IRS Reverses UBI Positions as to Educational Institutions’ Room Rentals

By Bruce R. HopkinsApril 1, 2011 | Print
(First published in the April 2011 issue of Bruce R. Hopkins Nonprofit Business Counsel, which was available electronically to subscribers in March.)

The IRS has reconsidered its positions, on application of the unrelated business rules, as to room rentals by tax-exempt educational institutions, basically holding that rentals to anyone other than students are unrelated businesses, in so doing revoking a 2006 private letter ruling (Priv. Ltr. Rul. 201106019).


The institution involved in this matter is a multi-denominational seminary (an educational institution described in IRC §  170(b)(1)(A)(ii)). Its mission includes educating leaders for ministry in churches and related organizations, extending the work of social justice, and academic teaching and research.

This entity arranges for its students and faculty to participate in various programs with educational and religious institutions located near its campus. It has several academic partnership agreements with another institution and offers dual degrees, a PhD program, and a master’s program in divinity and social work.

This campus is often used for meetings of groups of different backgrounds but similar purposes. Speakers and musical performers at the institution may also speak and perform at some of the other institutions. Likewise, speakers and performers at other institutions may speak and perform at the institution.

In a building on campus, the institution offers rooms on an overnight basis. A substantial use of this building is temporary housing of students waiting for long-term dormitory assignments. Accommodations are also offered to official visitors, such as speakers. Rental of these rooms is not limited to individuals affiliated with the institution or with any of the other nearby educational institutions. Indeed, rooms are offered to the public.

Commercial hotels are located in the area. Accommodations in this building and rates charged to guests are comparable to these hotels. When a lodger in the building is an official visitor who does not pay for the lodging, the revenue entry is charged to the host department. When the facility is used to provide temporary housing for students, the rate is the daily portion of the student housing fee.

In 2006, the IRS ruled that revenue generated from these room rentals to the public is unrelated business income, while revenue generated from providing living quarters in buildings that the institution owns to its students and faculty, potential students, family members of potential students, guest speakers, and guests of nonaffiliated nonprofit organizations in the area who are speakers or performers at the institution is related business income (Priv. Ltr. Rul. 200625035) (see the September 2006 issue).

Law and Analysis

The IRS reiterated that the provision of campus housing by this institution (and exempt educational institutions in general) to students, whether in its dormitories or temporarily elsewhere, and related services are activities that are substantially related to exempt purposes. The new ruling does not address the matter of housing for faculty, other than to revoke the 2006 ruling on the point.

The IRS also ruled that revenue attributable to the provision of temporary lodging to the institutions’ students, in the building, while they await full-time campus housing is a related business. Otherwise, the IRS wrote, this building is operated in the manner of a “boutique hotel.” Thus, all other rental revenue was ruled to be unrelated business income, because the institution failed to establish a substantial and causal relationship between the guests’ stays and its exempt purposes. (The IRS allowed that the institution “may have shown some relatedness.”) The IRS observed that the institution did not provide an explanation as to how any of the categories of paying guests came to this boutique hotel other than through its general reservation system. [24.5(a)]

Commentary: The IRS has struggled with this case. In the 2006 ruling, the IRS held that the institution’s provision of living quarters for its students is an activity protected from unrelated business income taxation by the convenience doctrine. [24.7(b)] This position, however, was incorrect: the provision of housing by an exempt educational institution to its students is a substantially related activity. There is no need to rely on an exception from the unrelated business rules. The IRS fixed this aspect of the ruling in the new one, without discussion of the point.

In this ruling, however, the IRS ruled that this provision of campus housing to students contributes importantly to the institutions’ “charitable purpose of advancing education.” That conclusion of law also is incorrect; these institutions’ exemption is based on their status as educational (not charitable) organizations (Reg. §  1.501(c)(3)-1(d)(3)(ii), Example (1)). Advancement of education, as charitable purpose or activity, is reserved for collateral undertakings in the educational context (Reg. § 1.501(c)(3)-1(d)(2)), such as provision of student housing for the benefit of an educational institution by an unrelated organization (e.g., Rev. Rul. 67-217).

This type of analysis necessarily involves line drawing, but the IRS has drawn the boundaries here too narrowly. For example, the rental of a room to an individual who the institution is recruiting (a potential student) should be a related activity, as should a rental to that individual’s parents. Likewise, the rental of a room to a guest speaker who has come to the campus to teach as part of the institution’s exempt educational function should qualify as a related activity.

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