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Stadium Parking Income for a Church

Question:

A church located next to a football stadium opens its parking lot to fans on Saturdays when the team has a home game. This happens about half a dozen times each year, and the parking lot is manned by volunteer church members. Parking is free, but the volunteers do solicit donations. Does this arrangement affect the church's tax-exempt status? How much control can these volunteers have over the church's use of the donations?

Answer:

First, this situation will not affect the tax exempt status of the church. Non-ministry related sources of income, although they do not affect the tax exempt status of the church, may be subject to unrelated business income tax (UBIT). According to IRS Pub. 598, churches may be subject to UBIT on "income from a trade or business regularly conducted by an exempt organization and not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity." This activity clearly meets all the criteria of the IRS definition, which subjects unrelated business income to tax, except possibly in the area of being "regularly conducted." IRS Code Section 513-1(c)(2)(i) addresses this issue:
Where income producing activities are of a kind normally undertaken by nonexempt commercial organizations only on a seasonal basis, the conduct of such activities by an exempt organization during a significant portion of the season ordinarily constitutes the regular conduct of trade or business. For example, the operation of a track for horse racing for several weeks of a year would be considered the regular conduct of trade or business because it is usual to carry on such trade or business only during a particular season.
Because the church opens its parking lot each time the stadium lots are open, the church is likely viewed as conducting its business regularly during the season in which comparable nonexempt commercial entities are engaging in the same business. Although the activity is not conducted year round, the church takes advantage of the opportunity whenever it is available. Based on these considerations, the church will most likely be subject to UBIT on this income. Expenses directly incurred in the production of this income may be deducted in the computation of UBIT.

The church should also carefully consider the amount of control allowed to the volunteers over the funds. Excess control by the volunteers could be viewed as disguised compensation if their influence produces personal benefit.  Rather than giving them direct influence on the use of the funds, the church should allow them input into the decisions of the committees that "control" the designation of funds.  

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