Brooklyn Law Review


Rebeka Cohan


This note explores the unrelated business income tax (UBIT) and its unfair impact on smaller, less well-funded nonprofits. Although typically exempt from taxation, nonprofits can still be subject to the unrelated business income tax. Nonprofits are subject to UBIT when they have income that (1) qualifies as a trade or business, (2) is regularly carried on, and (3) is not substantially related to its tax-exempt purpose. This note argues that small nonprofits are unfairly disadvantaged by UBIT, because they typically have low budgets and small staffs without legal counsel. Congress should update the Internal Revenue Code (IRC) so organizations that earn less than $100,000 in annual unrelated income are exempt from UBIT. The complexity of UBIT and vagueness of its “substantially related prong” make the tax difficult to apply. Additionally, organizations with financial and legal resources can receive what essentially acts as a personalized tax exemption after submitting private letter ruling (PLR) requests. PLRs are determinations made by IRS officials of whether income is taxable. They only apply to the requesting taxpayer. Given the unfair application of the complex law and UBIT’s low revenue production for the Internal Revenue Service (IRS), this update to the IRC would benefit both the IRS and nonprofits that serve the needs of local communities.