In response to a letter ruling request, the IRS ruled in PLR 201701002 that the income to be received by a private operating foundation were related to the organization’s exempt purpose.  Thus, the foundation would not be subject to either the unrelated business income tax nor the excess business holdings tax.

The letter ruling describes the organization’s exempt purpose as follows:

The Foundation is a tax-exempt organization described in section 501(c)(3) of the Code and classified as a private operating foundation under sections 509(a) and 4942(j)(3). It was formed for the charitable purpose of improving the lives of low income children and their families in State. The Foundation represents that, among other exempt activities, it furthers this charitable purpose through the collection, analysis, interpretation, and sharing of City metro region neighborhood data to improve community decision-making.

The organization has a comprehensive data collection and summary operation, making neighborhood data available through a searchable database tool.  But sometimes the organization is asked for “technical assistance” from social sector organizations (nonprofits, foundations, government agencies, and community organizations) to obtain information not readily available from the tools it makes available on its website.

The ruling notes:

The Foundation represents that a client social sector organization seeks technical assistance because it does not have the in-house technical or subject-matter expertise to run the type of analysis it is requesting.

A social sector organization seeking the Foundation's services initiates a project request to the Foundation. The Foundation represents that it administers an extensive screening process similar to its grant making screening process to ensure that each project it agrees to undertake for a client social sector organization will provide information and insight to advance the Foundation's mission, in addition to ensuring that the services will be provided only to those specific social sector organizations that are focused on improving the lives of low-income children and their families.

The Foundation represents that, except in the case where there are privacy restrictions on the data source, all of the data and information provided by the client for the project is added to the Foundation's repository for use in other projects as needed by the Foundation. The Foundation represents that these projects provide the Foundation with data about the health and well-being of City metro region children, their families, and their communities so that the Foundation can better understand community needs and highlight the greatest potential for impact. The additional data informs the Foundation's grantmaking activities and assists the Foundation with tracking community change occurring as a result of its funding efforts. The Foundation represents that completed projects are made available to the public on its website.

Unfortunately, the organization discovered such specialized work often was costly and would like to charge something for this work.  The request goes on to note:

The Foundation previously absorbed all costs of providing technical assistance, but absorbing all costs severely limits the number of projects that the Foundation engages in each year. In order to enable it to engage in more projects that bring in valuable new data and identify research questions not previously explored, the Foundation proposes to charge a “reasonable fee” for technical assistance requests. The Foundation will not charge for requests that require less than four hours of staff time. In addition, the Foundation represents that it will scope its pricing in alignment with clients' ability to pay. The Foundation represents that, on a case by case basis, it will charge fees less than cost.

The Foundation will continue to perform certain data activities without charge, including making data publicly available through its web-based searchable database tool, engaging in local and national partnerships to improve the data repository, and encouraging data-based decision-making.

The Foundation represents that, if it accepts a technical assistance request, the contract between the Foundation and the client social sector organization will provide that the client will not use the resulting product or information for any purpose other than the exempt purpose for which the Foundation agreed to provide the product or information, and will not resell the product or information.

The IRS first rules on whether this will generate unrelated business taxable income (UBIT) under IRC §511 due to this being an unrelated trade or business as defined in IRC §513.

The ruling begins by noting:

In this case, the Foundation's technical assistance services are substantially related to the performance of its exempt functions. The services are part of the organization's exempt data activities. The Foundation's screening process ensures that it only undertakes projects that will provide valuable research and data to serve its charitable mission of improving the lives of low income children and their families. Performing the data analysis and interpretation services related to each project gives the Foundation access to new data and identifies new research questions related to its charitable mission. The Foundation makes the results of each project publicly available on its website. It also requires that its clients never sell the results of any project or use the results for any purpose other than the exempt purpose for which the Foundation agreed to provide its products or services; namely, to improve the lives of low income children and their families.

The IRS also distinguishes this case from what some might have viewed as similar situations that were found to create unrelated trades or businesses:

The Foundation is not like the organizations in B.S.W. Group, Inc . v. Commissioner and Rev. Rul. 72-369, because its technical assistance services have a primarily charitable purpose and differ from those available through commercial ventures. In B.S.W. Group, Inc., as in Rev. Rul. 72-369, the consulting services served the individual needs of the clients, but the services themselves were not inherently charitable, nor did they further the charitable purpose of the organization itself. In this case, the technical assistance services themselves further charitable purposes. Further, providing the technical assistance furthers the Foundation's own charitable purposes because the Foundation uses resulting data and analysis for its own research and grantmaking purposes, in addition to assisting client social sector organizations to perform their own charitable activities. In addition, the Foundation's services differ from those commercially available because the Foundation has access to raw data that is not available to commercial ventures and its activities are performed by employees of the Foundation who have developed particular knowledge and extensive understanding of issues facing low income children and their families in City metro region and perform such functions as part of other activities that further the Foundation's exempt purposes. Finally, unlike the organization in B.S.W. Group, Inc., which did not appear to charge any fee less than cost, and the organization in Rev. Rul. 72-369, which charged fees at cost, the Foundation will determine on a case-by-case basis whether to charge a fee below cost to complete the project.

The IRS concludes that the foundation does not have an unrelated trade or business under IRC §513 and is therefore not subject to the unrelated trade or business tax found at IRC §511 on this income

The ruling next looks at whether the foundation will run afoul of the excess business holdings tax of IRC §4943.  IRC §4943(d)(3)(A) excludes from the definition of a business enterprise for this purpose a functionally related trade or business as defined by IRC §4942(j)(4).

The ruling notes:

Section 4942(j)(4) defines a “functionally related business” as: (1) a trade or business which is not an unrelated trade or business (as defined in section 513); or (2) an activity which is carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which is related (aside from the need of the organization for income or funds or the use it makes of the profits derived) to the exempt purposes of the organization.

In this case, the technical assistance services constitute a “functionally related business” because they are a trade or business which is not an unrelated trade or business as defined in section 513 of the Code. Thus, the Foundation will not be subject to tax under section 4943(a).