We are a nonprofit rock club that would like to sell unrelated items on eBay to increase our income and provide for increasing community services as well as member benefit. We know income derived from "unrelated" business dealings becomes taxable, but I have heard that such income derived by the efforts of volunteers (club members in this case) would not be taxable. If this is so, is there any limit on such income?
You are correct that a trade or business of selling unrelated items will generate unrelated business income subject to unrelated business income tax. You are also correct that an activity where substantially all of the work is done for the organization without compensation is excluded from the definition of “trade or business,” and therefore its profits are not considered unrelated business income and are not subject to unrelated business income tax. It sounds as though your activity would fit this exception.
There is no absolute limit on this type of income. It will be treated as “other income” on your tax return and will be included only in the denominator of the public support fraction, which could be an adverse factor in your public charity status. Also, since it is not a charitable activity, the IRS could question your exemption if it is a substantial part of your activities. A charity can lose its exemption if it carries on a “substantial” noncharitable activity. (See Ready Reference Page: “Nonprofits Often Worry About UBIT.”)