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

37 Pages Posted: 7 Nov 2007 Last revised: 17 Aug 2009

See all articles by Michael S. Knoll

Michael S. Knoll

University of Pennsylvania Law School; University of Pennsylvania Wharton School -- Real Estate Department


After grateful alumni acquired the Mueller Spaghetti Company on behalf of New York University, and the courts held that the university did not have to pay tax on the pasta maker's income, Mueller's competitors cried foul. Congress responded to their pleas and enacted the unrelated business income tax (UBIT). The UBIT subjects an otherwise tax-exempt entity, such as a charitable institution or a religious organization, to tax on its income from a trade or business that is not substantially related to the organization's tax-exempt purpose. The UBIT is widely viewed as leveling the playing field between taxable for-profit businesses and tax-exempt nonprofits. Although it seems obvious that the nonprofits' tax exemption would provide them with a tax-induced advantage over their for-profit competitors, an across-the-board exemption from tax, such as that granted to nonprofits, does not generally provide such an advantage. Accordingly, the effect of the UBIT is not to level the playing field, but rather to tilt it against nonprofits and to the advantage of for-profit businesses. Furthermore, because nonprofits do not enjoy a tax-induced advantage in competitiveness by virtue of their exemption from tax, there is no benefit that they can leverage by issuing market-rate debt to fund their investments. Accordingly, the UBIT provisions that sweep debt-financed investments within its reach are also problematic.

Keywords: Unrelated business income tax, tax-exempt entity, charity, religious organization, nonprofit organization, debt-financed investments, for-profit business, federal income taxation, competitiveness, unfair competition, tax competition, competitive advantage, private activity bonds, property tax

JEL Classification: H25, K34

Suggested Citation

Knoll, Michael S., The UBIT: Leveling an Uneven Playing Field or Tilting a Level One?. Fordham Law Review, Vol. 76, p. 857, 2007; U of Penn, Inst for Law & Econ Research Paper No. 07-29. Available at SSRN:

Michael S. Knoll (Contact Author)

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-898-6190 (Phone)
215-573-2025 (Fax)

University of Pennsylvania Wharton School -- Real Estate Department ( email )

Philadelphia, PA 19104-6330
United States

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