Under Internal Revenue Code Section 115, The University of Tennessee is tax-exempt as an instrumentality of the State of Tennessee (IRS Determination Letter dated March 27, 1998). The Internal Revenue Code provides the exempt purposes of state colleges and universities include charitable, scientific, testing for public safety, literary, educational, fostering national or international amateur sports competition, or preventing cruelty to children or animals. The University is not, however, exempt from tax imposed by Code Sections 511, 512 and 513 on activities which are unrelated to those exempt purposes and must file Form 990-T annually on gross income from an unrelated trade or business of $1,000 or more per fiscal year.
Three elements must be present in order for an activity conducted by the University to generate unrelated business income (UBI):
Trade or Business
Regularly Carried On
Substantially Unrelated to the Exempt Purpose of the University
Statutorily excepted, activities that meet one of the following criteria will not be subject to the unrelated business income tax (UBIT):
Performed substantially (85% or more) by volunteer labor
Conducted primarily for convenience of University students, faculty, staff or patients
Sales of donated merchandise
Qualified sponsorship payments
Distribution of low cost articles
Exchange or rental of member lists between tax-exempt organizations
Additionally, the following types of income are excluded from UBI:
Passive investment income
Gains or losses from sale of property (not inventory)
Rents from real property
Research income (not ordinary testing or inspection of products)
UBTI means the gross income derived from any unrelated trade or business regularly carried on by the University, less the deductions "directly connected" with carrying on the trade or business.
To be directly connected with the conduct of an unrelated business, deductions must have a proximate and primary relationship to carrying on that business.
For purposes of computing UBTI, expenses attributable solely to the operation of an unrelated business may be deducted in full.
Expenses incurred in connection with both an exempt purpose and the conduct of an unrelated trade or business (e.g., facilities or personnel) must be allocated between the two purposes using a reasonable basis of allocation.
If a particular cost has been allocated, the department, school or center must specify the basis of allocation.
Federal income tax must be paid on the amount of UBTI generated by an activity.
Those schools/departments whose activities generate UBTI will be charged their proportionate share of the tax expense which will be allocated at the time of the IRS payment and reporting.
The Controller is responsible for ensuring schools and centers comply with federal tax law and regulations regarding the reporting and taxation of UBTI. The Controller also is responsible for the timely preparation and submission of the Exempt Organization Business Income Tax Return (IRS Form 990-T).
Each department has the primary responsibility for monitoring and reporting to the Controller any external revenue generating activity to ensure such activity is properly reported for possible inclusion on IRS Form 990-T. This includes, but is not limited to, implementation of monitoring procedures by the department to:
Ensure timely notification and consultation with the Controller prior to the commencement of such activity for guidance and potential mitigation of tax exposure
Ensure revenue and expenses of each activity are accurately captured and reported
Ensure allocation methods associated with the costs of each activity are reasonable and consistent
Each department, school or center that makes external sales (non-departmental sales) is required to complete an Unrelated Business Income Questionnaire for each activity generating UBTI, regardless of the amount of revenue generated. Thereafter, a questionnaire should be completed only when new activities are initiated or a change occurs in an existing activity previously determined to be exempt.
The questionnaire must be submitted to the Controller's Office no later than August 31st of each year, when applicable. An email notification will be sent to departments that request an I account for the activity.
The completed questionnaire will be used to determine if the activity should be included in the University's Consolidated Exempt Organization Business Income Tax Return (Form 990-T) submitted to the IRS.
Annually, the Unrelated Business Income Worksheet must be submitted by September 30th of each year to report unrelated activity related to the prior fiscal year. (i.e. September 30, 2009 for fiscal year June 30, 2009 activity). The worksheet
can be used for reporting the revenue and expenses associated with UBI.
The Chief Business Officer should certify to the accuracy of the activity being reported on the questionnaire returned to the Controller's Office from their respective departments and that it encompasses all business activities that must be reported as UBTI. (CBO Transmittal Letter)