The UBIT: Leveling an Uneven Playing Field or Tilting a Level One?

Fordham Law Review Volume 76 Issue 2 Article 12 2007 The UBIT: Leveling an Uneven Playing Field or Tilting a Level One? Michael S. Knoll Follow this and additional works at: https://ir.lawnet.fordham.edu/flr Part of the Law Commons Recommended Citation Michael S. Knoll, The UBIT: Leveling an Uneven Playing Field or Tilting a Level One?, 76 Fordham L. Rev. 857 (2007). Available at: https://ir.lawnet.fordham.edu/flr/vol76/iss2/12 This Article is brought to you for free and open access by FLASH: The Fordham Law Archive of Scholarship and History. It has been accepted for inclusion in Fordham Law Review by an authorized editor of FLASH: The Fordham Law Archive of Scholarship and History. For more information, please contact . The UBIT: Leveling an Uneven Playing Field or Tilting a Level One? Cover Page Footnote Theodore K. Warner Professor, University of Pennsylvania Law School, and Professor of Real Estate, Wharton School of the University of Pennsylvania. I have benefited from presentations made at the University of Pennsylvania Law School, the University of Toronto's Tax Law and Policy Workshop, and the Fordham University School of Law and Lincoln Center for the Performing Arts Symposium Nonprofit Law, Economic Challenges, and the Future of Charities. I thank Alvin Dong for his assistance with the research. This article is available in Fordham Law Review: https://ir.lawnet.fordham.edu/flr/vol76/iss2/12 THE UBIT: LEVELING AN UNEVEN PLAYING FIELD OR TILTING A LEVEL ONE? Michael S. Knoll* INTRODUCTION If you take a walk along the Upper West Side of Manhattan, you will see numerous restaurants, especially on the avenues. There is, however, a stretch of the west side of Broadway, between 60th and 65th Streets, where there are no restaurants open to the public. Occupying that land are two prominent New York institutions: the Lincoln Center for the Performing Arts and Fordham Law School. The difficult time that pedestrians walking past Lincoln Center and Fordham have finding a bagel or a latte will change when the remodeled Lincoln Center opens in 2010. The current renovation plans call for tearing down the wall that separates Lincoln Center from the pedestrian traffic along Broadway and opening the plaza, famous for its fountain, to the street. Like much contemporary urban architecture, the buildings at Lincoln Center seek to integrate that institution into its neighborhood by removing barriers that keep out pedestrians. Lincoln Center will also reach out to its neighbors by hosting several restaurants open to the public. The managers of Lincoln Center hope that those restaurants will attract not only individuals attending events at the center, but also passersby and neighborhood residents. By operating restaurants open to the general public, Lincoln Center will find itself in direct competition with numerous private restaurants in the area. 1 However, unlike almost all of the establishments with which it will compete, the Lincoln Center restaurants will be owned and operated by a nonprofit organization. As a nonprofit under § 501(c)(3) of the Internal Revenue Code, Lincoln Center is exempt from federal tax on its income from activities that are related to its exempt function. Almost all competing establishments-whether owned by individuals directly, through passthrough entities, or through corporations-are not tax exempt. That * Theodore K. Warner Professor, University of Pennsylvania Law School, and Professor of Real Estate, Wharton School of the University of Pennsylvania. I have benefited from presentations made at the University of Pennsylvania Law School, the University of Toronto's Tax Law and Policy Workshop, and the Fordham University School of Law and Lincoln Center for the Performing Arts Symposium Nonprofit Law, Economic Challenges, and the Future of Charities. I thank Alvin Dong for his assistance with the research. 1. Currently, the eating establishments within Lincoln Center cannot be seen from the street and are mostly inside of venues that require tickets for entry. They also compete with private restaurants, but not as directly as will the new restaurants. FORDHAM LA W REVIEW situation raises two policy questions: [Vol. 76 Will the Lincoln Center restaurants have a tax-induced advantage over other restaurants in competing for diners? And if so, would a tax on the unrelated business income of nonprofits, if it applied to the Lincoln Center restaurants, undo that advantage? Although the Lincoln Center renovation raises the two questions posed above, they are not unique to it. For-profit businesses frequently find themselves in direct competition with nonprofits. Universities, religious institutions, museums, and other nonprofit organizations frequently operate restaurants. They also operate bookstores, gift shops, coffee shops, hotels, gyms, and other facilities that are open to the public. These facilities, which compete directly with for-profit facilities, often fall within the nonprofit's tax exemption. In some instances, the competition from nonprofits might appear to be an insignificant threat to private enterprise. Think, for example, of one Girl Scout selling cookies. In aggregate, however, the Girl Scouts sell many cookies, some portion of which reduces the sales of for-profit bakeries. In other cases, the competition might seem small from a national perspective, but still constitutes a serious threat to a small group of local competitors. In some instances, nonprofits have started ventures that were narrowly focused on taking customers away from competing for-profit businesses. For example, in Chicago in the 1990s, several major museums, including the Art Institute, Shedd Aquarium, and the Field Museum, began holding afternoon cocktail parties where they produced revenue through admissions fees and drink sales. These events, which were in direct competition with more traditional watering holes, were specifically aimed at shifting 2 customers from bars and restaurants to the museums. In still other fields, for-profit and nonprofit businesses regularly compete head-to-head. For example, there are both nonprofit and for-profit day care facilities, nursing homes, hospitals, and schools. In all of these fields, forprofit businesses and nonprofits exist side by side. They regularly compete against one another for customers, and, in many markets, both nonprofits and for-profit businesses hold substantial market shares. Although the commercial activities of nonprofits are most visible when nonprofits sell directly to consumers, nonprofits also compete with forprofit entities in the business-to-business sector of the economy. For example, in Nashville, Tennessee, Baptist Hospital, the region's largest nonprofit hospital, built a $15 million, eighteen-acre office and training facility that it rents to the Tennessee Titans professional football team. 3 2. Helmut K. Anheier & Stefan Toepler, Commerce and the Muse: Are Art Museums Becoming Comm (...truncated)