Organizations classified by the Internal Revenue Service as exempt from Federal income taxation reported a total of $7.6 billion of gross "unrelated business income" (UBI) for Tax Year 1998. While these organizations are generally tax-exempt, they are subject to Federal taxation of income received from commercial and other activities that are not substantially related to their tax-exempt missions. The 46,208 organizations filing a 1998 Form 990-T, Exempt Organization Business Income Tax Return, offset gross UBI with a total of $8.2 billion of deductions, resulting in an overall deficit of $0.6 billion. However, slightly more than half of the filers reported taxable profits (positive net income), which amounted to $1.7 billion.

Income is defined as UBI if it is produced from an activity that is conducted on a regular basis and is not directly related to an organization's tax-exempt mission. The fact that the income may be used for furthering an organization's exempt purposes does not alter the definition. Any profits from an organization's unrelated business activities are taxed at regular corporate or trust income tax rates [1].

Organizations reported $505.9 million of unrelated business income tax liability on Tax Year 1998 Forms 990-T. Total tax liability, which is computed as unrelated business income tax, plus other taxes, minus total credits, was $464.3 million [2]. Much of the total amount of additional taxes reported on Form 990-T for 1998 was the "proxy tax," which was imposed on certain membership dues used for lobbying activities. Figure A shows the computation of total tax liability for 1998.

Proxy Tax

The proxy tax is required to be reported on Form 990-T and is included in total tax, but it has no connection to the unrelated business income tax or an organization's involvement in unrelated business activities. The proxy tax, which was effective beginning with Tax Year 1994, is imposed on a tax-exempt organization's nondeductible lobbying and political expenditures when they are financed with dues collected from organization members, and the organization either fails to notify the members of their shares of dues that were spent on lobbying and political activities, or the organization fails to state the full amount of allocable dues in the notification.