We recently answered a question related to a church opening its parking lots for patrons of a nearby football stadium in exchange for donations (read the previous post here: Stadium Parking Income for a Church). In relation to that situation, a reader asks why the church may be subject to UBIT (unrelated business income tax) if the work is performed by volunteers.
The question references an exception to UBIT in IRS Publication 598, which states, "Any trade or business in which substantially all the work is performed for the organization without compensation is not an unrelated trade or business." Again, please reference our earlier post for more on the specifics of an unrelated trade or business.
This exception would seem to include the situation under consideration, but the phrase "substantially all the work" is extremely important in determining whether income is exempt. This issue was addressed in IRS Letter Ruling 982206, issued January 29, 1998. M, a tax-exempt organization that received income in return for providing space for the storage of camping trailers, felt that it should not be subject to UBIT on this income because the vast majority of the work was performed by volunteers. Both M and the IRS agreed that the income itself would be subject to UBIT, but M contended that the volunteer exemption should apply. However, according to the ruling, "the exclusion from unrelated business income for volunteer labor under section 513(a)(1) of the Code is only applicable when the activity performed by the volunteers is a material income producing factor in carrying on the activity." In this case, the IRS held that the payments ("donations" in our question) were "for the use of the facility over a period of time rather than the minimal services attendant with the movement of the units into and out of the building." In essence, the patrons were paying for the use of the space, not for the minimal services performed by the volunteers, including services to collect monies paid for the use of the facilities.
The application to our question is clear: in the situation presented here, where the use of the space is the primary, regularly conducted service provided in exchange for payment, the work performed by volunteers is not substantial enough to provide for exemption from UBIT.