soi bulletin - Internal Revenue Service - Department of the Treasury

Exempt Organization Business Income Tax Returns, 1991positive UBTI attributable to section 501(c)(9) organizationswas 27 percent, but these organizations accountedfor only 2 percent of organizations that reported positiveUBTL Voluntary employees' beneficiary associationsgenerally were not able to take deductions as large as mostother types of organizations because of the nature of theirexempt activities, discussed below.Section 501(c)(9) organizations primarily engage ininvestment activities in order to fund the benefits paid outto member-employees. Nearly 75 percent of their aggregategross UBI was reported as investment income for1991. As mentioned in the discussion of deductions, thelargest deduction item, by far, reported by employees'beneficiary associations was for amounts set aside toprovide for future payment of life, sick, accident, or otherbenefits. However, if amounts were set aside that exceededthe qualified asset account limits, as specified insection 419A of the Code, then they were not allowed as adeduction from unrelated business investment income. Inother words, if a section 501 (c)(9) association overfundedan employee welfare benefit plan, its investment incomecould not be set aside tax-free. It was taxable as unrelatedbusiness income.Another factor contributing to the relatively smalldeductions taken by the employee beneficiary associationsis that, for many of them, their investment portfoliostypically are overseen by a single trust manager. Becausethere is no need for a staff of employees, deductions forsalaries and wages are quite small. In terms of contrast,salaries and wages reported by section 501 (c)(9) associationswere less than half a percent of total salaries andwages reported by all organizations, compared to 61percent for the section 501(c)(3) organizations. As apercentage of the total deductions reported by these twotypes of organizations, salaries and wages comprised a 2-percent share for the section 501(c)(9) organizationscompared to an 18-percent share for section 501(c)(3)organizations [11].Primary Unrelated Business Activity by IndustrialGroupingOrganizations filing a Form 990-T for 1991 were requiredto enter at least one, and up to three, industry codes fortheir principal business activities, based on the amount ofgross unrelated business income they generated. If anorganization engaged in more than one type of activity, itwas instructed to list the code for the largest unrelatedactivity (in terms of gross income) first, then the codes forthe next two largest activities, in descending order. Thediscussion of unrelated business activities that followstakes into consideration only the primary (first) activityServices and finance, code reported. Because it isnot possible to distribute grossinsurance, and realUBI by each type of activityestate accounted for when more than one activity78 percent of grosswas reported, the amount ofgross UBI assigned to theunrelated business primary unrelated businessincome.activity may not be entirelyrelated to that activity.Figure G shows that the primary unrelated businessactivity reported on 88 percent of returns filed fell withinfour major industrial groupings: manufacturing; retailtrade; services; and finance, insurance, and real estate (seeTable 5 for information on the major business activities orindustrial classifications reported). These four industrialgroupings were also responsible for 93 percent of totalgross UBI, with manufacturing producing $0.1 billion;retail trade, $0.4 billion; services, $1.5 billion; and finance,insurance, and real estate, $1.1 billion.The industrial classifications from which Form 990-Tfilers were required to make a choice included 155 industrycodes and 5 additional categories that were establishedspecifically for exempt organizations engaging in unrelatedbusiness activities to reflect particular provisions of theInternal Revenue Code [12]. These five classificationswere unrelated debt-financed activities other than rental ofreal estate; investment activities of section 501(c)(7), (9),(17), and (20) organizations; rental of personal property;passive income activities with controlled organizations;and exploited exempt activities. In Figure G and Table 5,the first four activities mentioned above are treated as partof the finance, insurance, and real estate division. Exploitedexempt activities is treated separately in Figure Gand Table 5 as one of the major industrial groupings [13].There were 1,495 organizations that reported unrelatedactivities in the manufacturing division. Most of them, 87percent, could be categorized under two types of unrelatedactivities: printing and publishing, 45 percent, and petroleumrefining and related industries, 42 percent [14].Three percent of total gross UBI was attributable to theprinting and publishing industrial sub-group. Petroleumrefining and related industries accounted for only one-tenthof I percent of total gross UBI. Business leagues, realestate boards, and various types of nonprofit charitableorganizations accounted for. most of the printing andpublishing carried on by tax-exempt organizations as theirprincipal unrelated trade or business activity. Almost all ofthe organizations that reported petroleum refining andrelated industries as their principal unrelated businessactivity were trusts that acted as fiduciary agents for IndividualRetirement Arrangements and profit-sharing plans.45