## Facts

- Gundersen Medical Foundation, Ltd. was a Wisconsin nonstock corporation recognized as tax-exempt under I.R.C. § 501(c)(3) for educational and scientific purposes.
- The Foundation operated in close association with Gundersen Clinic, Ltd., a separate, for-profit medical clinic.
- To expand facilities on land it owned adjacent to the Clinic, the Foundation borrowed funds and financed an expanded building.
- The Foundation leased the expanded building to the Clinic, and the Clinic used it in its medical practice.
- The building’s use was mixed: some space and activities involved Foundation students as part of their medical training, while other space was used for routine patient care without student participation.
- For tax years 1970–1974, the Foundation did not report the Clinic’s rental payments as taxable income.
- The IRS determined that a portion of the rent constituted unrelated business taxable income (UBTI) attributable to debt-financed property and assessed deficiencies.
- The Foundation paid the assessed amounts, filed refund claims, and brought a refund suit after the IRS denied the claims.

## Issues

1. Whether rent received from leasing a debt-financed building to a for-profit clinic constituted UBTI as income from debt-financed property under I.R.C. §§ 511–514.
2. Whether the clinic’s mixed use of the leased premises was “substantially related” to the Foundation’s exempt educational and scientific purposes so as to exclude the rent, in whole or part, from UBTI.

## Decision

- Judgment was for the United States on the principal issue.
- The court held that the IRS properly treated a portion of the rental income as UBTI arising from debt-financed property for tax years 1970–1974.
- The court rejected the Foundation’s position that the lease arrangement rendered the rental stream exempt-function income in its entirety.
- Any relief was limited to computational adjustments consistent with allocating income based on exempt versus nonexempt use.

## Legal Principles

- Tax-exempt status under I.R.C. § 501(c)(3) does not exempt an organization from tax on UBTI under I.R.C. §§ 511–512.
- Under I.R.C. § 514, income from debt-financed property is taxable to the extent the property is used to produce income and is not used substantially in furtherance of the organization’s exempt purposes.
- “Substantially related” requires an objective connection between the income-producing use of the property and the exempt purpose; intent or general organizational affiliation is insufficient.
- When debt-financed property is put to mixed exempt and nonexempt use, UBTI analysis may allocate income proportionally to the nonexempt, commercial use.
- A close operational relationship between an exempt organization and a for-profit affiliate does not by itself convert the affiliate’s ordinary commercial activity into an exempt function for UBTI purposes.

## Conclusion

The court upheld taxation of part of the Foundation’s rental income because the debt-financed building leased to a for-profit clinic was used substantially for routine commercial patient care not directly tied to the Foundation’s educational programs, making the related portion of rent taxable as UBTI under I.R.C. §§ 511–514.


Gundersen Med. Found., Ltd. v. United States, 536 F. Supp. 556 (W.D. Wis. 1982)