Generally speaking, is revenue generated from hauling freight by a non profit, tax exempt tourist railroad/operating museum is considered related income or unrelated business income?

Wow, there are a LOT of impacts and that is just one of them.

There is also the immediate possible status change to a common carrier - putting your track (if not your organization) possibly under STB authority if it has been off the system - the impacts of railroad retirement - the impacts of the FRA regulation, the insurance necessary that the Class 1 wants for car interchange and inspection, and the list goes on.

The 'short answer' is that nearly all nonprofits form a stand-alone entity that is responsible just for freight; separate name, payroll, etc. It may seem like that's more bother than it is worth, but when you look at it in the end, the only other real alternative is have the connecting carrier have rights over you to handle the customer and pay you a trackage rights fee. And even that can get interesting unless common sense prevails. It can help if it is one customer/one move where it's more like an industrial spur, but that's a fine line as well.

Not that it can't be done, it's done many places in many ways, but I'm trying to think of any organization that actually does the freight and participates in the rate division under the nonprofit banner, and I'm not coming up with any. If I post this they'll emerge!

Thanks for the input Randy. I'm assuming the railroad in my hypothetical would be a common carrier, would be owned by a non profit historical society but generate revenue from a combination of tourist and freight operations. My intuition tells me that hauling freight is not an activity that would fit under the exempt purpose of operating a railroad museum, but I would like a second opinion on that.

Perhaps someone from TVRM will comment. There was a picture on their 2-8-0 #610 posted recently working revenue freight.

Frederick G. Bailey

Thanks for the tip...

TVRM's 2008 form 990 on guidestar shows that TVRM has 100% controlling interest in the East Chattanooga Belt Railway Co., a for profit common carrier. Perhaps it was under the auspices of this subsidiary that the freight was being moved. They also list $112,894 in unrelated business revenue from car handling.

RMNE is the 100% owner of the Naugatuck Railroad Company, which is a common carrier (and the last to be granted that status by the old ICC before it went away in 1995). That common carrier status was a requirement for our lease from CDOT. Additionally, in order to operate a railroad in Connecticut, one must have a specific railroad charter from the State Legislature (NAUG's was granted in 1995). Valley Railroad also is State-chartered (1970), but is not a common carrier.

We have handled freight in the past, occasional inbound lube/hydraulic oils and 8 or so large power transformers. We have had one full-time railroad employee (although not for the last 5 years) and some occasional part-timers and Railroad Retirement is paid for those people.

NAUG operating income is handled separately from RMNE income. NAUG freight revenue is on a per-car basis (Rule 11), not a division of revenue. We collect directly from the customer.

Best bet is the non-profit Museum owns the for-profit railroad company 100%, no "other" investors. Keep it simple and keep control of it. In my opinion, of course.

Howard P.

Must be a coincidence because I spent a couple of hours this afternoon discussing this very subject with our attorneys (and at their rate, $1500 was gone in no time).

While TVRM has had various subsidiaries for over nine years we are looking at how to structure a new freight hauling business venture that could start in the near future. There are dozens of variables that have to be factored in when trying to do this, with both tax regulatory issues to be considered. Let me try to pull those thoughts together and I'll try to post something on Friday.

Tim Andrews
TVRM
Chattanooga, TN

Net revenue from moving freight on a railroad owned by a non-profit would be considered unrelated business income (UBI) by IRS and as such would be taxable and has to be reported on a 990T.

Also, there is a possibility that if the organization could lose it's 501c3 tax exempt status if it has too much UBI.

Bob H

Another place to examine: The Wilmington & Western. They have/had a separate freight-operating subsidiary of some sort, although for most of its existence it has been only to switch a brickyard near its junction with CSX (and why they can't find a way to just build a CSX siding is beyond me). There was originally some token freight traffic to two or three industries along the line, but nothing of any substance that I could tell since the late 1980s or so.

Don't take my reaction as negativity. There's one client railroad museum that does a little freight over their 'demonstration line', just enough to keep the common-carrier status and actually make a little money (and yes, it is under a controlled for-profit subsidiary name). When their interchange connection was threated by real estate pressures we reminded the developers that they were attempting to condemn a federally-regulated freight transportation issue here and they would have to hear this in front of the STB - they couldn't consider this as a local issue under local development authority and just condemn it out of the way.

It's amazing how fast an acceptable compromise can be worked out with that issue thrown up on the table. Whatever grief that freight business has caused them over the years was NOTHING compared to what it gained them in that situation, and that's the intangible benefit here. Staying on the general system, having a little common-carrier freight business, etc. is like a major force field in place for NIMBY issues and local irrational reactions that can be generated from short-term political decisions. It's not for everybody, some deep analysis has to be done, and it's a rather legitimate area for study.

And, depending on how you want to do the 'agreement' between the non-profit and the for-profit, the for-profit can eat track maintenance, signal inspection costs, etc. so that wondering what to do with all that money shucked over to the nonprofit can become an effective non-issue.

o_0 Could TVRM be planning a C&C takeover?

The McCreary County Heritage Foundation, a 501c3, owns and operates the Big South Fork Scenic Railway, in Stearns, KY as a tourist railroad. The same organization operates the Kentucky & Tennessee Railway with the same equipment and employees. The K&T has moved about 8 cars/day, 5 days a week for several years. I don't know the current status of K&T ownership, but can say that the relationship is close. I don't know what method is used for the accounting, railroad retirement, etc.

The Indiana Railway Museum, which is a non-profit 501(c)(3) organization and which operates the French Lick, West Baden & Southern tourist train, also owns the Dubois County Railroad, a fairly busy, short line railroad. Folks from the INRM don't seem to post here to RyPN, but probably could give a good insight on the operation of the short line.

Les

To answer that we need to revisit "nonprofit 101".

Disneyland cannot be a nonprofit. The Tech Museum can be. The difference is their defined MISSION, and whether that mission is eligible for nonprofit status.

For-profit businesses earn revenue to pay expenses. Their mission must, by law, be to make money for their investors, and they must actually make money or IRS will call them a hobby. Businesses can deduct expenses; hobbies cannot.

Nonprofits get income from program services (among other sources) to pay costs of program services. Their mission must, by law, be some charitable purpose which is socially meritorious and profits no individual - hence "nonprofit". Their activities can, and often should, involve doing money-losing things which advance their mission.

Take Mid-Continent Railway Museum, which recently spent more than their annual budget converting a revenue coach back into a historically correct FISH CAR. That would be criminally insane for a for-profit company to do, but totally correct for a nonprofit following its mission.

What nonprofits should do is wildly different than what for-profits should do.

So back to freight. What is related business income? As Einstein would say, related to what?

You got it -- Mission.

So the million dollar question is -- does handling freight serve the mission? (by more than "the income helps us".) For a museum, "mission" is generally "collect, preserve and teach". You can't collect or preserve other people's freight cars, but you can damn well teach.

To me, that has "mixed freight" written all over it.

Related sort of note - the proposed use for Reader 108 on Blacklands RR in Texas was as a for-hire time machine, essentially an engineer for a day kind of experience as is available in Poland on commuter trains, but in this case running a peddeler freight on a shortline akin to how it was done 60 years ago. I'd pay for that.......

dave