## Facts

- A tax-exempt charitable trust existed solely to provide funding to the University of New Haven.
- The trust invested endowment assets in marketable securities and, during the relevant tax years, purchased securities on margin by borrowing from its broker.
- The trust earned dividends and capital gains from the margin-purchased securities.
- Under the Internal Revenue Code’s UBIT provisions, income from “debt-financed property” is treated as unrelated business taxable income to the extent attributable to acquisition indebtedness.
- Treasury regulations treat securities purchased on margin as “debt-financed property” and treat both dividends and capital gains from such securities as debt-financed income.
- The trust reported and paid UBIT on the margin-derived dividends and gains, then sought refunds, arguing UBIT should apply only when there is actual or potential unfair competition with taxable businesses.
- The IRS denied the refund claims, and the trust sued for refunds in federal district court.

## Issues

1. Whether UBIT on income from “debt-financed property” under 26 U.S.C. §§ 511–514 applies to dividends and capital gains from securities purchased on margin without proof of actual or potential unfair competition.
2. Whether a court may impose a competition-based limitation on § 514 debt-financed income rules that is not stated in the statutory text.

## Decision

- The Second Circuit affirmed summary judgment for the United States.
- The court held that the trust’s dividends and capital gains from margin-purchased securities were taxable as unrelated business taxable income to the extent attributable to the debt.
- The court rejected the argument that the government must prove actual or potential unfair competition as a prerequisite to UBIT on debt-financed income.

## Legal Principles

- When statutory conditions for § 514 “debt-financed property” are met, the resulting income is treated as unrelated business taxable income to the extent of acquisition indebtedness, without an additional competition requirement.
- Securities acquired with margin borrowing can constitute debt-financed property, and dividends and capital gains from those securities can be treated as debt-financed income under Treasury regulations implementing § 514.
- General legislative purpose references to curbing unfair competition do not authorize courts to add extra-textual elements to the UBIT rules where Congress established categorical statutory standards.

## Conclusion

The court held that a tax-exempt organization’s income from margin-financed securities is taxable under the debt-financed income rules of §§ 511–514 based on the statute and implementing regulations, and that UBIT liability does not depend on proof of actual or potential unfair competition.


Bartels Tr. v. United States, 209 F.3d 147 (2d Cir. 2000)