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FUNDAMENTAL CONCEPTSto the distribution of low-cost articles if the distribution of the articles isincidental to the solicitation of charitable contributions. 494• In the case of charitable and veterans’ organizations, contributions towhich are deductible for federal income tax purposes, any trade or businessconsisting of (1) exchanging, with another of these organizations,names and addresses of donors to or members of the organization; or (2)renting the names and addresses to another of these organizations. 495(g) Exempted IncomeCertain types of income are exempt from the unrelated business income tax. 496Because the unrelated business income rules apply to active business conductedby tax-exempt organizations, most types of passive income are exemptfrom taxation. This exemption, euphemistically embraced by the concept of modifications,generally covers income such as dividends, interest, payments withrespect to securities loans, annuities, royalties, most rents, capital gains, andgains on the lapse or termination of options written by the organization. 497The unrelated debt-financed income rules, however, override the generalexception for passive income. 498 Also, interest, annuities, royalties, and rentsderived from a controlled corporation may be taxable. 499 It should be noted thatthere are three exceptions pertaining to research income. 500 There is a specificdeduction, of $1,000, for any type of unrelated business income. 501§ 3.6 FACTORS AFFECTING INCOME TAX DEDUCTIBILITYOF CHARITABLE GIFTSSeveral factors affect the deductibility of charitable gifts:• The transaction must be a gift 502• The recipient of the gift must be a charitable organization 503• The nature of the donor 504494 IRC § 513(h)(1)(A). The IRS is of the view that this exception is unavailable when the solicitation is in competitionwith for-profit vendors or is illegal. Tech. Adv. Mem. 9652004. Of course, the exception is not availablewhen the monetary limitation is exceeded. See, e.g., State Police Association of Massachusetts v.Commissioner, 72 T.C.M. (CCH) 582 (1996).495 IRC § 513(h)(1)(B). When this exception is not available, such as when one of the parties is not a charitableorganization, the resulting revenue is taxable unless it can be sheltered by means of another exception, such asby characterizing it as a royalty. See § 3.5, text accompanied by note 497. In this setting, even the exchange ofmailing lists can give rise to taxable income. See, e.g., Tech. Adv. Mem. 9635001.496 IRC § 512(b).497 IRC §§ 512(b)(1), (2), (3), and (5). Most of the controversy in this context centers on the scope of the termroyalty. See, e.g., Sierra Club, Inc. v. Commissioner, 86 F.3d 1526 (9th Cir. 1996).498 IRC §§ 512(b)(4) and 514. The unrelated debt-financed income rules are the subject of Tax-Exempt Organizationsch. 29.499 IRC § 512(b)(13).500 IRC §§ 512(b)(7), (8), and (9).501 IRC § 512(b)(12).502 See § 3.1.503 See § 3.3.504 See § 3.2. 120