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FUNDAMENTAL CONCEPTSas “in the case of any corporation wholly owned by one or more such colleges anduniversities.” 449To be tax-exempt, an organization must be organized and operated primarilyfor exempt purposes. 450 The federal tax law allows an exempt organizationto engage in a certain amount of activity unrelated to its exempt purposes. 451When the organization derives net income from one or more unrelated businessactivities, known as unrelated business taxable income, it is subject to tax on thatincome. An organization’s tax exemption will be revoked if an inappropriateportion of its activities is not in furtherance of an exempt purpose. 452Business activities may preclude initial qualification of an otherwise exemptorganization as a charitable or other entity. This would occur through its failureto satisfy the operational test, which looks to see whether the organization isbeing operated principally for exempt purposes. 453 Likewise, an organizationwill not meet the organizational test if its articles of organization empower it, asmore than an insubstantial part of its activities, to carry on activities that are notin furtherance of its exempt purpose. 454(b) Trade or Business DefinedFor purposes of the federal tax rules, the term trade or business, in this setting,includes “any activity which is carried on for the production of income from the saleof goods or the performance of services.” 455 Accordingly, most activities that wouldconstitute a trade or business under basic tax law principles 456 are considered atrade or business for purposes of the unrelated trade or business rules. 457This definition of trade or business is broadly encompassing and embracesnearly every activity of a tax-exempt organization. Absent a specific exemption,458 only investment activities generally escape this classification.In this sense, every tax-exempt organization is viewed as a bundle of activities,each of which is a trade or business. Thus, the IRS is empowered to examineeach of the activities in the bundle in search of unrelated business endeavor. AsCongress chose to state the principle, “an activity does not lose identity as atrade or business merely because it is carried on within a larger aggregate ofsimilar activities or within a larger complex of other endeavors which may, ormay not, be related to the exempt purposes of the organization.” 459 This isknown as the fragmentation rule.Congress also enacted a rule stating that, “[w]here an activity carried on forprofit constitutes an unrelated trade or business, no part of such trade or business449 IRC § 511(a)(2)(B).450 See Tax Exempt Organizations § 4.4.451 See, e.g., Reg. § 1.501(c)(3)-1(e)(1).452 See, e.g., Reg. § 1.501(c)(3)-1(c)(1).453 See Tax-Exempt Organizations § 4.5.454 Id. § 4.3.455 IRC § 513(c).456 IRC § 162.457 Reg. § 1.513-1(b).458 See §§ 3.5(f), (g).459 IRC § 513(c). 116