Fortunately, this is not a real story. To alleviate this potentially unfair competition issue, the Internal Revenue Code makes an exempt organization like the EDL, subject to federal tax at a corporate level to the extent that their income is generated from a business unrelated to their mission. This is commonly called, “Unrelated Business Income.” The Unrelated Business Income has to be reported separately in the Form 990-T.
Unrelated business income is usually found when there is a trade or business activity that is carried on regularly, but is not substantially related to the exempt purpose of the organization. In our theoretical EDL case, the sandwich sale was clearly a business activity, as it involves a sale of product. Furthermore, these sales were made every day. Since the mission of the EDL was to feed people in need, these sales cannot be substantially related to the EDL’s exempt purpose. Therefore, EDL will have to report their sandwich sales separately in 990-T and pay taxes on that income.
In a previous article, I briefly introduced a specific rule about how a membership organization has to calculate their income from journal sales when there are two different price tags for member sales and non-member sales. In fact, this rule was just the tip of the iceberg of a very complicated calculation process of UBIT income and expenses for a membership organization. We will go over more specific rules for the UBIT calculation later by type of organization. However, let me now put in a very broad context, the UBIT in Form 990-T . Generally, Unrelated Business Income is taxable after deducting directly connected expenses, and the tax is called UBIT (“Unrelated Business Income Tax”).
 See Internal Revenue Code Section 513(a) for definition of UBIT.
 See Treas. Reg. 1.512(a)–1(a) to find the meaning of “directly connected.”