The unrelated business taxable income (UBIT) of organizations described in § 501(c)(7), § 501(c)(9), and § 501(c)(17) includes all gross income, less deductions directly connected with the production of that income, except that gross income for this purpose does not include exempt function income. Also, the dividends received deductions for corporations are not allowed in computing unrelated business taxable income, because they are not expenses incurred in the production of income. Exempt function income is gross income from dues, fees, charges or similar items paid by members for the purposes for which exempt status was granted to the organization. Exempt function income also includes income that is set aside for qualified purposes.

The passive income of these types of organizations generally is not taxed if it is set aside to be used for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals. In addition, in the case of a § 501(c)(9) or a § 501(c)(17) organization, passive income is generally not taxed if it is set aside to provide for the payment of life, sick, accident, or other benefits. However, any amounts set aside that exceed the qualified asset account limit are unrelated business income. These organizations figure their asset account limits under § 419A. Special rules apply to the treatment of existing reserves for post-retirement medical or life insurance benefits. These rules are explained in § 512(a)(3)(E). Income derived from an unrelated trade or business MAY NOT BE SET ASIDE and therefore cannot be exempt function income. In addition, any income set aside and later spent for other purposes must be included in unrelated business taxable income.

Any gain on the sale of property used directly in performing an exempt function by a § 501(c)(7), § 501(c)(9), or § 501(c)(17) organization that is used to purchase other property that is used directly in performing an exempt function by these organizations is recognized only to the extent that the sales price of the old property exceeds the cost of purchasing the new property. For the nonrecognition of this gain to apply, the purchase of the new property must be within 1 year before the date of sale of the old property or within 3 years after the date of sale. For these purposes, the term "sale of property" includes the destruction in whole or in part, theft, seizure, requisition, or condemnation of the property.

For a discussion of current developments concerning UBIT, download UBIT: Current Developments. For a discussion of the general UBIT rules, see Unrelated Business Income Tax. For more information, download Publication 598, Tax on Unrelated Business Income of Exempt Organizations.