Total rental income | $6,000 |
Deductions directly connected with rental income | $1,000 |
Debt/basis percentage ($30,000/$50,000) | 60% |
Rental income treated as gross income from an unrelated trade or business (60 percent of $6,000) | $3,600 |
Less the allowable portion of deductions directly connected with such income (60 percent of $1,000) | $600 |
Net rental income included by X in computing its unrelated business taxable income pursuant to section 514 | $3,000 |
M's taxable income (disregarding rent paid to Z) | $500,000 |
Less taxable income from dormitory | $150,000 |
Excess taxable income | $350,000 |
Ratio ($350,000/$500,000) | 7/10 |
Total rent paid to Z | $100,000 |
Total deductions ($4,000 + $16,000) | $20,000 |
Rental income treated under section 512(b)(15) as gross income from an unrelated trade or business (7/10 of $100,000) | $70,000 |
Less deductions directly connected with such income (7/10 of $20,000) | $14,000 |
Net rental income included by Z in computing its unrelated business taxable income pursuant to section 512(b)(15) | $56,000 |
Total rents | $10,000 |
Deductions directly connected with such rents | $2,000 |
Debt/basis percentage ($150,000/$300,000) | 50% |
Rental income treated as gross income from an unrelated trade or business (50 percent of $10,000) | $5,000 |
Less the allowable portion of deductions directly connected with such income (50 percent of $2,000) | $1,000 |
Net rental income included by Z in computing its unrelated business taxable income pursuant to section 514 | $4,000 |
Example. On January 1, 1967, A transfers property to X, an exempt organization described in section 501(c)(3), which immediately places the property in a fund. On January 1, 1971, A transfers additional property to X, which property is also placed in the fund. In exchange for each transfer, A receives income participation fund certificates which entitle him to a proportionate part of the fund's income for his life and for the life of another individual. None of the payments made by X are treated by the recipients as the proceeds of a sale or exchange of the property transferred. In this situation, none of the property received by X from A is treated as debt-financed property.
but the land is actually used by the organization in furtherance of its exempt purpose within the 10-year period, such property (subject to the provisions of subparagraph (4) of this paragraph) shall not be treated as debt-financed property for any period prior to such conversion.
such credit or refund may nevertheless be allowed or made, if a claim is filed within 1 year after the close of the taxable year in which such actual use condition is satisfied. For a special rule with respect to the payment of interest at the rate of 4 percent per annum, see section 514(b)(3)(D), prior to its amendment by section 7(b) of the Act of January 3, 1975 (Pub. L. 93-625 , 88 Stat. 2115).
Example. Y, a calendar year exempt organization, acquires real property in January 1970, which is contiguous with other property used by Y in furtherance of its exempt purpose. However, Y does not satisfy the Commissioner by January 1975, that the existing structure will be demolished and the land will be used in furtherance of its exempt purpose. In accordance with this subparagraph, from 1975 until the property is converted to an exempt use, the income derived from such property shall be subject to the tax on unrelated business income. During July 1979, Y demolishes the existing structure on the land and begins using the land in furtherance of its exempt purpose. At this time Y may file claims for refund for the open years 1976 through 1978. Further, in accordance with this subparagraph, Y may also file a claim for refund for 1975, even though a claim for such taxable year may be barred by the statute of limitations, provided such claim is filed before the close of 1980.
26 C.F.R. §1.514(b)-1