A.4. Competition

(1) Although the legislative history reflects that the primary objective of adopting the

UBIT was to eliminate a source of unfair competition by placing the unrelated business activities of exempt organizations on equal footing with taxable businesses (see Treas. Reg. 1.513-1(b); S. Rep. No. 2375, 81st Cong., 2d Sess. 27 (1950), 1950-2 C.B. 483, 504)), the IRS maintains that unfair competition is neither the sole nor the primary criterion to be considered in determining whether an activity is unrelated trade or business.

a. The Code and regulations do not require the IRS to consider competition

in determining UBIT.

b. Also, IRS forms do not require information reporting concerning

competition.

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c. Additionally, the IRS lacks both the data and the expertise to determine

the degree of competition and most particularly whether there is “unfair” competition. See testimony of Lawrence B. Gibbs, Commissioner of Internal Revenue, before the Subcommittee on Oversight, House Ways and Means Committee, on June 22, 1987, 100th Cong., 1st Sess., Pt. 1 of 3, US GPO Serial 100-26, p. 69.

d. Although preventing unfair competition is the major purpose of the

unrelated business income tax, a specific finding of unfair competition isn’t always required to determine which activities constitute a trade or business. See Fraternal Order of Police v. Commissioner, 833 F.2d 717, 722 (7th Cir. 1987).

(2) Notwithstanding that view, some courts have used the presence of unfair

competition as part of the test for whether an activity is a trade or business. The issue was repeatedly raised in greeting card cases discussed below (see also the low-cost article discussion in Part VII.I of this document):

a. In Hope School v. United States, 612 F. 2d 298 (7th Cir. 1980), the court

strongly endorsed the concept of unfair competition as an essential element in the analysis of unrelated business taxable income. However, there was no evidence presented at trial to suggest that the school’s solicitation program using mailed greetings cards represented the possibility of an unfair competitive advantage over taxpaying greeting card businesses. Therefore, the court found no unfair competition.

b. Similarly, in Veterans of Foreign Wars of the United States v. United

States, 601 F. Supp. 7 (W.D. Mo. 1984), the court cited Hope School and found that the organization, which ran a greeting card solicitation program but didn’t reinvest the proceeds from its campaign back into the program, gained no competitive advantage from its tax-exempt status and didn’t operate a trade or business for purposes of the tax on unrelated business income.

c. Another case in which the absence of competition was emphasized is

Greene County Medical Society Foundation v. United States, 345 F. Supp. 900 (W.D. Mo. 1972). There, the court stated that the organization’s production and sale of phonograph records by the "Singing Doctors" wasn’t competitive with the ordinary business of commercial record production and sales and, therefore, wasn’t a trade or business. The IRS didn’t acquiesce in this decision. See IRS AOD-1973 WL 34820 (May 16, 1973) and IRS AOD-1973 WL 34826 (May 21, 1973).

d. The Tax Court in Veterans of Foreign Wars, Department of Michigan v.

Commissioner, 89 T.C. 7 (1987), found that the organization’s Christmas card program was in direct competition with Christmas cards marketed by commercial entities.

e. In Disabled American Veterans v. United States, 650 F. 2d 1178 (Ct. Cl.

1981), the court stated that the legislative history clearly indicates that to

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constitute a trade or business for UBTI purposes, the activity must be conducted in a competitive fashion. The court clarified its position by stating that actual competition need not be established, since Sections 511–513 don’t confine UBTI to those situations where it is established that some specific aspect of unfair competition has occurred.

f. In Smith-Dodd Businessman’s Association, Inc. v. Commissioner, 65 T.C.

620 (1975), the Tax Court stated that "unfair competition plays a relatively insignificant role in the application of the amended unrelated business tax."

(3) A few courts have tried to reconcile the profit motive test and unfair competition

test by observing that they aren’t in conflict. See, for example, Illinois Association of Professional Insurance Agents v. Commissioner, 801 F.2d 987, 991 n.4 (7th Cir. 1986) (“No court has yet created a general exception to the unrelated business income tax based solely on a showing that the tax-exempt organization didn’t compete, or threaten to compete, unfairly with tax-paying entities”). Courts, especially in the wake of American Bar Endowment, are more likely to apply the profit motive test. See National Water Well Association v. Commissioner, 92 T.C. 75, 85-86 (1989).

(4) Strong support for the IRS position that competition is neither the sole nor

primary criterion to be considered in determining whether an activity is unrelated trade or business can be found in Clarence LaBelle Post No. 217, Veterans of Foreign Wars of the United States v. United States, 580 F. 2d 270 (8th Cir. 1978). In that case, the organization argued that it should not be subject to UBIT because it wasn’t competing with a taxpaying entity, while the government argued that UBIT isn’t limited to competitive businesses. The court held that UBIT isn’t limited to income earned by a trade or business that operates in competition with taxpaying entities. See also Bartels Trust for Benefit of Cornell University ex rel. Bartels v. United States, 617 F. 3d 1357 (Fed. Cir. 2010). See also Education Athletic Association v. Commissioner, T.C. Memo 1999-75 (holding that the fact that the taxpayer didn’t compete with forprofit entities with respect to pickle card sales wasn’t controlling for purposes of determining whether income from such sales was subject to UBIT).