Chapter 2: Unrelated Business Income

2.1 INTRODUCTION—GENERAL PRINCIPLES OF THE UNRELATED BUSINESS INCOME TAX

(a) The “Trade or Business” Requirement

(i) Profit Motive
(ii) Fragmentation Rule
(iii) Efficiencies in Operation
(iv) Covenant not to Compete

(b) The “Regularly Carried on” Requirement
(c) The “Not Substantially Related” Requirement
(d) The Agency Issue

2.2 STATUTORY EXCEPTIONS TO UNRELATED BUSINESS INCOME

(a) Capital Gains Transactions

(i) Property Acquired by Bequest or Gift
(ii) Subdividing and Improving Real Property
(iii) Sales of Stocks and Securities

(b) Interest and Dividends
(c) Rental Income
(d) Royalties

(i) Active Versus Passive Royalties
(ii) Royalty or Joint Venture Distribution
(iii) Royalty or Agency Relationship
(iv) Current Status of Royalty Exclusion

(e) Distribution of Low-Cost Articles
(f) Research Activities

(i) Exemption Under the Traditional Principles
(ii) Special Exceptions
(g) Volunteer Activities
(h) “Convenience Exception”

2.3 INCOME FROM CONTROLLED ORGANIZATIONS

(a) Pre-2006/Post-2013 Controlled Organization Rules
(b) The Rules For 2006 Through 2013

2.4 FOREIGN INSURANCE INCOME

2.5 UNRELATED DEBT-FINANCED INCOME

(a) Debt-Financed Property
(b) Other Exceptions
(c) Acquisition Indebtedness
(d) Computation of Debt-Financed Income

2.6 ALLOWABLE DEDUCTIONS

(a) Background
(b) Direct and Indirect Cost Allocations
(c) Analogous Cost Allocation Standards and Methods
(d) Substantiation Requirements
(e) Special Deduction Provisions

(i) Loss Deductions
(ii) Net Operating Loss Deduction
(iii) Charitable Contribution Deduction
(iv) Specific Deduction