## Facts

- A charitable trust recognized as tax-exempt under I.R.C. § 501(c)(3) was formed to financially support Cornell University.
- In 1999 and 2000, the trust purchased securities “on margin,” using borrowed funds from its broker to complete the purchases.
- The trust later sold the margin-financed securities, generating gains.
- For 1999, the trust filed Form 990-T and reported the sale proceeds as capital gains without reporting related income tax liability.
- The IRS determined the gains were taxable as unrelated business taxable income (UBTI) because the securities were debt-financed property under I.R.C. §§ 512(b)(4) and 514, assessed UBIT, and the trust paid the tax.
- The trust sought a refund in the Court of Federal Claims, which denied relief.

## Issues

1. Whether securities acquired on margin by a § 501(c)(3) trust constitute “debt-financed property” under I.R.C. § 514 due to acquisition indebtedness.
2. Whether gains from the sale of such margin-financed securities are included in UBTI and subject to UBIT under I.R.C. § 512(b)(4), notwithstanding their capital-gain character.

## Decision

- The Federal Circuit affirmed the judgment of the Court of Federal Claims.
- It held that securities purchased on margin are “debt-financed property” within the meaning of I.R.C. § 514 because the purchases involve acquisition indebtedness.
- It held that gains from selling those securities are UBTI under I.R.C. § 512(b)(4) and therefore subject to UBIT.
- The trust was not entitled to a tax refund.

## Legal Principles

- Property acquired with “acquisition indebtedness” is “debt-financed property” under I.R.C. § 514.
- Borrowing used to acquire securities on margin constitutes acquisition indebtedness for purposes of § 514.
- I.R.C. § 512(b)(4) brings otherwise excluded passive income (including certain gains) into UBTI to the extent it is derived from debt-financed property.
- A tax-exempt organization’s investment gains can be subject to UBIT when leverage is used to acquire the underlying assets.

## Conclusion

A § 501(c)(3) trust that purchases securities on margin holds debt-financed property under I.R.C. § 514, and gains from selling those securities are taxable as UBTI under I.R.C. § 512(b)(4), so UBIT applies and a refund is unavailable.


Bartels Tr. for Benefit of Cornell Univ. ex rel. Bartels v. United States, 617 F.3d 1357 (Fed. Cir. 2010)