A.1. Profit Motive

(1) Per Section 512, exempt organizations in determining unrelated business

taxable income (UBTI) may deduct expenses directly connected with the production of gross income (other than exempt function income) to the extent such deductions are otherwise allowed by Chapter 1 of the Code. In general, the Chapter 1 deduction provision Section 162 provides for a deduction for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Generally, an activity lacking a profit motivation, doesn’t constitute a trade or business for purposes of the deduction of expenses under Section 162.

(2) In Portland Golf Club v. Commissioner, 497 U.S. 154 (1990), the Court held

that a Section 501(c)(7) social club was required to demonstrate an intent to profit. The Court analyzed Section 512(a)(3)(A) and viewed the inclusion of the phrase "allowed by this chapter" as limiting deductions to Chapter 1. The expenses at issue were allowable as deductions (if at all) only under Section 162. Under Section 162(a), expenses must be incurred in connection with a "trade or business." The Court, citing Commissioner v. Groetzinger, 480 U.S.

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23, 35 (1987), stated that trade or business activities fall within the scope of Section 162(a) only if an intent to profit has been shown.