                                                      OCEAN PINES ASSOCIATION, INC., PETITIONER v.
                                                         COMMISSIONER OF INTERNAL REVENUE,
                                                                     RESPONDENT
                                                         Docket No. 5127–08.                     Filed August 30, 2010.

                                                   P, a homeowners association exempt from tax under sec.
                                                 501(c)(4), I.R.C., operated two parking lots and a beach club
                                                 eight miles from the area in which its members lived. The
                                                 parking lots and the primary beach club facilities were acces-
                                                 sible only to the association’s members and their guests. The
                                                 association did not report its net income from the parking lot
                                                 and beach club activities as unrelated business taxable
                                                 income on its tax returns for 2003 and 2004. R issued a notice
                                                 of deficiency determining that the net income was subject to
                                                 the unrelated business income tax because the operation of
                                                 the parking lots and the beach club is not substantially
                                                 related to the promotion of community welfare (the purpose
                                                 constituting the basis of the association’s exemption under
                                                 sec. 501, I.R.C., see secs. 1.501(c)(4)–1(a)(2), 1.513–1(a), (d)(1),
                                                 Income Tax Regs.) and because the revenue received from
                                                 operating the parking lots is not rent from real property
                                                 under sec. 512(b), I.R.C. Held: The operation of the parking
                                                 lots and the beach club is not substantially related to the pro-
                                                 motion of community welfare because the facilities are not
                                                 open to the general public. Held, further, the revenue received
                                                 from operating the parking lots is not rent from real property.

                                            Steven M. Gevarter, for petitioner.
                                            Jared W. Murphy, for respondent.

                                                                                     OPINION

                                        MORRISON, Judge: On November 29, 2007, respondent
                                      Commissioner of Internal Revenue mailed a notice of defi-
                                      ciency for the taxable years 2003 and 2004 to petitioner
                                      Ocean Pines Association, Inc. We refer to respondent as the
                                      IRS. We refer to petitioner as the Association. In the notice,
                                      the IRS determined the following deficiencies in income tax
                                      and additions to tax under section 6651(a)(1): 1
                                           1 Unless   otherwise indicated, all section references are to the Internal Revenue Code in effect


                                      276




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                                      (276)      OCEAN PINES ASSOCIATION, INC. v. COMMISSIONER                                      277


                                                                                                         Addition to tax
                                                        Year                   Deficiency                sec. 6651(a)(1)

                                                        2003                    $65,929                       $16,482
                                                        2004                     94,195                        23,549

                                      After concessions, the issues remaining for decision are: (1)
                                      whether the Association’s operation of a beach club and two
                                      nearby parking lots is substantially related to the promotion
                                      of community welfare (we hold that the operation is not
                                      substantially related, and that therefore the operation is sub-
                                      ject to the tax on unrelated-business income), and (2)
                                      whether the revenue received by the Association from its
                                      members for parking on its two parking lots is exempt from
                                      the tax on unrelated-business income as rent from real prop-
                                      erty within the meaning of section 512(b)(3) (we hold that
                                      the revenue is not rent from real property).

                                                                                Background
                                         The parties agreed to submit this case to the Court with-
                                      out trial under Rule 122. We adopt as findings of fact all
                                      statements contained in the stipulation of facts. The stipula-
                                      tion of facts and the attached exhibits are incorporated here
                                      by this reference. The Association is a homeowners associa-
                                      tion and nonstock corporation organized and incorporated
                                      under the laws of Maryland with its principal office in Mary-
                                      land. The IRS ruled that it was exempt from federal income
                                      tax as an organization described in section 501(c)(4) (civic
                                      league or organizations not organized for profit but operated
                                      exclusively for the promotion of social welfare).
                                         The Association’s articles of incorporation state that one of
                                      its purposes is ‘‘to further and promote the community wel-
                                      fare of property owners in the residential community located
                                      in Worcester County, Maryland known as ‘Ocean Pines’ ’’. Its
                                      membership consists of all of the owners of residential prop-
                                      erty within the 3,500-acre area known as Ocean Pines.
                                      According to the 2000 census, the population of Ocean Pines
                                      was 10,496. The Association collects property assessments
                                      and other fees from its members and enforces zoning restric-
                                      tions against its members. It maintains bulkheads, road-
                                      for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Proce-
                                      dure.




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                                      278                135 UNITED STATES TAX COURT REPORTS                                        (276)


                                      ways, and parking lots within Ocean Pines. The Association
                                      also operates recreational facilities in Ocean Pines that are
                                      open to both members and nonmembers, including five swim-
                                      ming pools, a golf course, two marinas, a yacht club, tennis
                                      complexes, a soccer field, 10 parks, and five walking trails.
                                      The Association provides, through its Recreation and Parks
                                      Department, various seminars, sports camps, a children’s
                                      softball league, swimming lessons, and adult aquatic pro-
                                      grams to both members and nonmembers. Some of the rec-
                                      reational facilities and services described above are free.
                                      Others are available only for a fee, which is typically higher
                                      for nonmembers than members. The Association maintains
                                      two volunteer fire stations and a police force. Parking within
                                      the Ocean Pines area is free and open to both members and
                                      nonmembers.
                                        The Association owns beachfront property approximately
                                      eight miles from the Ocean Pines area in Ocean City, an area
                                      within Worcester County, Maryland. The Ocean City prop-
                                      erty consists of two parking lots, containing 300 parking
                                      spaces in total, and an oceanfront beach club, known as the
                                      Ocean Pines Beach Club. The Association’s members who use
                                      the parking lots and the beach club commute approximately
                                      15 minutes by car from Ocean Pines to Ocean City. The
                                      beach club is open from the beginning of Memorial Day
                                      weekend until Labor Day (we refer to this period as the
                                      summer months). The beach club is closed during the eve-
                                      nings unless reserved for special events. The beach club
                                      allows both Association members and nonmembers to pur-
                                      chase food and beverage services and to use its restrooms for
                                      free. However, the swimming pool, gym lockers, and shower
                                      facilities are accessible only to Association members. The
                                      record does not reveal whether the Association charges a
                                      separate fee to its members who use these facilities. In the
                                      summer months, the Association limits use of the parking
                                      lots to its members who have purchased parking lot permits,
                                      and their guests. They may use the parking lots during the
                                      day until 4 p.m. Only the Association’s members are eligible
                                      to purchase permits for the parking lots. The Association’s
                                      members must pay a weekly or monthly fee depending on the
                                      period for which the permit is issued. The Association’s
                                      employees in Ocean Pines issue the permits. The Association
                                      leases the parking lots to third-party businesses during the




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                                      (276)      OCEAN PINES ASSOCIATION, INC. v. COMMISSIONER                                      279


                                      summer months from approximately 4 p.m. until approxi-
                                      mately 3 a.m. The Association also leases the lots during all
                                      nonsummer months. It provides no significant services to the
                                      third-party businesses. The Association employs a guard
                                      daily during the summer months from 8 a.m. until 4 p.m.
                                      The guard removes a chain barring entrance to the parking
                                      lots at the beginning of each day during the summer months
                                      (and replaces it at the end of each summer day) and checks
                                      the parking permit decals on the vehicles as they enter the
                                      parking lots. If the vehicles do not have permit decals, they
                                      are turned away. If any vehicle remains on the parking lot
                                      from the periods of use by the third-party businesses, the
                                      parking guard places a note on the vehicle demanding that
                                      the owner remove the vehicle from the parking lot as soon
                                      as possible. The parking guard does not collect fees or park
                                      vehicles; the lots offer no valet services. Parking is available
                                      upon a first-come, first-served basis; i.e., there are no
                                      assigned parking spaces. The Association does not maintain
                                      common areas in Ocean City, such as beach or bike paths,
                                      nor does it levy assessments on the residents or homeowners
                                      in Ocean City.
                                        In 2003, the Association received $232,089 in revenue from
                                      the two parking lots, $61,024 of which was paid by the third-
                                      party businesses. It paid $39,092 in expenses attributable to
                                      the operation of the parking lots by the Association (as
                                      opposed to the leasing of the parking lots to third-party
                                      businesses). It incurred a $20,486 net loss for operation of
                                      the beach club in 2003. In 2004, the Association received
                                      $266,487 in revenue from the two parking lots, $64,692 of
                                      which was paid by third-party businesses. It paid $21,939 in
                                      expenses attributable to the operation of the parking lots by
                                      the Association. It incurred a $1,741 net loss for operation of
                                      the beach club in 2004. The Association timely filed Form
                                      990, Return of Organization Exempt From Income Tax, but
                                      did not file the form on which the unrelated business income
                                      tax is reported, Form 990–T, Exempt Organization Business
                                      Income Tax Return. The Form 990 is not in the record.
                                        The IRS issued a notice of deficiency to the Association on
                                      November 29, 2007 (discussed above), determining that the
                                      Association owed unrelated business income tax on the net
                                      income attributable to the operation of its parking lots. The
                                      net income figures used to calculate the deficiency in unre-




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                                      280                135 UNITED STATES TAX COURT REPORTS                                        (276)


                                      lated business income tax for each tax year at issue included
                                      the income from the leasing of the parking lots to third par-
                                      ties and a deduction for the parking lot expenses, but
                                      excluded the losses from the operation of the beach club. 2
                                      The IRS determined the late-filing addition to tax in the
                                      notice because the Association failed to file a Form 990–T.
                                      The Association filed a petition in response to the notice of
                                      deficiency. When this case was called from the calendar for
                                      the trial session of this Court at Baltimore, Maryland, the
                                      parties filed a joint motion for leave to submit the case under
                                      Rule 122, which the Court granted, and a stipulation of set-
                                      tled issues. In the stipulation of settled issues, the IRS con-
                                      ceded that
                                      the revenue received by the Association from the leasing of its Ocean City
                                      parking lots to third parties in the evening hours and during the off-sea-
                                      son [3] is excepted from § 511 unrelated business taxable income because
                                      it satisfies the § 512(b) exception to unrelated business income for the rent
                                      from real property.

                                      The IRS also conceded that the Association was not liable for
                                      the late-filing addition to tax under section 6651(a)(1)
                                      because it relied on the advice of its accountants in deter-
                                      mining that filing a Form 990–T for the years at issue was
                                      not necessary. The parties stipulated that the amount of net
                                      income from the Association’s operation of the parking lots
                                      and the beach club potentially subject to the unrelated busi-
                                      ness income tax is $111,487 in 2003 and $178,115 in 2004.
                                      These net income amounts were calculated by excluding the
                                      revenue received from the third-party businesses for rental of
                                      the parking lots, by including the parking lot fees received
                                      from members of the Association, by deducting the losses
                                      from the operation of the beach club, and by deducting all of
                                      the expenses from the operation of the parking lots.

                                                                                Discussion
                                       The Association has the burden of proving that the deter-
                                      minations of the deficiencies in the notice are wrong. See
                                        2 As explained below, the IRS now concedes that the losses from the operation of the beach

                                      club are deductible against the net income figures used to calculate the deficiency.
                                        3 The revenue referred to in the stipulation of settled issues is the $61,024 paid in 2003 and

                                      the $64,692 paid in 2004 by the third-party businesses, unreduced by any expenses allocable
                                      to the Association’s operation of the parking lots.




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                                      (276)      OCEAN PINES ASSOCIATION, INC. v. COMMISSIONER                                      281


                                      Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
                                      For reasons explained below, we hold that the operation of
                                      the parking lots and the beach club is not substantially
                                      related to the promotion of community welfare and that the
                                      income from operation of the parking lots is not rent from
                                      real property within the meaning of section 512(b)(3). There-
                                      fore, the income from operation of the parking lots and the
                                      beach club is subject to the unrelated business income tax.
                                      I. Whether the Operation of the Parking Lots and the Beach
                                         Club Is Substantially Related to the Promotion of Com-
                                         munity Welfare
                                         Section 501(c)(4) exempts from Federal tax ‘‘Civic leagues
                                      or organizations not organized for profit but operated exclu-
                                      sively for the promotion of social welfare’’. Regulations clarify
                                      that ‘‘An organization is operated exclusively for the pro-
                                      motion of social welfare if it is primarily engaged in pro-
                                      moting in some way the common good and general welfare
                                      of the people of the community.’’ Sec. 1.501(c)(4)–1(a)(2),
                                      Income Tax Regs. By implication, the regulation defines
                                      ‘‘exclusively’’ to mean ‘‘primarily’’. Thus, ‘‘an organization will
                                      not be denied exemption if it partakes in activities not in fur-
                                      therance of an exempt purpose so long as such noncon-
                                      forming activities are insubstantial in comparison to activi-
                                      ties which further exempt purpose(s).’’ Ky. Bar Found., Inc.
                                      v. Commissioner, 78 T.C. 921, 923 (1982). Section 501(c)(4)
                                      organizations, like some other types of tax-exempt organiza-
                                      tions, must pay income tax on their ‘‘unrelated business tax-
                                      able income’’. See sec. 511(a)(1). Section 512(a)(1) defines
                                      ‘‘unrelated business taxable income’’. It provides:
                                      Except as otherwise provided in this subsection, the term ‘‘unrelated busi-
                                      ness taxable income’’ means the gross income derived by any organization
                                      from any unrelated trade or business * * * regularly carried on by it, less
                                      the deductions allowed by this chapter which are directly connected with
                                      the carrying on of such trade or business, both computed with the modi-
                                      fications provided in subsection (b).

                                      Section 513(a) provides that the term ‘‘unrelated trade or
                                      business’’ means any trade or business the conduct of which
                                      is not ‘‘substantially related (aside from the need of such
                                      organization for income or funds or the use it makes of the
                                      profits derived) to the exercise or performance by such




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                                      282                135 UNITED STATES TAX COURT REPORTS                                        (276)


                                      organization of its charitable, educational, or other purpose
                                      or function constituting the basis for its exemption under sec-
                                      tion 501’’. Accordingly, income is unrelated business taxable
                                      income if it is derived from a regularly carried-on trade or
                                      business that is not substantially related to the purpose con-
                                      stituting the basis of the organization’s exemption under sec-
                                      tion 501. See sec. 1.513–1(a), (d)(1), Income Tax Regs. For
                                      the conduct of a trade or business to be substantially related
                                      to the purpose or purposes for which the organization was
                                      granted a tax exemption, ‘‘performance of the services from
                                      which the gross income is derived must contribute impor-
                                      tantly to the accomplishment of these purposes.’’ Sec. 1.513–
                                      1(d)(2), Income Tax Regs. The parties agree that the parking
                                      lot and beach club activity constitute a regularly carried-on
                                      trade or business, but disagree as to whether the activity is
                                      substantially related to the purpose of promoting community
                                      welfare, the purpose constituting the basis of the Associa-
                                      tion’s exemption under section 501(c)(4).
                                         The Association contends that the parking lot and beach
                                      club activity ‘‘[promote] the community welfare of the prop-
                                      erty owners’’ of Ocean Pines, which is one of the purposes of
                                      the Association that was set forth in its articles of incorpora-
                                      tion. It argues that ‘‘the ability to walk on the beach or swim
                                      either in the ocean or in the pool at the * * * [beach club]
                                      * * * directly promotes the health and wellness (i.e.,
                                      ‘community welfare’) of the * * * [Association’s] members’’.
                                      The IRS argues, first, that the facilities at the beach club are
                                      solely recreational and thus would be nontaxable if operated
                                      by a section 501(c)(7) organization (a ‘‘club’’ that is ‘‘orga-
                                      nized for pleasure, recreation, and other nonprofitable pur-
                                      poses’’) but are taxable because they are operated by a sec-
                                      tion 501(c)(4) organization. It argues, second, that the beach
                                      club and the parking lots do not promote community welfare
                                      because they are not open to the general public. We need not
                                      determine whether the IRS’s first argument is correct. We
                                      agree with the IRS’s second argument. We conclude that the
                                      operation of the beach club and the parking lots does not pro-
                                      mote community welfare because they are not accessible to
                                      nonmembers; that is, the general public.
                                         In Flat Top Lake Association, Inc. v. United States, 868
                                      F.2d 108, 111–113 (4th Cir. 1989), the Court of Appeals for
                                      the Fourth Circuit held that a homeowners association that




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                                      (276)      OCEAN PINES ASSOCIATION, INC. v. COMMISSIONER                                      283


                                      restricts the use of its facilities to its members does not pro-
                                      mote the welfare of the community. Although Flat Top con-
                                      cerned the question of eligibility for section 501(c)(4) status,
                                      as opposed to the question of whether a particular activity of
                                      a section 501(c)(4) organization is substantially related to the
                                      promotion of community welfare and is therefore exempt
                                      from the unrelated business income tax, the two questions
                                      are related. As the Tax Court held in Profl. Ins. Agents of
                                      Mich. v. Commissioner, 78 T.C. 246, 267 (1982), affd. 726
                                      F.2d 1097 (6th Cir. 1984):
                                      Logically, if * * * activities do not contribute to * * * [an organization’s
                                      tax-exempt purpose] in the context of determining whether an organization
                                      qualifies for exemption, then surely these same activities cannot be said
                                      to be related to the organization’s exempt purpose in the context of the
                                      UBTI provisions.

                                      Applying these principles, a homeowners association gen-
                                      erally does not promote community welfare if all of the
                                      association’s facilities are closed to the general public (i.e.,
                                      closed to nonmembers of the association). See Flat Top Lake
                                      Association, Inc. v. United States, supra at 111–113. It fol-
                                      lows that if a homeowners association has one facility that
                                      is closed to the general public, then that facility is not
                                      substantially related to the promotion of community welfare.
                                      The income from that facility is subject to the unrelated busi-
                                      ness income tax unless an exception applies.
                                        The IRS does not contend that the Association’s tax-exempt
                                      status should be revoked. It concedes that most of the
                                      Association’s facilities and services are open to the general
                                      public. Its contention is that income from the portion of its
                                      facilities not open to the general public (i.e., the beach club
                                      and the parking lots) is subject to the unrelated business
                                      income tax because the operation of these facilities is not
                                      substantially related to the promotion of community welfare.
                                      We agree. The parking lots and the beach club are not acces-
                                      sible to the general public. 4 Only Association members and
                                        4 The Association argues for these purposes that its membership is so broad that its member-

                                      ship should be considered the general public and therefore its parking lots and beach club
                                      (which are open only to its members and their guests) should be considered open to the general
                                      public. But the court in Flat Top held that a homeowners association that operates for the exclu-
                                      sive benefit of its members ‘‘does not serve a ‘community’ as that term relates to the broader
                                      concept of social welfare.’’ Flat Top Lake Association, Inc. v. United States, 868 F.2d 108, 111
                                      (4th Cir. 1989).




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                                      284                135 UNITED STATES TAX COURT REPORTS                                        (276)


                                      their guests may park in the parking lots. Although the
                                      beach club allows both Association members and nonmem-
                                      bers to access its food and beverage services and its rest-
                                      rooms, its primary facilities (the swimming pool, gym lockers,
                                      and showers) are accessible only to the Association’s mem-
                                      bers. Thus, the operation of the parking lots and the beach
                                      club is not substantially related to the purpose of ‘‘[pro-
                                      moting] social welfare’’ within the meaning of section
                                      501(c)(4) because they are not open to the general public.
                                      Thus, unless an exception applies, the income attributable to
                                      the operation of the parking lots and the beach club is sub-
                                      ject to the unrelated business income tax.
                                      II. Whether Parking Lot Income Is Rent From Real Property
                                          Within the Meaning of Section 512(b)(3)
                                         Section 512(a) provides that unrelated business taxable
                                      income is income earned by a tax-exempt organization from
                                      an unrelated trade or business it regularly carries on, subject
                                      to the modifications in section 512(b). One of these modifica-
                                      tions, in section 512(b)(3)(A)(i), is that ‘‘rents from real prop-
                                      erty’’ are excluded from unrelated business taxable income.
                                      The IRS claims that the income from operating the two
                                      parking lots is not rent from real property because of state-
                                      ments in legislative reports and because, it says, a regulation
                                      explicitly bars income from operation of a parking lot from
                                      qualification for the exception. The Association contends that
                                      under the regulation, the income from operating the two
                                      parking lots is rent from real property. We agree with the
                                      IRS.
                                         When Congress enacted the unrelated business income tax
                                      provisions as part of the Revenue Act of 1950, ch. 994, 64
                                      Stat. 906, the House Ways and Means Committee report
                                      stated that the provision of the law excluding rents from real
                                      property from unrelated business taxable income was
                                      intended to exclude income from passive ownership of assets:
                                         The tax applied to unrelated business taxable income does not apply to
                                      dividends, interest, royalties (including of course, overriding royalties),
                                      rents (other than certain rents on property acquired with borrowed funds),
                                      and gains from sales of leased property. Your committee believes that such
                                      ‘‘passive’’ income should not be taxed where it is used for exempt purposes
                                      because investments producing incomes of these types have long been rec-




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                                      (276)      OCEAN PINES ASSOCIATION, INC. v. COMMISSIONER                                          285


                                      ognized as proper for educational and charitable organizations. [H. Rept.
                                      2319, 81st Cong., 2d Sess. 38 (1950), 1950–2 C.B. 380, 409.]

                                           It later stated:
                                      The term ‘‘rents from real property’’ does not include income from the oper-
                                      ation of a hotel but does include rents derived from a lease of the hotel
                                      itself. Similarly, income derived from the operation of a parking lot is not
                                      considered ‘‘rents from real property.’’ [Id. at 110, 1950–2 C.B. at 459;
                                      emphasis added.]

                                      The Senate Finance Committee report also included the lan-
                                      guage above regarding operation of a hotel and a parking lot.
                                      S. Rept. 2375, 81st Cong., 2d Sess. 108 (1950), 1950–2 C.B.
                                      483, 560.
                                        The tax on unrelated business income, as enacted in 1950,
                                      did not apply to churches and some other tax-exempt
                                      organizations. Revenue Act of 1950, sec. 421(b)(1), 64 Stat.
                                      948. In 1969, the Treasury Department recommended
                                      extending the unrelated business income tax to all tax-
                                      exempt organizations. U.S. Treasury Dept. Tax Reform
                                      Studies and Proposals (Part 1) 26–27 (1969). The Joint Com-
                                      mittee staff supported the Treasury Department’s rec-
                                      ommendation, citing its own research on the scope of
                                      churches’ unrelated business activities. One of the examples
                                      of an unrelated business given by the staff was a church’s
                                      operation of a parking lot. Staff of Joint Comm. on Taxation,
                                      Tax-Exempt Organizations 20–21 (J. Comm. Print 1969). The
                                      House Ways and Means Committee report on the Tax
                                      Reform Act of 1969, Pub. L. 91–172, 83 Stat. 487, incor-
                                      porated the Joint Committee’s examples of proliferating
                                      church-operated businesses in describing why it was recom-
                                      mending an expansion of the unrelated business income tax:
                                         There is inequity in taxing certain exempt organizations on their ‘‘unre-
                                      lated business income’’ and not taxing others. It has become apparent that
                                      organizations now subject to the provision and those not subject to it are
                                      equally apt to engage in unrelated business. For example, numerous busi-
                                      ness activities of churches have come to the attention of the committee.
                                      Some churches are involved in operating chains of religious bookstores,
                                      hotels, factories, companies leasing business property, radio and TV sta-
                                      tions, newspapers, parking lots, record companies, groceries, bakeries,
                                      cleaners, candy sale businesses, restaurants, etc. * * * [Emphasis added.]

                                                                      *        *      *       *   *       *   *




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                                      286                135 UNITED STATES TAX COURT REPORTS                                        (276)


                                        The bill in extending the unrelated business income tax to churches pro-
                                      vides a period of time * * * for churches to dispose of unrelated business
                                      or to spin them off in separate taxable corporations.
                                        [H. Rept. 91–413 (Part 1), at 47–48 (1969), 1969–3 C.B. 200, 230–231.]

                                        Similarly, the report of the Senate Finance Committee
                                      stated:
                                      In recent years, many of the exempt organizations not now subject to the
                                      unrelated business income tax—such as churches, social clubs, fraternal
                                      beneficiary societies, etc.—have begun to engage in substantial commercial
                                      activity. For example, numerous business activities of churches have come
                                      to the attention of the committee. Some churches are engaged in operating
                                      publishing houses, hotels, factories, radio and TV stations, parking lots,
                                      newspapers, bakeries, restaurants, etc. Furthermore, it is difficult to jus-
                                      tify taxing a university or hospital which runs a public restaurant or hotel
                                      or other business and not tax a country club or lodge engaged in similar
                                      activity. [S. Rept. 91–552, at 67 (1969), 1969–3 C.B. 423, 467; emphasis
                                      added.]

                                      The reports suggest that income from operating a parking lot
                                      was not exempt from the unrelated business income tax
                                      under any provision. The legislative history stated or implied
                                      four times that the operation of parking lots yields unrelated
                                      business taxable income and not rent from real property.
                                        Section 1.512(b)–1(c)(5), Income Tax Regs., provides that
                                      income from the operation of a parking lot is not rent from
                                      real property. The regulation provides:
                                      Rendering of services. For purposes of this paragraph, payments for the
                                      use or occupancy of rooms and other space where services are also ren-
                                      dered to the occupant, such as for the use or occupancy of rooms or other
                                      quarters in hotels, boarding houses, or apartment houses furnishing hotel
                                      services, or in tourist camps or tourist homes, motor courts, or motels, or
                                      for the use or occupancy of space in parking lots, warehouses, or storage
                                      garages, does not constitute rent from real property. Generally, services
                                      are considered rendered to the occupant if they are primarily for his con-
                                      venience and are other than those usually or customarily rendered in
                                      connection with the rental of rooms or other space for occupancy only. The
                                      supplying of maid service, for example, constitutes such service; whereas
                                      the furnishing of heat and light, the cleaning of public entrances, exits,
                                      stairways, and lobbies, the collection of trash, etc., are not considered as
                                      services rendered to the occupant. Payments for the use or occupancy of
                                      entire private residences or living quarters in duplex or multiple housing
                                      units, of offices in any office building, etc., are generally treated as rent
                                      from real property. [Emphasis added.]

                                      The Association, in interpreting the above regulation, argues
                                      that income from operating a parking lot is rent from real




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                                      (276)      OCEAN PINES ASSOCIATION, INC. v. COMMISSIONER                                      287


                                      property unless the services provided by the tax-exempt
                                      organization in operating it are ‘‘substantial.’’ It states that
                                      the services it provides at the lots, i.e., the provision of
                                      parking guards to open the lots and to check parking decals,
                                      are insubstantial. It compares its level of service to its
                                      parking lot customers to the level of service involved in the
                                      trash collection mentioned in the regulation. But the test in
                                      the regulation for determining whether the services are ren-
                                      dered to the occupant (and therefore disqualify the organiza-
                                      tion from using the rental exception) is not whether the serv-
                                      ices provided are substantial, but whether the services are
                                      (1) ‘‘primarily’’ for the ‘‘convenience’’ of the occupant and (2)
                                      are ‘‘other than those usually or customarily rendered in
                                      connection with the rental of rooms or other space for occu-
                                      pancy only.’’ And as to the question of whether the services
                                      provided by an operator of a parking lot satisfy this test, the
                                      regulation also provides guidance. The first sentence of the
                                      regulation lists ‘‘the use or occupancy of space in parking
                                      lots’’ as an example of ‘‘use or occupancy of rooms and other
                                      space where services are also rendered to the occupant’’. The
                                      regulation, as we interpret it, determines that the services
                                      provided by an operator of a parking lot (at least a typical
                                      parking lot) are primarily for the convenience of the cus-
                                      tomer and are other than those usually or customarily ren-
                                      dered in connection with the rental of rooms or space for
                                      occupancy only. 5 Although this conclusion might not apply to
                                      a parking lot that is so unusual that it would not be consid-
                                      ered a ‘‘parking lot’’ within the ordinary meaning of the term,
                                      there is nothing to suggest that the services the Association
                                      provides to its parking lot customers are unusual in this con-
                                      text. Thus, the net income the Association earned from oper-
                                      ating the parking lots during the summer months does not
                                      constitute rent from real property as defined in section
                                      512(b)(3). The net income is subject to the unrelated business
                                      income tax.
                                         In reaching our holdings here, we have considered all argu-
                                      ments made, and, to the extent not mentioned above, we con-
                                      clude they are moot, irrelevant, or without merit.
                                        5 The lease payments from third-party businesses are rent from real property under the regu-

                                      lation, and thus were properly conceded by the IRS as excludable from unrelated business tax-
                                      able income, because Ocean Pines did not directly operate the parking lot on the behalf of the
                                      third-party businesses.




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                                      288                135 UNITED STATES TAX COURT REPORTS                                        (276)


                                           To reflect the foregoing,
                                                                         Decision will be entered under Rule 155.
                                                                               f




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