• IRS Issues New Ruling Regarding Hotels Operated by Colleges and Universities
  • March 7, 2011 | Author: Raymond J. Casella
  • Law Firm: Shipman & Goodwin LLP - Hartford Office
  • The IRS has ruled that revenue generated from renting rooms to persons other than students constitutes unrelated business taxable income.

    In a recent private letter ruling, the IRS articulated its current position with respect to the provision of accommodations by a college or a university to individuals other than its students and faculty. The underlying issue involves whether the income generated from providing rooms to non-students, such as family members of students, potential students, family members of potential students, and guest speakers, constitutes unrelated business taxable income.

    After reiterating its longstanding position that revenue generated from providing living quarters to students does not constitute unrelated business taxable income, the IRS ruled that revenue generated from renting rooms to persons other than an institution’s students constitutes unrelated business taxable income. The ruling revoked a 2006 private letter ruling to the same school that indicated that temporary living quarters provided to family members of students and faculty, potential students, family members of potential students, guest speakers, and musical performers, did not constitute unrelated business taxable income (the 2011 ruling does not address faculty).

    Generally, unless a specific exception applies, income from a commercial activity of a college or university will constitute unrelated business taxable income if the income is from a regularly carried on trade or business that is not substantially related to the organization’s educational activities. Though renting rooms to students generally constitutes a trade or business activity, it is considered by the IRS to be substantially related to an institution’s educational activities and, thus, does not constitute unrelated business taxable income. This conclusion is supported by another longstanding IRS position that certain ancillary activities carried on for the convenience of students or employees do not constitute an unrelated trade or business. To the contrary, renting rooms to non-students in a manner similar to the provision of rooms by a commercial hotel is not generally considered by the IRS to be substantially related to an institution’s educational activities.

    It is important to note that there are situations in which the provision of rooms to non-students in a commercial-like manner will not generate unrelated business taxable income. Those situations include hotels operated as part of a college’s or university’s hotel management program or hotels operated out of necessity by geographically remote institution. These situations are treated differently because these guests’ stays are causally related to the exempt purpose of the college or university— teaching the hotel management students and providing local access to educational activities that is not otherwise available, respectively.

    Practitioners recognize the significance of this ruling outside the limited context of housing provided by educational organizations. This ruling is part of a recent trend by the IRS to closely examine commercial activities conducted by exempt organizations. Recent rulings have demonstrated a more critical view on what activities are substantially and causally related to exempt an exempt organization’s charitable purposes when similar activities are conducted by for-profit entities.