C. Legislative History

(1) Prior to the Revenue Act of 1950, which added what are now Sections 511

through 515, there was no unrelated business income tax. An organization was either fully tax exempt or fully taxable on all its income. If an exempt organization wasn’t primarily engaged in an exempt activity, revocation of exempt status was the only remedy.

a. Unrelated trade or business activities didn’t exist because courts had ruled

that the use or destination of income generated, rather than the income’s source, was the primary factor in determining whether the income was taxable. If income from an activity was used in activities furthering the organization's exempt purpose, the income was considered tax exempt. The courts referred to this as the "destination of income" test. The "destination of income test” was laid down by the United States Supreme Court in Trinidad v. Sagrada Orden de Predicadores, 263 U.S. 578 (1924), holding that the destination and not the source of the income was the ultimate test of exemption.

b. Another problem was that many of the organizations exempt under the

1939 Code weren’t required to file information returns, therefore the IRS was often unaware of the business activities in which such organizations participated. See also People's Educational Camp Soc. Inc. v. C.I.R. 331 F.2d 923 (1964) holding that “destination of income test” didn’t afford income tax exemption to corporation which devoted much of its revenues to improving its ability to compete commercially through accumulation of large surpluses and expansion of its income producing facilities.

(2) By 1950, Congress had become concerned that some exempt organizations

were engaged in profitable business activities in competition with taxable entities. See Congressional Record, Vol. 96, Part 7, pp. 9273–9274.

(3) These problems were, for the most part, resolved by the Revenue Act of 1950

which, among other things, imposed a tax on the "unrelated business taxable income" of certain otherwise tax-exempt organizations. In addition, most exempt organizations are now required to file annual information returns, making it easier to scrutinize their operations to determine whether they continue to be entitled to exemption and, if so, whether they are subject to the tax on UBI.

(4) According to the report of the Senate Finance Committee (S. Rep. No. 2375,

81st Cong., 2d Sess. 27 (1950), 1950-2 C.B. 483, 504):

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a. "The problem at which the tax on unrelated business income is directed is

primarily that of unfair competition. The tax-free status of IRC Section (501) organizations enables them to use their profits tax-free to expand operations, while their competitors can expand only with the profits remaining after taxes. Also, a number of examples have arisen where these organizations have, in effect, used their tax exemptions to buy an ordinary business. That is, they have acquired the business with little or no investment on their own part and paid for it in installments out of subsequent earnings - a procedure which usually couldn’t be followed if the business were taxable."

(5) The Revenue Act of 1950 excepted certain organizations from the UBIT

provisions. However, it became apparent that many of the excepted organizations were engaging, or were apt to engage, in unrelated business. Congress responded in the Tax Reform Act of 1969 by subjecting almost all exempt organizations to the tax on unrelated business income. In addition, changes were made to expand or redefine the types of income subject to the unrelated provisions in order to eliminate tax avoidance and abuses. These changes included:

a. The unrelated debt-financed income provisions. See Section 514(a) 514(f).

b. A more restrictive exclusion in the case of rents. See Section 512(b)(3).

c. Conditions under which a controlling organization includes in unrelated

business taxable income interest, annuities, royalties, and rents it receives or accrues from a controlled entity. See Section 512(b)(13).

(6) In 2017, Public Law 115-97, 131 Stat. 2054, Section 13702 (Dec. 22, 2017)

established that for taxable years beginning after December 31, 2017, organizations with more than one unrelated trade or business must calculate unrelated business taxable income separately with respect to each trade or business (Section 512(a)(6)). This provision addresses the perception, as discussed in Portland Golf Club v. Commissioner, 497 U.S. 154 (1990), that organizations were creating taxable losses from activities that aren’t trades or businesses “because they lacked a profit motive” to offset unrelated business taxable income generated by other activities. Further, Congress intended “that a deduction from one trade or business for a taxable year may not be used to offset income from a different unrelated trade or business for the same taxable year.” See H.R. Rep. No. 115-466, at 548 (2017). Final regulations on Section 512(a)(6) were published on December 2, 2020.