A charity rented a portion of its premises to another charity with similar purposes. The IRS ruled that the rental income was not subject to the "unrelated business income tax" (UBIT), even though the property was "debt-financed," since the rental arrangement was "substantially related" to the charity's exempt purposes. The IRS noted that rental income received by a charity from "debt-financed" property generally is subject to UBIT. However, an exception applies to rental agreements that are substantially related to the charity's exempt purposes. The IRS noted that "an organization's leasing of its property to others may be substantially related to the performance of its exempt function." This test was met, the IRS concluded, because the rental agreement "will contribute importantly to the accomplishment of [the charity's] purposes" and will help further its "charitable goals."
The IRS noted that a rental agreement will be "substantially related" to a charity's exempt purposes if it meets any one or more of the following conditions: