*(a) General Principles

p. 581, carryover paragraph. Insert as last sentence:

The IRS ruled that income to be received by a private foundation on satisfaction of debts of legal fees earned by its founder, now deceased, will not be unrelated business income because the foundation will only be a passive recipient of the income; the unrelated business that was regularly carried on to generate the fees was conducted by the founder's law firm, not the foundation.^38.1

*(b) Profit Motivation Requirement

*p. 582, first paragraph. Insert footnote at end of last line:

1. 49.1. This matter of the requirement of a profit motive in the exempt organizations context closely parallels the law distinguishing bona fide businesses from hobbies (“hobby loss” rules (IRC § 183). Not all courts agree with the IRS's interpretation of these rules, however; an appellate court characterized the approach as “goofy” (Roberts v. Comm'r, 820 F.3d 247, 250 (7th Cir. 2016)). In Roberts, the court of appeals stated that the rule should be that if an activity is in an “industry known to attract hobbyists” and “loses large sums of money year after year that the owner of the business deducts from a very large income that he derives from other (and genuine) businesses,” a presumption arises that the activity is a hobby (id. at 254). Roberts also is the authority for the position that having two consecutive years of losses is an insufficient basis for concluding absence of a profit motive. Likewise, Estate of Stuller v. United States, 811 F.3d 890 (7th Cir. 2016).

p. 588. Insert following first complete paragraph, before heading:

*(f) Concept of Investment Plus

Activities that solely (or perhaps substantially) give rise to passive income, usually investment income, are generally not considered active businesses and thus not unrelated businesses.^85.1 A set of activities may, of course, entail more than passive investing and thus are considered one or more businesses. This concept has been dubbed by a federal appellate court investment plus.^85.2

This federal court of appeals held that a private equity fund was engaged in a trade or business as that phrase is applied in the context of the multiemployer pension termination liability law. This enhancement of the term trade or business may be applicable in the unrelated business setting, serving as a reminder that activities that go beyond conventional investing can be considered, for federal tax purposes, a business.

The appellate court concluded that at least one private equity fund, which operated a business (through layers of fund‐related activities), was not merely a passive investor but “sufficiently operated, managed, and was advantaged by its relationship with its portfolio company,”^85.3 a business that became bankrupt. This litigation started when the funds sought a declaration from a federal district court that they were not subject to liability for a share of the pension fund's unfunded vested benefits because, in part, they were not businesses as required by the law enacted as part of the Multiemployer Pension Plan Amendments Act of 1980.

The court characterized the funds' activities, engaged in once they acquired controlling interests in struggling companies (called “portfolio companies”), as acting to “implement restructuring and operational plans, build management teams, become intimately involved in company operations, and otherwise cause growth in the portfolio companies in which the [funds] invest.”^85.4 The funds do not have any offices or employees; they do not make or sell goods; they report only investment income on their tax returns. The overall plan is to subsequently sell what (it is intended) becomes a successful company and reap a profit.

As the court observed, these funds “engaged in a particular type of investment approach, to be distinguished from mere stock holding or mutual fund investments.”^85.5 The court found that “[n]umerous individuals with affiliations to various [funds'] entities…exerted substantial operational and managerial control over [the company], which at the time of the acquisition had 208 employees and continued as a [manufacturing] trade or business.”^85.6

In the unrelated business area, two Supreme Court opinions stand for the proposition that mere investing is not a trade or business.^85.7 The funds relied on those opinions in asserting that they were only investing, rather than engaging in business activities. But the court invoked its investment plus test. Pursuant to this test, more than investing with the objective of making a profit is needed to cause a set of activities to be a business. In this case, the appellate court held, the funds are “actively involved in the management and operation of the companies in which they invest.”^85.8 They engage in “extensive intervention,”^85.9 including (by means of their general partners) decisions about hiring, terminating, and compensating agents and employees of the portfolio companies.^85.10

Thus, as noted, this opinion should be instructive to tax‐exempt healthcare organizations, such as those with large endowment funds, in that what may initially appear to be mere investing (a passive undertaking) can be more than that. Where there is a form of investment plus, the bundle of activities may, for tax law purposes, be considered an active business, which is to say an unrelated business.

(a) General Principles

p. 590, note 101, fifth line. Insert time following preparatory.

*(c) Fundraising Activities

*p. 592. Insert as first complete paragraph, before heading:

The IRS ruled that a fundraising event conducted by a tax‐exempt alumni association, held every weekend for the benefit of a public college, is an unrelated business.^110.1 The association funds scholarships and other financial aid for the college's students, and provides financial support for college facilities, including a computer room in the library and maintenance of the football field. The association's principal argument was that the event contributes importantly to its exempt purposes by attracting potential students and donors to the college's campus, endearing the college to its alumni and others, and developing civic support for the college. The IRS dismissed these assertions as being “merely speculative,” noting that the event's website contains only statements about use of the funds raised.

(a) Exceptions for Activities

p. 632, note 370. Delete text and substitute:

• This amount is $10.60 for years beginning in 2016 (Rev. Proc. 2015‐53, 2015‐44 I.R.B. 615 § 3.29(1)).

(b) Exceptions for Income

p. 634, note 385. Insert following existing text:

• For example, the IRS ruled that revenue paid by vendors at an event, sponsored by a tax‐exempt alumni association and held in parking areas of the related exempt college, was not rent, largely because of the extensive services provided to the vendors that were said by the agency to go “far beyond” services “usually rendered for occupancy only” (Priv. Ltr. Rul. 201544029).

(b) Special Rule

p. 647, first complete paragraph, third line. Delete 2014 and insert 2015.

p. 647, note 466. Insert following existing text:

• These rules were extended by enactment of the Tax Increase Prevention Act of 2014 (Pub. L. No. 113‐295) § 131. They were subsequently reinstated and made permanent with enactment of the Protecting Americans from Tax Hikes Act of 2015 (Pub. L. No. 114‐113) § 114.