Fair Is fair.

• Author: Kenny, Laura
• Position: Tax-exempt organizations income from short-term leases of real property

Many college campuses and museums are beautiful settings for weddings, bar mitzvahs and corporate functions. Renting scenic facilities is a great way for nonprofit organizations to generate extra revenue to support their missions.

In general, this activity produces unrelated business income if it is regularly carried on and services are provided for a customer and its guests.

While rental income from real estate is generally nontaxable, facility rentals often require organizations to provide other services for special functions (such as security, music or use of a liquor license). These services taint the rental income, resulting in taxable income. Nevertheless, some Service decisions indicate that there may be an opportunity to structure these contracts to obtain the best possible tax position.

Recently, the IRS issued two letter rulings, in which each nonprofit organization's primary purpose was conducting agricultural/educational fairs; one fair lasted 17 days, the other five or six days. During the off-season when the fairs were not being held, the organizations rented out their facilities on an interim basis to unrelated, outside parties.

In Letter Ruling (TAM) 9835001, the exempt organization billed fees for renting the space. The fees included customary related services, such as security and custodial services. It separately stated the amounts charged for various other services performed for...