This Insights blog is Part 1 of a 3-Part series that provides a focused overview of the unrelated business income tax rules for the nonprofit organization that is tax-exempt pursuant to section 501(c)(3) of the Internal Revenue Code (the “Code”).
This Part 1 sets the framework and provides an overview for the organizational and operational tests applicable to tax-exempt organizations and, without getting into too much detail (yet), the why or when the unrelated business income tax rules come into play for the organization.
General Rule For Tax Exemption Under Section 501(c)(3) of The Code
To be exempt as an organization described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in section 501(c)(3) of the Code. See 26 U.S.C. § 501(c)(3); 26 C.F.R. § 1.501(c)(3)-1(a)(1). If an organization fails to meet either the organizational test or the operational test, the organization is not qualified for tax exemption under section 501(c)(3) of the Code.
The Organizational Test
Section 1.501(c)(3)-(1) of the Treasury Regulations contains the organizational test:
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