(a) In general. Except as otherwise provided in Sec. 1.512(a)-3,
Sec. 1.512(a)-4, or paragraph (f) of this section, section 512(a)(1)
defines unrelated business taxable income as the gross income derived
from any unrelated trade or business regularly carried on, less those
deductions allowed by chapter 1 of the Code which are directly connected
with the carrying on of such trade or business, subject to certain
modifications referred to in Sec. 1.512(b)-1. To be deductible in
computing unrelated business taxable income, therefore, expenses,
depreciation, and similar items not only must qualify as deductions
allowed by chapter 1 of the Code, but also must be directly connected
with the carrying on of unrelated trade or business. Except as provided
in paragraph (d)(2) of this section, to be directly connected with the
conduct of unrelated business for purposes of section 512, an item of
deduction must have proximate and primary relationship to the carrying
on of that business. In the case of an organization which derives gross
income from the regular conduct of two or more unrelated business
activities, unrelated business taxable income is the aggregate of gross
income from all such unrelated business activities less the aggregate of
the deductions allowed with respect to all such unrelated business
activities. For the treatment of amounts of income or loss of common
trust funds, see Sec. 1.584-2(c)(3).
(b) Expenses attributable solely to unrelated business activities.
Expenses, depreciation, and similar items attributable solely to the
conduct of unrelated business activities are proximately and primarily
related to that business activity, and therefore qualify for deduction
to the extent that they meet the requirements of section 162, section
167, or other relevant provisions of the Code, connected with the
conduct of that activity and are deductible in computing unrelated
business activities are directly connected with the
conduct of that activity and are deductible in computing unrelated
business taxable income if they otherwise qualify for deduction under
the requirements of section 162. Similarly, depreciation of a building
used entirely in the conduct of unrelated business activities would be
an allowable deduction to the extent otherwise permitted by section 167.
(c) Dual use of facilities or personnel. Where facilities are used
both to carry on exempt activities and to conduct unrelated trade or
business activities, expenses, depreciation and similar items
attributable to such facilities (as, for example, items of overhead),
shall be allocated between the two uses on a reasonable basis.
Similarly, where personnel are used both to carry on exempt activities
and to conduct unrelated trade or business activities, expenses and
similar items attributable to such personnel (as, for example, items of
salary) shall be allocated between the two uses on a reasonable basis.
The portion of any such item so allocated to the unrelated trade or
business activity is proximately and primarily related to that business
activity, and shall be allowable as a deduction in computing unrelated
business taxable income in the manner and to the extent permitted by
section 162, section 167, or other relevant provisions of the Code.
Thus, for example, assume that X, an exempt organization subject to the
provisions of section 511, pays its president a salary of $20,000 a
year. X derives gross income from the conduct of unrelated trade or
business activities. The president devotes approximately 10 percent of
his time during the year to the unrelated business activity. For
purposes of computing X's unrelated business taxable income, a deduction
of $2,000 (10 percent of $20,000), would be allowable for the salary
paid to its president.
(d) Exploitation of exempt activities--
(1) In general. In certain
cases, gross income is derived from an unrelated trade or business
activity which exploits an exempt activity. One example of such
exploitation is the sale of advertising in a periodical of an exempt
organization which contains editorial material related to the
accomplishment of the organization's exempt purpose. Except as specified
in subparagraph (2) of this paragraph and paragraph (f) of this section,
in such cases, expenses, depreciation and similar items attributable to
the conduct of the exempt activities are not deductible in computing
unrelated business taxable income. Since such items are incident to an
activity which is carried on in furtherance of the exempt purpose of the
organization, they do not possess the necessary proximate and primary
relationship to the unrelated trade or business activity and are
therefore not directly connected with that business activity.
(2) Allowable deductions. Where an unrelated trade or business
activity is of a kind carried on for profit by taxable organizations and
where the exempt activity exploited by the business is a type of
activity normally conducted by taxable organizations in pursuance of
such business, expenses, depreciation, and similar items which are
attributable to the exempt activity qualify as directly connected with
the carrying on of the unrelated trade or business activity to the
extent that:
(i) The aggregate of such items exceeds the income (if any) derived
from or attributable to the exempt activity; and
(ii) The allocation of such excess to the unrelated trade or
business activity does not result in a loss from such unrelated trade or
business activity.
Under the rule of the preceding sentence, expenses, depreciation and
similar items paid or incurred in the performance of an exempt activity
must be allocated first to the exempt activity to the extent of the
income derived from or attributable to the performance of that activity.
Furthermore, such items are in no event allocable to the unrelated trade
or business activity exploiting such exempt activity to the extent that
their deduction would result in a loss carryover or carryback with
respect to that trade or business activity. Similarly, they may not be
taken into account in computing unrelated business taxable income
attributable to any unrelated trade or business activity not exploiting
the same exempt activity. See paragraph (f) of this section for the
application of these rules to periodicals published by exempt organizations.
(e) Example. Paragraphs (a) through (d) of this section are
illustrated by the following example:
Example. W is an exempt business league with a large membership.
Under an arrangement with an advertising agency W regularly mails
brochures, pamphlets and other advertising materials to its members,
charging the agency an agreed amount per enclosure. The distribution of
the advertising materials does not contribute importantly to the
accomplishment of the purpose for which W is granted exemption.
Accordingly, the payments made to W by the advertising agency constitute
gross income from an unrelated trade or business activity. In computing
W's unrelated business taxable income, the expenses attributable solely
to the conduct of the business, or allocable to such business under the
rule of paragraph (c) of this section, are allowable as deductions in
accordance with the provisions of section 162. Such deductions include
the costs of handling and mailing, the salaries of personnel used full-
time in the unrelated business activity and an allocable portion of the
salaries of personnel used both to carry on exempt activities and to
conduct the unrelated business activity. However, costs of developing
W's membership and carrying on its exempt activities are not deductible.
Those costs are necessary to the maintenance of the intangible asset
exploited in the unrelated business activity--W's membership--but are
incurred primarily in connection with W's fundamental purpose as an
exempt organization. As a consequence, they do not have proximate and
primary relationship to the conduct of the unrelated business activity
and do not qualify as directly connected with it.
(f) Determination of unrelated business taxable income derived from
sale of advertising in exempt organization periodicals --
(1) In general. Under section 513 (relating to the definition of unrelated trade or
business) and Sec. 1.513-1, amounts realized by an exempt organization
from the sale of advertising in a periodical constitute gross income
from an unrelated trade or business activity involving the exploitation
of an exempt activity; namely, the circulation and readership of the
periodical developed through the production and distribution of the
readership content of the periodical. Paragraph (d) of this section
provides for the allowance of deductions attributable to the production
and distribution of the readership content of the periodical. Thus,
subject to the limitations of paragraph (d)(2) of this section, where
the circulation and readership of an exempt organization periodical are
utilized in connection with the sale of advertising in the periodical,
expenses, depreciation, and similar items of deductions attributable to
the production and distribution of the editorial or readership content
of the periodical shall qualify as items of deductions directly
connected with the unrelated advertising activity. Subparagraphs (2)
through (6) of this paragraph provide rules for determining the amount
of unrelated business taxable income attributable to the sale of
advertising in exempt organization periodicals. Subparagraph (7) of this
paragraph provides rules for determining when the unrelated business
taxable income of two or more exempt organization periodicals may be
determined on a consolidated basis.
(2) Computation of unrelated business taxable income attributable to
sale of advertising--
(i) Excess advertising costs. If the direct
advertising costs of an exempt organization periodical (determined under
subparagraph (6)(ii) of this paragraph) exceed gross advertising income
(determined under subparagraph (3)(ii) of this paragraph), such excess
shall be allowable as a deduction in determining unrelated business
taxable income from any unrelated trade or business activity carried on
by the organization.
(ii) Excess advertising income. If the gross advertising income of
an exempt organization periodical exceeds direct advertising costs,
paragraph (d)(2) of this section provides that items of deduction
attributable to the production and distribution of the readership
content of an exempt organization periodical shall qualify as items of
deduction directly connected with unrelated advertising activity in
computing the amount of unrelated business taxable income derived from
the advertising activity to the extent that such items exceed the income
derived from or attributable to such production and distribution, but
only to the extent that such items do not result in a loss from such
advertising activity. Furthermore, such items of deduction shall not
qualify as directly connected with such advertising activity to the
extent that their deduction would result in a loss carryback or carryover with
respect to such advertising activity. Similarly, such items of deduction
shall not be taken into account in computing unrelated business taxable
income attributable to any unrelated trade or business activity other
than such advertising activity. Thus:
(a) If the circulation income of the periodical (determined under
subparagraph (3)(iii) of this paragraph) equals or exceeds the
readership costs of such periodical (determined under subparagraph
(6)(iii) of this paragraph), the unrelated business taxable income
attributable to the periodical is the excess of the gross advertising
income of the periodical over direct advertising costs; but
(b) If the readership costs of an exempt organization periodical
exceed the circulation income of the periodical, the unrelated business
taxable income is the excess, if any, of the total income attributable
to the periodical (determined under subparagraph (3) of this paragraph)
over the total periodical costs (as defined in subparagraph (6)(i) of
this paragraph).
See subparagraph (7) of this paragraph for rules relating to the
consolidation of two or more periodicals.
(iii) Examples. The application of this paragraph may be illustrated
by the following examples. For purposes of these examples it is assumed
that the production and distribution of the readership content of the
periodical is related to the organization's exempt purpose.
Example 1. X, an exempt trade association, publishes a single
periodical which carries advertising. During 1971, X realizes a total of
$40,000 from the sale of advertising in the periodical (gross
advertising income) and $60,000 from the sales of the periodical to
members and nonmembers (circulation income). The total periodical costs
are $90,000 of which $50,000 is directly connected with the sale and
publication of advertising (direct advertising costs) and $40,000 is
attributable to the production and distribution of the readership
content (readership costs). Since the direct advertising costs of the
periodical ($50,000) exceed gross advertising income ($40,000), pursuant
to subdivision (i) of this subparagraph, the unrelated business taxable
income attributable to advertising is determined solely on the basis of
the income and deductions directly connected with the production and
sale of the advertising:
Gross advertising revenue | $40,000 |
Direct advertising costs | (50,000) |
Loss attributable to advertising | (10,000) |
X has realized a loss of $10,000 from its advertising activity. This
loss is an allowable deduction in computing X's unrelated business
taxable income derived from any other unrelated trade or business
activity.
Example 2. Assume the facts as stated in example 1, except that the
circulation income of X periodical is $100,000 instead of $60,000, and
that of the total periodical costs, $25,000 are direct advertising
costs, and $65,000 are readership costs. Since the circulation income
($100,000) exceeds the total readership costs ($65,000), pursuant to
subdivision (ii)(a) of this subparagraph the unrelated business taxable
income attributable to the advertising activity is $15,000, the excess
of gross advertising income ($40,000) over direct advertising costs
($25,000).
Example 3. Assume the facts as stated in example 1, except that of
the total periodical costs, $20,000 are direct advertising costs and
$70,000 are readership costs. Since the readership costs of the
periodical ($70,000), exceed the circulation income ($60,000), pursuant
to subdivision (ii) (b) of this subparagraph the unrelated business
taxable income attributable to advertising is the excess of the total
income attributable to the periodical over the total periodical costs.
Thus, X has unrelated business taxable income attributable to the
advertising activity of $10,000 ($100,000 total income attributable to
the periodical less $90,000 total periodical costs).
Example 4. Assume the facts as stated in example 1, except that the
total periodical costs are $120,000 of which $30,000 are direct
advertising costs and $90,000 are readership costs. Since the readership
costs of the periodical ($90,000), exceed the circulation income
($60,000), pursuant to subdivision (ii) (b) of this subparagraph the
unrelated business taxable income attributable to advertising is the
excess, if any, of the total income attributable to the periodical over
the total periodical costs. Since the total income of the periodical
($100,000) does not exceed the total periodical costs ($120,000), X has
not derived any unrelated business taxable income from the advertising
activity. Further, only $70,000 of the $90,000 of readership costs may
be deducted in computing unrelated business taxable income since as
provided in subdivision (ii) of this subparagraph, such costs may be
deducted, to the extent they exceed circulation income, only to the
extent they do not result in a loss from the advertising activity. Thus,
there is no loss from such activity, and no amount may be deducted on
this account in computing X's unrelated trade or
business income derived from any other unrelated trade or business
activity.
(3) Income attributable to exempt organization periodicals--(i) In
general. For purposes of this paragraph the total income attributable to
an exempt organization periodical is the sum of its gross advertising
income and its circulation income.
(ii) Gross advertising income. The term gross advertising income
means all amounts derived from the unrelated advertising activities of
an exempt organization periodical (or for purposes of this paragraph in
the case of a taxable organization, all amounts derived from the
advertising activities of the taxable organization).
(iii) Circulation income. The term circulation income means the
income attributable to the production, distribution or circulation of a
periodical (other than gross advertising income) including all amounts
realized from or attributable to the sale or distribution of the
readership content of the periodical, such as amounts realized from
charges made for reprinting or republishing articles and special items
in the periodical and amounts realized from sales of back issues. Where
the right to receive an exempt organization periodical is associated
with membership or similar status in such organization for which dues,
fees or other charges are received (hereinafter referred to as
membership receipts), circulation income includes the portion of such
membership receipts allocable to the periodical (hereinafter referred to
as allocable membership receipts). Allocable membership receipts is the
amount which would have been charged and paid if:
(a) The periodical was that of a taxable organization.
(b) The periodical was published for profit, and
(c) The member was an unrelated party dealing with the taxable
organization at arm's length.
See subparagraph (4) of this paragraph for a discussion of the factors
to be considered in determining allocable membership receipts of an
exempt organization periodical under the standard described in the
preceding sentence.
(4) Allocable membership receipts. The allocable membership receipts
of an exempt organization periodical shall be determined in accordance
with the following rules:
(i) Subscription price charged to nonmembers. If 20 percent or more
of the total circulation of a periodical consist of sales to nonmembers,
the subscription price charged to such nonmembers shall determine the
price of the periodical for purposes of allocating membership receipts
to the periodical.
(ii) Subscription price to nonmembers. If paragraph (f)(4)(i) of
this section does not apply and if the membership dues from 20 percent
or more of the members of an exempt organization are less than those
received from the other members because the former members do not
receive the periodical, the amount of the reduction in membership dues
for a member not receiving the periodical shall determine the price of
the periodical for purposes of allocating membership receipts to the
periodical.
(iii) Pro rata allocation of membership receipts. Since it may
generally be assumed that membership receipts and gross advertising
income are equally available for all the exempt activities (including
the periodical) of the organization, the share of membership receipts
allocated to the periodical, where paragraphs (f)(4) (i) and (ii) of
this section do not apply, shall be an amount equal to the
organization's membership receipts multiplied by a fraction the
numerator of which is the total periodical costs and the denominator of
which is such costs plus the cost of other exempt activities of the
organization. For example, assume that an exempt organization has total
periodical costs of $30,000 and other exempt costs of $70,000. Further
assume that the membership receipts of the organization are $60,000 and
that paragraphs (f)(4) (i) and (ii) of this section do not apply. Under
these circumstances $18,000 ($60,000 times $30,000/$100,000) is
allocated to the periodical's circulation income.
(5) Examples. The rules set forth in paragraph (f)(4) of this
section may be illustrated by the following examples. For purposes of
these examples it is assumed that the exempt organization periodical
contains advertising, and that the production and distribution of
the readership content of the periodical is related to the
organization's exempt purpose.
Example 1. U is an exempt scientific organization with 10,000
members who pay annual dues of $15 per year. One of U's activities is
the publication of a monthly periodical which is distributed to all of
its members. U also distributes 5,000 additional copies of its
periodical to nonmember subscribers at a cost of $10 per year. Pursuant
to paragraph (f)(4)(i) of this section, since the nonmember circulation
of U's periodical represents 33\1/3\ percent of its total circulation
the subscription price charged to nonmembers will be used to determine
the portion of U's membership receipts allocable to the periodical.
Thus, U's allocable membership receipts will be $100,000 ($10 times
10,000 members), and U's total circulation income for the periodical
will be $150,000 ($100,000 from members plus $50,000 from sales to
nonmembers).
Example 2. Assume the facts as stated in example 1, except that U
sells only 500 copies of its periodical to nonmembers, at a price of $10
per year. Assume further that U's members may elect not to receive the
periodical, in which case their annual dues are reduced from $15 per
year to $6 per year, and that only 3,000 members elect to receive the
periodical and pay the full dues of $15 per year. U's stated
subscription price to members of $9 consistently results in an excess of
total income (including gross advertising income) attributable to the
periodical over total costs of the periodical. Since the 500 copies of
the periodical distributed to nonmembers represents only 14 percent of
the 3,500 copies distributed, pursuant to paragraph (f)(4)(i) of this
section, the $10 subscription price charged to nonmembers will not be
used in determining the portion of membership receipts allocable to the
periodical. On the other hand, since 70 percent of the members elect not
to receive the periodical and pay $9 less per year in dues, pursuant to
paragraph (f)(4)(ii) of this section, such $9 price will be used in
determining the subscription price charged to members. Thus, the
allocable membership receipts will be $9 per member, or $27,000 ($9
times 3,000 copies) and U's total circulation income will be $32,000
($27,000 plus $5,000).
Example 3. (a) W, an exempt trade association, has 800 members who
pay annual dues of $50 per year. W publishes a monthly journal the
editorial content and advertising of which are directed to the business
interests of its own members. The journal is distributed to all of W's
members and no receipts are derived from nonmembers.
(b) W has total receipts of $100,000 of which $40,000 ($50 x 800)
are membership receipts and $60,000 are gross advertising income. W's
total costs for the journal and other exempt activities is $100,000. W
has total periodical costs of $76,000 of which $41,000 are direct
advertising costs and $35,000 are readership costs.
(c) Paragraph (f)(4)(i) of this section will not apply since no
copies are available to nonmembers. Therefore, the allocation of
membership receipts shall be made in accordance with paragraph
(f)(4)(iii) of this section. Based upon pro rata allocation of
membership receipts (40,000) by a fraction the numerator of which is
total periodical costs ($76,000) and the denominator of which is the
total costs of the journal and the other exempt activities ($100,000),
$30,400 ($76,000/$100,000 times $40,000) of membership receipts is
circulation income.
(6) Deductions attributable to exempt organization periodicals--(i)
In general. For purposes of this paragraph the term total periodical
costs means the total deductions attributable to the periodical. For
purposes of this paragraph the total periodical costs of an exempt
organization periodical are the sum of the direct advertising costs of
the periodical (determined under subdivision (ii) of this subparagraph)
and the readership costs of the periodical (determined under subdivision
(iii) of this subparagraph). Items of deduction properly attributable to
exempt activities other than the publication of an exempt organization
periodical may not be allocated to such periodical. Where items are
attributable both to an exempt organization periodical and to other
activities of an exempt organization, the allocation of such items must
be made on a reasonable basis which fairly reflects the portion of such
item properly attributable to each such activity. The method of
allocation will vary with the nature of the item, but once adopted, a
reasonable method of allocation with respect to an item must be used
consistently. Thus, for example, salaries may generally be allocated
among various activities on the basis of the time devoted to each
activity; occupancy costs such as rent, heat and electricity may be
allocated on the basis of the portion of space devoted to each activity;
and depreciation may be allocated on the basis of space occupied and the
portion of the particular asset utilized in each activity. Allocations
based on dollar receipts from various exempt activities will generally
not be reasonable since such receipts are usually not an accurate
reflection of the costs associated with activities carried on by exempt organizations.
(ii) Direct advertising costs.
(a) The direct advertising costs of
an exempt organization periodical include all expenses, depreciation,
and similar items of deduction which are directly connected with the
sale and publication of advertising as determined in accordance with
paragraphs (a), (b), and (c) of this section. These items are allowable
as deductions in the computation of unrelated business income of the
organization for the taxable year to the extent they meet the
requirements of section 162, section 167, or other relevant provisions
of the Code. The items allowable as deductions under this subdivision do
not include any items of deduction attributable to the production or
distribution of the readership content of the periodical.
(b) The items allowable as deductions under this subdivision would
include agency commissions and other direct selling costs, such as
transportation and travel expenses, office salaries, promotion and
research expenses, and direct office overhead directly connected with
the sale of advertising lineage in the periodical. Also included would
be other items of deduction commonly classified as advertising costs
under standard account classification, such as art work and copy
preparation, telephone, telegraph, postage, and similar costs directly
connected with advertising.
(c) In addition to the items of deduction normally included in
standard account classifications relating to advertising costs, it is
also necessary to ascertain the portion of mechanical and distribution
costs attributable to advertising lineage. For this purpose, the general
account classifications of items includible in mechanical and
distribution costs ordinarily employed in business-paper and consumer
publication accounting provide a guide for the computation. Thus, the
mechanical and distribution costs in such cases would include the
portion of the costs and other expenses of composition, presswork,
binding, mailing (including paper and wrappers used for mailing), and
the bulk postage attributable to the advertising lineage of the
publication. The portion of mechanical and distribution costs
attributable to advertising lineage of the periodical will be determined
on the basis of the ratio of advertising lineage to total lineage of the
periodical, and the application of that ratio to the total mechanical
and distribution costs of the periodical, where records are not kept in
such a manner as to reflect more accurately the allocation of mechanical
and distributions costs to advertising lineage of the periodical, and
where there is no factor in the character of the periodical to indicate
that such an allocation would be unreasonable.
(iii) Readership costs. The readership costs of an exempt
organization periodical include expenses, depreciation or similar items
which are directly connected with the production and distribution of the
readership content of the periodical and which would otherwise be
allowable as deductions in determining unrelated business taxable income
under section 512 and the regulations thereunder if such production and
distribution constituted an unrelated trade or business activity. Thus,
readership costs include all the items of deduction attributable to an
exempt organization periodical which are not allocated to direct
advertising costs under subdivision (ii) of this subparagraph, including
the portion of such items attributable to the readership content of the
periodical, as opposed to the advertising content, and the portion of
mechanical and distribution costs which is not attributable to
advertising lineage in the periodical.
(7) Consolidation--(i) In general. Where an exempt organization
subject to unrelated business income tax under section 511 publishes two
or more periodicals for the production of income, it may treat the gross
income from all (but not less than all) of such periodicals and the
items of deduction directly connected with such periodicals (including
readership costs of such periodicals), on a consolidated basis as if
such periodicals were one periodical in determining the amount of
unrelated business taxable income derived from the sale of advertising
in such periodical. Such treatment must, however, be followed
consistently and once adopted shall be binding unless the
consent of the Commissioner is obtained as provided in sections 446(e)
and Sec. 1.446-1(e).
(ii) Production of income. For purposes of this subparagraph, an
exempt organization periodical is published for the production of income
if:
(a) The organization generally receives gross advertising income
from the periodical equal to at least 25 percent of the readership costs
of such periodical, and
(b) The publication of such periodical is an activity engaged in for
profit.
For purposes of the preceding sentence, the determination whether the
publication of a periodical is an activity engaged in for profit is to
be made by reference to objective standards taking into account all the
facts and circumstances involved in each case. The facts and
circumstances must indicate that the organization carries on the
activity with the objective that the publication of the periodical will
result in economic profit (without regard to tax consequences), although
not necessarily in a particular year. Thus, an exempt organization
periodical may be treated as having been published with such an
objective even though in a particular year its total periodical costs
exceed its total income. Similarly, if an exempt organization begins
publishing a new periodical, the fact that the total periodical costs
exceed the total income for the startup years because of a lack of
advertising sales does not mean that the periodical was published
without an objective of economic profit. The organization may establish
that the activity was carried on with such an objective. This might be
established by showing, for example, that there is a reasonable
expectation that the total income, by reason of an increase in
advertising sales, will exceed costs within a reasonable time. See
Sec. 1.183-2 for additional factors bearing on this determination.
(iii) Example. This subparagraph may be illustrated by the following
example:
Example. Y, an exempt trade association, publishes three periodicals
which it distributes to its members: a weekly newsletter, a monthly
magazine, and quarterly journal. Both the monthly magazine and the
quarterly journal contain advertising which accounts for gross
advertising income equal to more than 25 percent of their respective
readership costs. Similarly, the total income attributable to each such
periodical has exceeded the total deductions attributable to each such
periodical for substantially all the years they have been published. The
newsletter carries no advertising and its annual subscription price is
not intended to cover the cost of publication. The newsletter is a
service of Y distributed to all of its members in an effort to keep them
informed of changes occurring in the business world and is not engaged
in for profit. Under these circumstances, Y may consolidate the income
and deductions from the monthly and quarterly journals in computing its
unrelated business taxable income, but may not consolidate the income
and deductions attributable to the publication of the newsletter with
the income and deductions of its other periodicals since the newsletter
is not published for the production of income.
(g) Foreign organizations--
(1) In general. The unrelated business
taxable income of a foreign organization exempt from taxation under
section 501(a) consists of:
(i) The organization's unrelated business taxable income which is
derived from sources within the United States but which is not
effectively connected with the conduct of a trade or business within the
United States, plus
(ii) The organization's unrelated business taxable income
effectively connected with the conduct of a trade or business within the
United States (whether or not such income is derived from sources within
the United States).
To determine whether income realized by a foreign organization is
derived from sources within the United States or is effectively
connected with the conduct of a trade or business within the United
States, see part 1, subchapter N, chapter 1 of the Code (section 861 and
following) and the regulations thereunder.
(2) Effective dates. Subparagraph (1) of this paragraph applies to
taxable years beginning after December 31, 1969. For taxable years
beginning on or before December 31, 1969, the unrelated business taxable
income of a foreign organization exempt from taxation under section
501(a) consists of the organization's unrelated business taxable income
which:
(i) For taxable years beginning after December 31, 1966, is
effectively connected with the conduct of a trade or business within the
United States, whether or not such income is derived from sources within
the United States;
(ii) For taxable years beginning on or before December 31, 1966, is
derived from sources within the United States.
(h) Effective date. Paragraphs (a) through (f) of this section are
applicable with respect to taxable years beginning after December 12,
1967. However, if a taxpayer wishes to rely on the rules stated therein
for taxable years beginning before December 13, 1967, he may do so.
[Apr. 25, 2002]
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