For purposes of defining a business enterprise as the active conduct of a trade or business, it is important to distinguish gross income from active conduct of a business from income derived from passive sources. Gross income from passive sources includes: Dividends, interest, and annuities. Royalties (including overriding royalties), whether measured by production or by gross or taxable income from the property. Rents from real property, and from personal property leased with real property if the rents from the personal property are an incidental amount of the total rents under the lease (determined at the time the personal property is placed in service). Rents are not considered gross income from passive sources if more than 50% of the total rent under the lease is for personal property, or if the determination of the amount of rent depends in whole or in part on the income or profits received from the leased property (unless the amount is based on fixed percentages of gross receipts or sales). Gains from sales, exchanges, or other dispositions of property other than: Stock in trade or property of a kind which would properly be includible in inventory if on hand at the close of the taxable year; or property held primarily for sale to customers in the ordinary course of business. Gains or losses on the lapse or termination of options written by the organization in connection with its investment activities to buy or sell securities. Gains from cutting timber, that upon election may be considered a sale or exchange (section 631) Income from the sale of goods if the seller does not manufacture, produce, physically receive or deliver, negotiate sales of, or keep inventories in the goods Income that is otherwise considered passive will not lose its character merely because it is unrelated debt-financed income described in section 514 (see Publication 598, Tax on Unrelated Business Income of Exempt Organizations PDF, for more information on the unrelated debt-financed income rules).
