A §501(c)(3) tax-exempt hospital operates a gift shop (staffed by volunteers) and a public cafeteria (staffed by paid employees). Which activity generates Unrelated Business Income (UBI)?

Answer options:

Gift Shop only

Cafeteria only (if not primarily for convenience of staff/patients)

Both Gift Shop and Cafeteria

Neither

How to approach this question

Check exceptions. Volunteer labor = Exempt. Convenience of members = Exempt. Regular trade/business = Taxable.

Full Answer

B.Cafeteria only (if not primarily for convenience of staff/patients)✓ Correct

IRC §513(a). <br/>Gift Shop: Exempt because substantially all work is performed by volunteers (§513(a)(1)). <br/>Cafeteria: If open to public and not just for convenience of patients/employees, it is a trade or business regularly carried on and taxable.

Common mistakes

Assuming all income of a non-profit is exempt.

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