debts Interest

Size of gross unrelated

business income (UBI) Number Number

of Amount of Amount

returns returns

(32) (33) (34) (35)

Total 834 29,399 2,829 81,111

$1,000 under $10,001 (3) — — — —

$10,001 under $100,000 (3) 319 383 1,473 8,226

$100,000 under $500,000 294 2,494 1,032 17,224

$500,000 under $1,000,000 85 1,782 136 4,909

$1,000,000 under $5,000,000 105 13,232 149 22,175

$5,000,000 or more 31 11,508 39 28,577

Organizations with gross

unrelated business income

(UBI) of $1,000 under $10,001 (3)

Deductions directly connected with UBI

Taxes and

licenses paid Depreciation

deduction

Size of gross unrelated

business income (UBI) Number Number

of Amount of Amount

returns returns

(36) (37) (38) (39)

Total 11,625 192,368 7,767 171,419

$1,000 under $10,001 (3) — — — —

$10,001 under $100,000 (3) 7,371 28,029 4,630 19,952

$100,000 under $500,000 3,325 63,800 2,268 51,779

$500,000 under $1,000,000 467 22,187 408 19,184

$1,000,000 under $5,000,000 366 27,421 376 43,055

$5,000,000 or more 96 50,930 85 37,450

Organizations with gross

unrelated business income

(UBI) of $1,000 under $10,001 (3)

Deductions directly connected with UBI

Contributions

Depletion to deferred

compensation plans

Size of gross unrelated

business income (UBI) Number Number

of Amount of Amount

returns returns

(40) (41) (42) (43)

Total 119 2,085 937 9,170

$1,000 under $10,001 (3) — — — —

$10,001 under $100,000 (3) * 105 * 327 501 455

$100,000 under $500,000 * 7 * 163 285 1,376

$500,000 under $1,000,000 ** ** 73 977

$1,000,000 under $5,000,000 ** 4 ** 1,030 65 2,533

$5,000,000 or more 3 565 13 3,828

Organizations with gross

unrelated business income

(UBI) of $1,000 under $10,001 (3)

Deductions directly connected with UBI

Contributions Net operating

to employee loss

benefit plans carryover

Size of gross unrelated

business income (UBI) Number Number

of Amount of Amount

returns returns

(44) (45) (46) (47)

Total 4,532 225,386 7,163 1,783,288

$1,000 under $10,001 (3) — — — —

$10,001 under $100,000 (3) 1,993 5,002 4,665 312,977

$100,000 under $500,000 1,732 24,409 1,727 506,744

$500,000 under $1,000,000 364 15,146 357 216,491

$1,000,000 under $5,000,000 360 42,989 326 447,288

$5,000,000 or more 83 137,841 88 299,788

Organizations with gross

unrelated business income

(UBI) of $1,000 under $10,001 (3)

Deductions directly

connected with UBI Deductions not

directly connected

with UBI

Other deductions

Total

Size of gross unrelated

business income (UBI) Number Number

of Amount of Amount

returns returns

(48) (49) (50) (51)

Total 14,143 2,056,997 13,220 719,151

$1,000 under $10,001 (3) — — — —

$10,001 under $100,000 (3) 8,619 161,276 8,934 34,376

$100,000 under $500,000 4,070 313,777 3,200 75,195

$500,000 under $1,000,000 707 210,496 552 66,399

$1,000,000 under $5,000,000 601 589,931 418 127,338

$5,000,000 or more 146 781,517 116 415,844

Organizations with gross

unrelated business income

(UBI) of $1,000 under $10,001 (3)

Deductions not directly connected with UBI

Specific deduction Contributions

Size of gross unrelated

business income (UBI) Number Number

of Amount of Amount

returns returns

(52) (53) (54) (55)

Total 10,908 10,630 1,640 50,466

$1,000 under $10,001 (3) — — — —

$10,001 under $100,000 (3) 7,608 7,369 954 3,410

$100,000 under $500,000 2,520 2,485 505 8,247

$500,000 under $1,000,000 409 406 76 12,133

$1,000,000 under $5,000,000 293 292 75 5,047

$5,000,000 or more 78 78 30 21,629

Organizations with gross

unrelated business income

(UBI) of $1,000 under $10,001 (3)

Deductions not directly connected with UBI

Set-asides (7) Excess exempt

expenses

Size of gross unrelated

business income (UBI) Number Number

of Amount of Amount

returns returns

(56) (57) (58) (59)

Total 416 386,989 2,412 271,066

$1,000 under $10,001 (3) — — — —

$10,001 under $100,000 (3) 224 4,419 1,355 19,178

$100,000 under $500,000 107 20,022 713 44,440

$500,000 under $1,000,000 40 23,898 159 29,962

$1,000,000 under $5,000,000 32 52,931 148 69,068

$5,000,000 or more 13 285,719 37 108,417

* Estimate should be used with caution because of the small number

of sample returns on which it is based.

** Not shown to avoid disclosure of information about specific

taxpayers. However, the data are combined with data in an adjacent

size class, as appropriate, and included in the appropriate totals.

(1) Excludes cost of sales end services, which was subtracted from

gross receipts from sales and services in computing gross profit

from sales and services. Gross profit from sales and services was a

component of gross unrelated business Income (UBI). Cost of sales

and services can include amounts attributable to depreciation,

salaries and wages, and certain other deductible items. For all

exempt organizations reporting gross UBI, cost of sales and services

was $2.1 billion.

(2) Includes both deductions reported on the main part of the tax

return and expense items reported on supporting schedules.

(3) Organizations with gross UBI between $1,080 (the filing

threshold) and $10,000 were required to report only totals for

expenses end deductions (except for the specific deduction

and net operating loss carryover, which all organizations reported

separately). Organizations with gross UBI over $10,000 ware required

to report each expense and deduction item separately, as shown

in columns 14 through 45, 48, 49, and 54 through 59.

(4) Excludes $40.1 million of cost of sales and services reported

by organizations with gross UBI of $10,000 or less. See footnote

1 for explanation.

(5) Excludes $2.0 billion of cost of sales and services reported

by organizations with gross UBI over $10,000. See footnote 1 for

explanation.

(6) This deduction Wall required to be reported as a lump-sum total

only and may have included component deductions that were of the

same type shown elsewhere in this table. For example, if deductions

“allocable to rental income” included depreciation, then that amount

of depreciation would not be included in the separately reported item,

“depreciation.” Therefore, the total amount shown for some of the

separately reported deductions may be understated.

(7) Reported by Internal Revenue Code section 501(c)(7), (9), and (17)

organizations only.

NOTE: Detail may not add to totals because of rounding.

Notes and References

[1] The unrelated business income tax (UBIT) for nonprofit corporations was determined based on the regular corporate income tax rates in effect for Tax Year 1998. Nonprofit trusts were generally taxed at the regular individual (single status) income tax rates established for estates and trusts for Tax Year 1998. Trusts that were eligible for the maximum 28-percent tax rate on capital gain net income figured their tax based on Schedule D of Form 1041, U.S. Income Tax Return for Estates and Trusts. The corporate and trust tax-rate schedules are included in the definition of Unrelated Business Income Tax, found in the Explanation of Selected Terms section of this article.

[2] The amount of total tax liability originally reported on Forms 990-T, as stated in these statistics, may not necessarily be the amount ultimately paid to the Internal Revenue Service (IRS). Changes in tax liability assessments can be made after the original return is filed, either by the taxpayer on an amended return, by the IRS after examination, or by rulings of the U.S. tax courts after litigation.

[3] The $10.7 million of total proxy tax was reported on 638 Forms 990-T filed for Tax Year 1998. These statistics are from an unpublished tabulation of IRS Business Returns Transaction File records.

[4] Information related to Teachers Insurance and Annuity Association of America’s Form 990-T return filed for Tax Year 1997 is being disclosed with their permission.

[5] See Executive Office of the President, Office of Management and Budget, North American Industry Classification System: United States, 1997, Berman Press, Lanham, MD, 1998.

[6] Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts (NIPA) Tables, Table 1.9, Relation of Gross Domestic Product, Gross National Product, Net National Product, National Income, and Personal Income, February 28, 2002. This and other NIPA tables can be accessed from http://www.bea.doc.gov/bea/dn/nipaweb. According to Table 1.9, the amount of gross domestic product for 1998 was $8,781.5 billion.

[7] Eighty-six percent of the $1.2 billion of gross UBI associated with organizations having a primary activity of “investment activities of Code section 501(c)(7), (9), or (17) organizations” was reported by Internal Revenue Code section 501(c)(9) voluntary employees’ beneficiary associations, which generally administer trust funds for providing payment of life, health, accident, and other insurance benefits to their members. Any part of net investment income from these employee benefit associations that is not set aside for future charitable-purpose use is taxable.

[8] The term “charitable” refers to tax-exempt organizations with purposes that are charitable, educational, scientific, literary, or religious in nature, or organizations that test for public safety or prevent cruelty to children or animals. The term also covers organizations that otherwise qualified for tax-exempt status under the Income Tax Regulations issued for Internal Revenue Code section 501(c)(3).

[9] Another reason for presenting only the top-5 primary UBA’s of organizations tax-exempt under sections 501(c)(4) through 501(c)(7) is that specific taxpayer information reported on Form 990-T cannot be disclosed to the public, and providing more UBA’s beyond the top-5 activities in Figures E through H has the potential for disclosing the identity of the one or two organizations that reported some of them. Most tax-exempt organizations are required to file an annual Form 990, Return of Organization Exempt From Income Tax, or Form 990-EZ, Short Form Return of Organization Exempt From Income Tax (used by organizations with annual gross receipts of less than $100,000 and total end-of-year assets of less than $250,000). Form 990-T is required only for a tax year in which an organization has unrelated business income. While specific taxpayer information reported on an exempt organization’s Form 990/ 990-EZ “information return” can be disclosed to the public, specific taxpayer information reported on its Form 990-T “tax return” cannot. Under disclosure rules governing the release of taxpayer information, only aggregate totals from Form 990-T can be presented in this article.

[10] A business activity is considered unrelated if it does not contribute importantly (other than the production of funds)to accomplishing an organization’s charitable, educational, or other purpose that is the basis for the organization’s tax exemption. In determining whether activities contribute importantly to the accomplishment of an exempt purpose, the size and extent of the activities involved must be considered in relation to the nature and extent of the exempt function that they intend to serve. To the extent an activity is conducted on a scale larger than is reasonably necessary to perform an exempt purpose, it does not contribute importantly to the accomplishment of the exempt purpose. The part of the activity that is more than needed to accomplish the exempt purpose is an unrelated trade or business. Whether an activity contributes importantly depends in each case on the facts involved. See IRS Publication 598, Tax on Unrelated Business Income of Exempt Organizations, for additional information on unrelated business income and tax.

The following is a case example from Publication 598. An American folk art museum operates a shop in the museum that sells reproductions of works in the museum’s own collection and also works from the collections of other art museums. In addition, the museum sells souvenir items of the city where the museum is located. The sale of the reproductions, regardless of which museum houses the original works, is considered to be “related” because it contributes importantly to the achievement of the museum’s exempt educational purpose by making works of art familiar to a broader segment of the public, thereby enhancing the public’s understanding and appreciation of art. However, the sale of souvenir items depicting the city in which the museum is located is considered to be “unrelated” because it has no causal relationship to art or to artistic endeavor, and, therefore, does not contribute importantly to the accomplishment of the museum’s exempt educational purposes.

[11] These analyses can be found in Riley, Margaret, “Exempt Organization Business Income Tax Returns: Highlights and an Analysis of Exempt and Nonexempt Finances, 1993,” Statistics of Income Bulletin, Spring 1997, Volume 16, Number 4; Riley, Margaret, “Unrelated Business Income of Nonprofit Organizations, 1994,” Spring 1998, Volume 17, Number 4; and Riley, Margaret, “Unrelated Business Income of Nonprofit Organizations, 1997,” Spring 2001, Volume 20, Number 4.

[12] For additional information on the Form 990 and Form 990-T integrated sample design, see Harte, James M. and Hilgert, Cecelia H., “Enriching One Sample While Improving Another: Linking Differently Stratified Samples of Documents Filed by Exempt Organizations,” Statistics of Income: Turning Administrative Systems Into Information Systems, 1993.

Margaret Riley is a statistician with the Special Studies Special Projects Section. This article was prepared under the direction of Michael Alexander, Chief.

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