BlueSKy

You are here

Can anti-cruelty animal shelter provide vet services without UBIT?

Your Legal Questions Answered

Can anti-cruelty animal shelter provide vet services without UBIT?

I represent a 501(c)(3) that has a charitable mission of the prevention of cruelty to animals. They trap/neuter and release feral cats and have adoption services. But they also provide non-cosmetic veterinary services at fair market value to the community at large. Can they provide these veterinary services at full rate or does it need to be "low cost" service below market rate. I am worried about unrelated business income tax. I cannot find any IRS Letter Rulings on this.

Your concern about unrelated business income tax (UBIT) is a valid one because it could cost the organization its 501(c)(3) exemption if it the income is unrelated and substantial.  (See Ready Reference Page: “Nonprofit Often Worry about UBIT”)  Whether those services would create unrelated business taxable income (UBTI) and require payment of UBIT probably depends on the purpose for which the organization is exempt. 

You are correct that the IRS has a dim view of providing general commercial services at fair market value, such as business consulting services to nonprofits hoping to operate more efficiently, and frequently rules that they are not charitable services.  But they more often tolerate fair market value charges for services, like admission to the orchestra, tuition at the private school, or the cost of books from a religious book publishing company, that they deem central to the charitable purpose of the organization.

The IRS considered questions like yours in three non-binding, non-precedential and perhaps somewhat inconsistent Technical Advice Memoranda about 40 years ago when it was issuing public guidance through these publications. In TAM 8303001 it found unrelated business taxable income for an anti-cruelty organization that was exempt only to provide anti-cruelty services but also provided general veterinary services.  In TAM 8450006 and TAM 8501002 it found no unrelated business taxable income for organizations exempt to provide anti-cruelty services and other services to animals.

Check the organization’s Form 1023 application for recognition of exemption to see what it told the IRS it would do when it sought its (c)(3) status.  If it doesn’t say anything about general veterinary services and you think you may fall on the other side of the not-so-bright line the IRS drew nearly 40 years ago or can’t modify your activities to be on the right side of the line, you may want to notify the IRS now in the “new program services” question in Part III of the next Form 990.  There isn’t really any other way to modify your scope of exemption.  If the IRS doesn’t object, you have the basis for arguing that the veterinary services are part of your exempt purposes. It is not a perfect solution, but may be worth considering if you didn’t tell the IRS earlier that you are doing this activity.

Tuesday, November 21, 2023

Add new comment

Sign-up for our weekly Q&A; get a free report on electioneering