To those not accustomed to dealing with subchapter F of the Code (pertaining to exempt organizations) it may seem contradictory that so-called exempt organizations are subject to the unrelated business income tax. And the UBIT is not the only tax that may apply to exempt organizations. Charitable organizations which are private foundations are taxed on their net investment income and are subject to a series of excise taxes designed to curb particular behaviors susceptible to abuse. Thus, exempt organizations, which are not subject to the regular income tax imposed under §§1 and 11, are distinguished from for-profit companies that must pay income taxes. For convenience, we refer to them as exempt organizations, even though we know that they may be liable for the UBIT or other specialized taxes.

 Section 501 expressly recognizes that concept of tax-exempt organizations being subject to taxation. Exemption from taxation is provided under §501(a) for organizations described in §501(c), §501(d), and §401(a). These organizations are charities and 28 other categories of organizations described in §501(c), religious and apostolic organizations described in §501(d), and qualified retirement plans described in §401(a).

 Section 501(b) states that an organization exempt from taxation under §501(a) is subject to tax as provided in parts II (taxes on private foundations), III (the UBIT), and VI (taxes on political organizations) of subchapter F. Notwithstanding parts II, III, and VI of subchapter F, however, such an organization is “considered an organization exempt from income taxes for purposes of any law referring to organizations exempt from income taxes.”

 The Tax Court recently considered this seemingly straightforward Code provision in Research Corporation v. Commissioner, 138 T.C. No. 7 (2012).  Continue reading →