IRS written determination 201444043

Private letter rulings and published taxpayer determination letters. Native document type is retained separately; a determination letter is not labeled a private letter ruling. These taxpayer-specific releases cannot be used or cited as precedent under 26 USC 6110(k)(3); applicability and current legal force are not independently certified. Keep repeated UILC subjects attached to one actual numbered document.

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TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION
Number: 201444043
Release Date: 10/31/2014
Date: August
5, 2014
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224
UIL: 502.00-00; 503.00-00; 512.01-01
LEGEND:
University:
LLC:
Dear
We have considered your ruling request dated February 14, 2014, and as amended on May
9,
2014, requesting rulings under Internal Revenue Code (I.R.C.) §§ 501 (c)(3), 502, and 512.
FACTS
You have been recognized by the Internal Revenue Service as tax-exempt under§ 501 (c)(3)
and classified as a supporting organization
under§ 509(a)(3). Your tax-exempt purpose has
been to provide a broad range
of financial support (i.e., fundraising, asset administration,
investment activities, etc.) for University, which
is a college recognized as tax-exempt under§
501 (c)(3) and classified as an educational organization under§ 170(b)(1 )(A)(ii). In addition,
your board members also help mentor University students.
LLC is a limited liability company. You are the sole member
of LLC. You state that LLC is
considered as a disregarded entity for federal tax purposes under Treas.
Regs.§ 301.7701-3,
with LLC's activities attributed to you. LLC purchased land and commercial property (hereafter
"Retail Center'') adjacent to University's campus from an unrelated third party utilizing a
commercial loan and a cash contribution from you. You did not receive any financing from the
seller, any person related to the seller, any qualified trust, or any person related to a qualified
trust. The Retail Center buildings are leased to tenants, and which leases LLC assumed the
rights and obligations
of the landlord/lessor at closing. The business reasons for your purchase
(through LLC) include (1) the unique opportunity to enhance University's community by
investing
in property adjacent to University's campus; (2) the opportunity to acquire the property.
at a favorable price from a distressed seller; and (3) the opportunity to realize a significant return
on your investment in the form of both rental revenues and long-term appreciation in the
property's value.

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Each lease provides for the tenanUiessee to make rental payments to the landlord/lessor for the
use of the Retail Center. You affirm that the rents payable under the leases are for occupancy
of the retail space, with no portion of the rents being attributable to the use of personal property.
The rent for each lease
is a fixed amount specified in the applicable lease except that one lease
provides for additional rental payments based on gross receipts from the leased premise.
Furthermore, none of the leases provide for payments based
on net income or profits derived
from the leased property. Finally, you state that Retail Center will not be leased to the seller or
any
affiliate of the seller.
Under the leases, LLC is required to provide certain property management and maintenance
services with respect to the Retail Center. The maintenance services include the maintenance
of (1) structural portions of the Retail Center, (2) underground utility and sewer pipes, (3) areas
of the Retail Center, (4) grounds surrounding the Retail Center, and (5) common areas
of the
Retail Center. Management services include collecting rents, ensuring lease provisions are
enforced, negotiating new leases, and ensuring that common electricity, gas, sewer and other
standard utility services are supplied to the Retail Center. Collectively, these activities comprise
LLC's "Rental Activities." You state that LLC contracts with a third-party property management
company to conduct the
Rental Activities. You state that neither you nor LLC will engage
in the
Rental Activities directly.
You affirm that the acquisition of the Retail Center did not diminish the size and scope or alter
the nature of your charitable program. Other than the debt service expenditures and
management service fees paid, you expect your
expenditures after the acquisition to be
substantially
similar to your expenditures prior to the acquisition. Review of your financial
statements, including your filed Form 990s, shows that prior to the acquisition you conducted a
robust charitable program
in regard to your annual support of University. You further affirmed
that, ultimately, one hundred percent of the net profits from the Retail Center will be contributed
to University, its endowment, or otherwise expended on University's behalf.
RULINGS REQUESTED
1. The ownership of the Retail Center by LLC and the conduct of Rental Activities on behalf
of LLC will not provide a basis for the revocation of your tax-exempt status under §
501 (c)(3).
2. Rental payments to LLC by tenants in accordance with the terms of the leases will not
be treated as
unrelated business taxable income to you
under§ 512(b)(3).
3. The conduct of the Rental Activities on behalf of LLC and the payment of rent to LLC
under the leases will not cause you to be classified as a feeder organization under §
502.
LAW

3
I.R.C. § 170(b)(1)(A) (ii) provides for a charitable deduction for an educational organization
which normally maintains a regular faculty and curriculum and normally has a regularly enrolled
body of pupils or students
in attendance at the place where its educational activities are
regularly carried
on,
I.R.C. § 501 (c)(3) provides for the exemption from federal income tax of organizations which are
organized and operated
exclusively for charitable purposes and no part of the net earnings of
which inures to the benefit of any private shareholder or individual.
I.R.C. § 502(a) provides that
an organization operated for the primary purpose of carrying on a
trade or business for profit shall not
be exempt from taxation under § 501 on the ground that all
of its profits are payable to one or more organizations exempt from taxation under § 501.
I.R.C. § 502(b)(1) provides that the term "trade or business" shall not include the deriving of
rents which
would be excluded under§ 512(b)(3}, if§ 512 applied to the organization.
I.R.C. § 509(a)(3) defines a supporting organization as (A)
an organization that is organized,
and at all times thereafter is operated, exclusively for the benefit of, to perform the functions of,
or to carry out the purposes of one or more specified organizations described in paragraph (1)
or (2) of §509(a); (B) is (i) operated, supervised, or
controlled by one or more organizations
described
in paragraph (1) or (2) of §509(a}, (ii) supervised or controlled in connection with one
or more such organizations, or (iii) operated
in connection with one or more such organizations;
and (C) is not controlled directly or indirectly by one or more disqualified persons (as defined
in
§ 4946) other than foundation managers and other than one or more organizations described in
paragraph (1) or (2) of§ 509(a).
I.R.C.
§
511 (a)(1) imposes a tax on the unrelated business taxable income of organizations
otherwise exempt from Federal income taxation under§ 501(c)(3).
I.R.C. § 512(a)(1) defines "unrelated business taxable income" (UBTI)
as the gross income
derived by any organization from any
unrelated trade or business regularly carried on by it, less
allowable
deductions directly connected with the carrying on of such trade or business.
I.R.C. § 512(b)(3) excludes certain rents from the calculation of (UBTI). Specifically,
in the case
of
rents-
(A) Except as provided in subparagraph (B), there shall be excluded-
(i) all rents from real property (including property described in § 1245(a)(3)(C)), and
(ii) all rents from personal property (including for purposes of this paragraph as
personal property any property described in § 1245(a)(3)(B)) leased with such real
property, if the rents attributable to such personal property are an incidental amount of
the total rents received or accrued under the lease, determined at the time the personal
property is placed
in service.
(B) Subparagraph (A)
shall not
apply-
(i) if more than 50 percent of the total rent received or accrued under the lease is
attributable to personal property described
in subparagraph (A)(ii), or

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(ii) if the determination of the amount of such rent depends in whole or in part on
the income or profits derived by any person from the property leased (other than an
amount based on a fixed percentage or percentages of receipts or sales).
(C) There shall be excluded all deductions directly connected with rents excluded under
subparagraph (A).
I.R.C. § 513(a) defines "unrelated trade or business" to mean any trade or business the conduct
of which is not substantially related (aside from the need for income) to the exercise or
performance
of the organization's exempt purpose or function that constitutes the basis for its
exemption
under§ 501.
I.R.C. § 514(b)(1) For purposes of this section, the term "debt-financed property" means any
property which is held to produce income and with respect to which there is an acquisition
indebtedness (as defined
in subsection (c)) at any time during the taxable year (or, if the
property was disposed of during the taxable year, with respect to which there was an acquisition
indebtedness at any time during the 12-month period ending with the date
of such disposition).
I.R.C. § 514(c)(9)(A) provides that except as provided
in subparagraph (B), the term "acquisition
indebtedness" does not, for purposes of this section, include indebtedness incurred by a
qualified organization
in acquiring or improving any real property.
I.R.C. § 514(c)(9)(C) provides that for purposes
of this paragraph, the term "qualified
organization" means (i)
an organization described in § 170(b )( 1 )(A)(ii) and its affiliated support
organizations described
in § 509(a)(3); ·
Treas. Reg. § 1.501 (c)(3)-1 (e)(1) provides that
an organization may meet the requirements of§
501 ( c)(3) although it operates a trade or business as a substantial part of its activities, if the
operation
of such trade or business is in furtherance of the organization's exempt purpose or
purposes and if the organization is not organized or operated for the primary purpose of carrying
on an unrelated trade
or business, as defined in§ 513. In determining the existence or
nonexistence of such primary purpose, all the circumstances must be considered, including the
size and extent
of the trade or business and the size and extent of the activities which are in
furtherance of one or more exempt purposes. An organization which is organized and operated
for the primary purpose of carrying
on an unrelated trade or business is not exempt under §
501 (c)(3) even though it has certain religious purposes, its property is held in common, and its
profits do not inure to the benefit
of individual members of the organization. (emphasis added).
Treas. Reg. § 1.502-1 (a) provides that, in the case of an organization operated for the primary
purpose
of carrying on a trade or business for profit, exemption is not allowed under§ 501 on
the ground that all the profits
of such organization are payable to one or more organizations
exempt from taxation under §
501.
In determining the primary purpose of an organization, all
the circumstances must be considered, including the size and extent
of the trade or business
and the size and extent
of those activities of such organization which are specified in the
applicable paragraph
of§ 501.
Treas. Reg. § 1.512(b)-1 (c)(5) defines the rendering of services. For purposes of this

5
paragraph, payments for the use or occupancy of rooms and other space where services are
also rendered to the occupant, such as for the use or occupancy of rooms or other quarters
in
hotels, boarding houses, or apartment houses furnishing hotel services, or in tourist camps or
tourist homes, motor courts, or motels, or for the use of occupancy of space
in parking lots,
warehouses, or storage garages, does not constitute rent from real property. Generally, services
are considered rendered to the occupant if they are primarily for his convenience and are other
than those usually or customarily rendered
in connection with the rental of rooms or other space
for occupancy only. The supplying of maid service, for example, constitutes such service;
whereas the furnishing of heat and light, the cleaning of public entrances, exits, stairways, and
lobbies, the
collection of trash, etc., are not considered as services rendered to the occupant.
Payments for the use or occupancy of entire private residences or living quarters
in duplex or
multiple housing units, of offices in any office building, etc., are generally treated as rent from
real property.
Treas. Reg. § 1.513-1 (b) provides that for purposes
of§ 513 the term "trade or business" has
the same meaning it has in § 162, and generally includes any activity carried on for the
production of income from the sale of goods or performance of services.
Treas. Reg. § 1.513-1 (c) provides that
in determining whether trade or business from which a
particular amount of gross income derives is regularly carried
on, within the meaning of§ 512,
regard must be had to the frequency and continuity with which the activities productive of the
income are conducted and the manner
in which they are pursued.
Treas.
Reg.§ 1.513-1(d)(1) provides that gross income derives from unrelated trade or
business, within the meaning
of§ 513(a), if the conduct of the trade or business which produces
the income
is not substantially related (other than through the production of funds) to the
purposes for which exemption
is granted. The presence of this requirement necessitates an
examination of the relationship between the business activities which generate the particular
income
in question--the activities, that is, of producing or distributing the goods or performing
the services involved--and the accomplishment of the organization's exempt purposes.
Treas. Reg. § 1.513-1 (d)(2) defines the type of relationship required for a trade or business to
be
substantially related. Trade or business is related to exempt purposes,
in the relevant sense,
only where the conduct of the business activities has causal relationship to the achievement
of
exempt purposes (other than through the production of income); and it is substantially related,
for purposes of § 513, only if the causal relationship is a substantial one. Thus, for the conduct
of trade or business from which a particular amount of gross income
is derived to be
substantially related to purposes for which exemption
is granted, the production or distribution of
the goods or the performance of the services from which the gross income is derived must
contribute importantly to the accomplishment of those purposes. Where the production
or
distribution of the goods or the performance of the services does not contribute importantly to
the accomplishment of the exempt purposes of an organization, the income from the sale of the
goods or the performance of the services does not derive from the conduct of related trade or
business. Whether activities productive
of gross income contribute importantly to the
accomplishment of any purpose for which
an organization is granted exemption depends in
each case upon the facts and circumstances involved.

6
Rev. Rul. 58-547, 1958-2 C. B. 275, provides that a lease, the parties to which are both exempt
from tax
under§ 501(c)(3) and which otherwise constitutes a business lease within the meaning
of§ 514, will not be considered as substantially related to the charitable, educational, etc.,
purposes of the lessor solely because the lessee is likewise an exempt organization. The lease
of property under ordinary commercial arrangements does not constitute the exercise
of an
educational or charitable function
in and of itself. The fact that the lessee may be an exempt
educational organization does not cause the rental of space thereto to become a related activity
on the part of the lessor who may
be organized in part for educational purposes.
Rev. Rul. 64-182, 1964-1
C. B. 186, provides that a corporation organized exclusively for
charitable purposes derives its income principally from the rental of space
in a large commercial
office building which it owns, maintains and operates. The charitable purposes of the
corporation are carried out by aiding other charitable organizations, selected
in the discretion of
its governing body, through contributions and grants to such organizations for charitable
purposes. Held, the corporation is deemed to meet the primary purpose test
of§ 1.501 (c)(3)-
1 (e)(1
), and to be entitled to exemption from Federal income tax as a corporation organized and
operated exclusively for charitable purposes within the meaning of§ 501 (c)(3), where it is
shown to be carrying on through such contributions and grants a charitable program
commensurate in scope with its financial resources.
ANALYSIS
I. The first issue that needs to be addressed is whether LLC's operation of Retail Center is
the operation of an unrelated trade or business. If the operation of Retail Center is an unrelated
trade or business, it may jeopardize your exempt purposes if the operation of Retail Center is an
unrelated trade or business and a significant part of your activities, so then you are no longer
operated for charitable purposes as required under§ 501 (c)(3).
Section 513(a) defines "unrelated trade or business" as any trade or business the conduct
of which is not substantially related (aside from the need of such organization for income or
funds or the use it makes of the profits derived) to the exercise or performance by such
organization of its charitable, educational, or other purpose or function constituting the basis for
its exemption under §
501. The term "unrelated business income" pertains to income generated
from the sale of goods or services
as part of a regularly carried on trade or business that is not
substantially related to the exempt purpose of the organization.
See§§ 511, 512, and 513(a).
Although LLC is not an exempt organization, it
is a disregarded entity under Treas. Regs. §
301.7701-3 and its activities will be attributed to you. Renting retail space is an activity carried
on for profit, thus, constituting a trade or business. As such, because LLC's sole activity is to
operate Retail Center, the operation of which
is a regularly carried on and is considered a
business, you engage
in a regularly carried on trade or business. See §§ 1.513-1 (b), 1.513-
1 (c). The only issue remaining
is whether operating Retail Center is substantially related to your
exempt purposes, aside for your need for the income generated by the collection of rents from
the operation
of Retail Center. See § 1. 513-1 ( d)(2).
To determine whether the operation of
Retail Center and the collection of rents is
substantially related to your exempt purpose of supporting University, other than through the

7
production of income and the use of that income, necessitates an examination of the
relationship between the business activities that produced the income and the accomplishment
of your exempt purpose. Treas. Reg. § 1.513-1 (d)(1 ). "Thus, for the conduct of trade or
business from which a particular amount of gross income
is derived to be substantially related to
purposes for which exemption
is granted, the production or distribution of the goods or the
performance of the services from which the gross income
is derived must contribute importantly
to the accomplishment of those purposes." Treas. Reg. § 1.513-1 (d)(2). You have not provided
facts to support a conclusion that the operation of Retail Center, i.e., the leasing of commercial
space to commercial tenants, is substantially related to your exempt purposes other than
through the use of lease income to further the financial support of University. Operating a trade
or business for profit does not cause the trade or business to be substantially related to an
exempt purpose solely on the ground that all of the profits are payable to one or more
organizations exempt from taxation
under§ 501. See § 502. Specifically, the Internal Revenue
Service has held that the lease of property under ordinary commercial arrangements does not
constitute the exercise of an
educational or charitable function
in and of itself. Rev. Rul. 58-547,
1958-2
C. B. 275. As such, the operation of Retail Center is unrelated to your exempt purposes
and the income generated from the leasing of Retail Center generates unrelated business
income.
Although the leasing of Retail Center generates unrelated business income, an exception
exists
under§ 512(b)(3). Section 512(b)(3) excludes from the calculation of unrelated business
income all rents from real property. You stated that the income LLC collects from the leasing of
Retail Center is income from the rental of real property. You state that LLC contracts with a
third-party property management company to conduct the Rental Activities. You state that
neither you nor LLC will engage
in the Rental Activities directly. These are routine property
management and property maintenance services and are not considered the provision of
personal services by a landlord to their tenants. See Treas. Reg. 1.512(b)-1 (c)(5).
The exception
under§ 512(b)(3) for income generated from the rental of real property
does not
apply if the acquisition of real property was debt financed.
See§ 514(b)(1). However,
the inclusion
in unrelated business income for income from debt-financed property does not
apply for certain "qualified organizations."
See§ 514(c)(9)(A). The term qualified organization
includes organizations described
in§ 170(b)(1)(A)(ii) and its affiliated organizations described in
§ 509(a)(3). See§ 514(c)(9) (C). Because University is described in§ 170(b)(1)(A)(ii) and you
are described
in§ 509(a)(3), both University and you are qualified organizations and the income
generated from Retail Center will not be considered unrelated business income. Although the
income from Retail Center is not taxable as unrelated business income
under§ 512(b)(3), it is
still income from an unrelated trade or business
under§ 513.
II. The second issue to
be addressed is whether LLC's operation of Retail Center, an
unrelated trade or business, will jeopardize your tax-exempt status.
Section 501 (c)(3) requires tax-exempt organizations to be operated exclusively for
charitable purposes. You have previously received a determination that you have been
recognized by the Internal Revenue Service as tax-exempt
under§ 501 (c)(3) and classified as a
supporting organization under§ 509(a)(3) for providing a broad range of financial support (i.e.,

8
fundraising, asset administration, investment activities, etc.) to University, which is a college
recognized as tax-exempt
under§ 501 (c)(3) and classified as an educational organization under
§ 170(b)(1 )(A)(ii). An organization
will jeopardize its tax-exempt status if it
is no longer
organized or operated for§ 501 (c)(3) purposes. Because you are the sole member of LLC, the
activities of LLC will be attributed to you. As such, you will
be deemed to conduct the Rental
Activities described above and the operation of Retail Center. As stated above, these activities
are unrelated to your exempt purposes other than for your need of income and the use of this
income for your charitable purposes.
An organization may continue to meet the requirements
of§ 501 (c)(3) although it operates
a trade or business as a substantial part of its activities, if the operation of such trade or
business is in furtherance of the organization's exempt purposes and if the organization is not
organized or operated for the primary purpose of carrying
on an unrelated trade or business.
See Treas. Reg. § 1.501 (c)(3)-1 (e)(1). The facts of Rev. Rul. 64-182 are substantially similar to
those surrounding the acquisition and lease of Retail Center by LLC. The organization
in Rev.
Rul. 64-182 derived its income principally from the rental of space in a commercial office
building that the organization owned and maintained and operated. The charitable purpose of
the organization was carried out by aiding other charitable organitions through contributions and
grants to those organizations for charitable purposes.
In Rev. Rul. 64-182, the organization was
deemed to meet the primary purpose test of Treas. Reg. §
1.501 (c)(3)-1 (e)(1) and to be entitled
to exemption under §
501 ( c)(3) upon a showing that the organization's program of contributions
and grants was commensurate
in scope with the organization's financial resources. Accordingly,
you too should be deemed to meet the primary purpose test and continue to qualify for
exemption under §
501 ( c)(3) as long as your program of supporting University is commensurate
in scope with your financial resources.
Your charitable purpose
is to provide a broad range of financial support (i.e., fundraising,
asset administration, investment activities, etc.) for University. Through LLC, you acquired and
manage Retail Center and perform Rental Activities. You affirm that the acquisition of Retail
Center did not diminish the size and scope or alter the nature of your charitable program. Other
than the debt service expenditures and management service fees paid, you expect your
expenditures on behalf of University after the acquisition of Retail Center to be substantially
similar to your expenditures
on behalf of University prior to the acquisition. Review of your
financial statements, including your filed Form 990s, shows that prior to the acquisition you
conducted a robust charitable program
in regard to your annual support of University. You
further affirm that, ultimately, one hundred percent of the net profits from the Retail Center will
be contributed to University or its endowment or otherwise expended on University's behalf.
Accordingly, your "primary purpose" as used
in Treas. Reg. § 1.501 (c)(3)-1 (e)(1) is to engage in
a charitable program on behalf of University and the scope of this charitable program is
commensurate
in scope with your financial resources. Therefore, you are not organized and
operated for the primary purpose of carrying on an unrelated trade or business.
Ill. The third issue to be addressed is whether the
LLC's
Rental Activities will cause you to be
classified as a feeder organization
under§ 502. Section 502(a) provides that an organization
operated for the primary purpose of carrying on a trade or business for profit shall not be
exempt from taxation under§ 501 on the ground that all of its profits are payable to one or more

9
organizations exempt from taxation under§ 501. In determining the primary purpose of an
organization,
all circumstances must be considered, including the size and extent of the trade or
business and the size and extent of the organization's exempt activities. Treas. Reg. § 1.502-
1 (a). However, § 502(b)(1) provides that the term "trade or business" shall not include the
deriving of rents which would be excluded
under§ 512(b)(3), if§ 512 applied to the
organization. Section 512(b)(3) generally excludes rents from real property, subject to a couple
of exceptions.
In this case, none of those exceptions apply. Accordingly, if§ 512 applied,
LLC's rental income would be excluded from the calculation of unrelated business taxable
income
under§ 512(b)(3). Therefore, LLC's Rental Activities are not a trade or business within
the meaning
of§ 502, meaning that you will not be classified as a feeder organization under §
502.
CONCLUSION
Based on the foregoing, we rule as follows:
1. The ownership of the Retail Center by LLC and the conduct of Rental Activities on behalf
of LLC will not provide a basis for the revocation of your tax-exempt status under §
501 (c)(3).
2. Rental payments to LLC by tenants in accordance with the terms of the leases will not
be treated as unrelated business taxable income to you.
3. The conduct of the Rental Activities on behalf of LLC and the payment of rent to LLC
under the leases will not cause you to be classified as a feeder organization under§
502.
This ruling will be made available for public inspection under section 6110 of the Code after
certain deletions of identifying information are made. For details, see enclosed Notice 437,
Notice
of Intention to Disclose. A copy of this ruling with deletions that we intend to make
available for public inspection is attached to Notice 437. If you disagree with our proposed
deletions, you should follow the instructions
in Notice 437.
This
ruling
is directed only to the organization that requested it. Section 6110(k)(3) of the Code
provides that it may not
be used or cited by others as precedent.
This ruling is based on the facts as they were presented and
on the understanding that there will
be no material changes in these facts. This ruling does not address the applicability of any
section of the Code or
regulations to the facts submitted other than with respect to the sections
described. Because it could help resolve questions concerning your federal income tax status,
this ruling should be kept
in your permanent records.
If you have any questions about this ruling, please contact the person whose name and
telephone number are shown
in the heading of this letter.

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In accordance with the Power of Attorney currently on file with the Internal Revenue Service, we
are sending a copy
of this letter to your authorized representative.
Enclosure
Notice 437
Sincerely,
Michael Seto
Manager, EO Technical