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FUNDAMENTAL CONCEPTSconducted trade or business is subject to tax, unless it is substantially related toaccomplishment of the organization’s exempt purpose. 470 To be substantiallyrelated, the activity must have a substantial causal relationship to the achievementof an exempt purpose. 471 The fact that an asset is essential to the conduct ofan organization’s exempt activities does not shield commercial income from taxationwhen that income was produced by that asset. 472 The income-producingactivities must still meet the causal relationship test if the income is not to be subjectto tax. 473 This issue arises when an organization owns a facility or other assetsthat are put to dual use. For example, the operation of an auditorium as an ordinarymotion picture theater for public entertainment in the evening would betreated as an unrelated activity even though the theater is used exclusively fortax-exempt purposes during regular hours. 474A related concept is that activities should not be conducted on a scale largerthan is reasonably necessary for performance of the exempt functions. 475 Activitiesin excess of the needs of exempt functions constitute the conduct of an unrelatedbusiness. 476(e) Unrelated Business Taxable IncomeAs indicated, to be subject to the unrelated income rules, an activity must satisfyfour tests. The first three of these tests is built into the definition of the phraseunrelated business taxable income. That term is defined as the “gross incomederived by any organization from any unrelated trade or business . . . regularlycarried on by it, less the deductions allowed . . . [under federal tax law] whichare directly connected with the carrying on of such trade or business.” 477Both this gross income and allowable deductions are computed in conformancewith the modifications discussed below. 478Tax-exempt organizations are subject to tax on their unrelated business taxableincome at the regular corporate tax rates, or at individual rates if the organizationis not incorporated. 479(f) Exempted ActivitiesCertain business activities conducted by tax-exempt organizations are exemptfrom unrelated business taxation. These include:• A trade or business “in which substantially all the work in carrying onsuch trade or business is performed for the organization without compensation.”480470 Reg. § 1.513-1(a).471 Reg. § 1.513-1(d)(2).472 Reg. § 1.513-1(d).473 Reg. § 1.513-1(d)(2).474 Id.475 Reg. § 1.513-1(d)(3).476 Id.477 IRC § 512(a)(1).478 See § 3.5(g).479 IRC § 511.480 IRC § 513(a)(1). 118