[Federal Register Volume 63, Number 78 (Thursday, April 23, 1998)]
[Proposed Rules]
[Pages 20156-20158]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-10747]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-121268-97]
RIN 1545-AW10
Travel and Tour Activities of Tax Exempt Organizations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations clarifying when
the travel and tour activities of tax exempt organizations are
substantially related to the purposes for which exemption was granted.
These proposed regulations are intended to augment the guidance that
currently exists with respect to travel tours and the unrelated
business income tax.
DATES: Written comments and requests for a public hearing must be
received by July 22, 1998.
ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-121268-97), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered between the
hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-121268-97), Courier's
Desk, Internal Revenue Service, 1111 Constitution Avenue NW.,
Washington, DC. Alternatively, taxpayers may submit comments
electronically via the internet by selecting the ``Tax Regs'' option on
the IRS Home Page, or by submitting comments directly to the IRS
internet site at http://www.irs.ustreas.gov/prod/tax__regs/
comments.html.
FOR FURTHER INFORMATION CONTACT: Robin Ehrenberg, (202) 622-6080 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
An organization generally exempt from tax under section 501(a) of
the Internal Revenue Code (``Code'') must pay tax on its unrelated
business taxable income, as defined in section 512. Section 512(a)(1)
defines unrelated business taxable income (''UBTI'') as the gross
income derived by any organization from any unrelated trade or business
(as defined in section 513) regularly carried on by the organization,
less the deductions which are directly connected with the conduct of
the trade or business. Gross income from an unrelated trade or business
and any deductions directly connected to that trade or business are
both computed in accordance with the general income tax rules of
chapter 1 of the Internal Revenue Code, subject to the modifications
provided in section 512(b).
Section 513(a) generally defines an unrelated trade or business as
any trade or business the conduct of which is not substantially related
(aside from the need of an organization for income or funds or the use
it makes of the profits derived) to the exercise or performance by the
organization of its charitable, educational, or other purpose or
function constituting the basis for its exemption under section 501.
A ``trade or business'' is defined in Section 1.513-1(b) of the
Income Tax Regulations as having the same meaning it has for purposes
of section 162, and ``generally includes any activity carried on for
the production of income from the sale of goods or performance of
services.'' The key test of whether an activity constitutes a trade or
business is whether the activity was conducted with a profit motive.
See U.S. v. American Bar Endowment, 477 U.S. 105 (1986); Professional
Insurance Agents of Michigan v. Commissioner 726 F.2d 1097 (6th Cir.
1983); National Water Well Association v. Commissioner, 92 T.C. 75
(1989). The regulations further provide that an activity conducted for
the production of income does not lose its character as a business
``merely because [it is] carried on within a larger aggregate of
similar activities or within a larger complex of other endeavors which
may, or may not, be related to the exempt purposes of the
organization.'' This ``fragmentation rule,'' as it is commonly known,
may result in different treatment of related activities under the
unrelated business income tax.
Section 1.513-1(d)(2) of the Income Tax Regulations provides that a
trade or business is ``substantially related'' to exempt purposes only
where the conduct of the business activities has a substantial causal
relationship to the achievement of the exempt purposes (other than
through the production of income) of the organization conducting the
trade or business. Thus, a trade or business is substantially related
for purposes of section 513 only if the conduct of the trade or
business contributes importantly to the accomplishment of the
organization's exempt purposes.
In recent years, taxpayers and Congress have asked the IRS to
publish guidance addressing questions relating to the unrelated
business income tax treatment of income generated from travel tours
conducted by tax exempt organizations. Although the IRS has issued a
number of revenue rulings addressing situations in which tax exempt
organizations sponsor travel tours, most of these rulings have analyzed
whether an organization that offers travel tours as its primary
activity can qualify as a charitable or educational organization
described in section 501(c)(3) of the Code.
Rev. Rul. 67-327, 1967-2 C.B. 187, holds that an organization whose
purpose is to arrange group tours for students and faculty of a
university in order to allow them to travel abroad does not qualify for
exemption because the organization operates essentially as
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a commercial travel agency. The ruling concludes that the
organization's activities are not ``educational'' as that term is
defined in Treas. Reg. Sec. 1.501(c)(3)-1(d)(3)(i)(a), because they do
not provide instruction or training of individuals for the purpose of
improving or developing their capabilities.
In contrast, in Rev. Rul. 69-400, 1969-2 C.B. 114, an organization
that selects students and faculty members interested in a certain
foreign history and culture and enrolls them at foreign universities
and arranges for on-site tours conducted by local scholars that
complement classroom studies, is held to be exempt. Rev. Rul. 69-400
distinguishes Rev. Rul. 67-327 on the basis that the organization in
the later ruling is arranging for instruction not just travel.
Rev. Rul. 70-534, 1970-2 C.B. 113, describes an organization that
conducts travel study tours as its primary activity. Tours are geared
toward students, but others can take the tours as long as they
participate in the mandatory study programs. Organized study, taught by
certified teachers, is conducted five to six hours a day, and a library
of materials related to the courses being taught is available. Exams
are given, each student is graded and a state board of education allows
credit for a student's participation in the study tour program. The
revenue ruling concludes that the organization furthers educational
purposes because it performs training and instruction for the purpose
of allowing individuals to improve and develop their capabilities, and
is, therefore, described in section 501(c)(3).
Rev. Rul. 77-366, 1977-2 C.B. 192, concerns an organization that
arranges and conducts ocean cruises for ministers, church members and
their families for the purpose of providing continuing education in an
atmosphere supporting spiritual renewal. The organization's activities
include lectures, discussions, workshops and some shore activities that
further charitable purposes. However, because of the extensive
resources the organization devotes to social and recreational programs,
the scheduling of those programs relative to the schedule for the
exempt purpose programs, and other facts and circumstances, the
organization was held to be also serving a substantial nonexempt
purpose and, therefore, not to qualify for exemption as an organization
described in section 501(c)(3).
The Tax Court applied a similar analysis to an organization
operating a mountain lodge when it held that the organization failed to
qualify as a religious organization described in section 501(c)(3).
Although religious activities were offered to guests in addition to a
wide range of recreational activities, guests were not required to
participate in the religious activities, and the record failed to show
that the recreational activities were insubstantial. See The Schoger
Foundation v. Commissioner, 76 T.C. 380 (1981).
In contrast, Rev. Rul. 77-430, 1977-2 C.B. 194, holds that an
organization conducting weekend retreats is furthering its stated
purpose of advancing religion. Individuals come to participate in a
program of seminars, lectures, prayer sessions and meditation led by
ministers and priests that are scheduled on an hourly basis throughout
the day. Recreational activities are not scheduled, but are available
to participants during their limited free time. Under these facts and
circumstances, the ruling holds that the facilities are being used to
advance religion and that recreational activities are incidental to the
accomplishment of this purpose.
The revenue rulings all focus on the degree of educational or
religious content participants are expected to receive in each travel
program in determining whether the activity serves an exempt purpose.
The same approach was taken in the one ruling that has specifically
addressed the application of the unrelated business income tax to
income generated by travel tours. Rev. Rul. 78-43, 1978-1 C.B. 164,
describes the travel tour activity of a university alumni association.
The association's program of approximately ten tours per year is open
to all current members and their immediate families and is planned with
various travel agencies. Each travel agency pays a per person fee to
the association. The tours do not include any formal educational
program and do not differ substantially from commercially operated
tours. Rev. Rul. 78-43 concludes that there is no causal relationship
between arranging the travel tours described in the ruling and the
achievement of an exempt purpose. Accordingly, the ruling holds that
the sale of tours to members is an unrelated trade or business within
the meaning of section 513.
These proposed regulations are intended to augment the guidance
that currently exists with respect to travel tours and the unrelated
business income tax. The proposed regulations also provide additional
guidance regarding the fragmentation rule and the distinctions that may
be necessary among different tours or activities that are part of a
single organization's travel program.
The IRS and Treasury are soliciting comments on these proposed
regulations. In particular, because the IRS relies heavily on review of
records to determine whether an organization's trade or business
activities further an exempt purpose, comments are requested on whether
the IRS should specify the types of records organizations should keep
to establish the activity's purpose.
Explanation of Provisions
The proposed regulations add a new Sec. 1.513-7 providing that the
determination of whether travel tour activities of tax exempt
organizations are substantially related to an organization's exempt
purposes is a question of facts and circumstances. The proposed
regulations set forth a series of examples to illustrate how various
facts and circumstances would be analyzed.
Proposed Effective Date
These regulations are proposed to be effective for taxable years
beginning after the date final regulations are published in the Federal
Register. For prior taxable years, the IRS will continue to apply
principles of existing law.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in EO 12866. Therefore,
a regulatory assessment is not required. It also has been determined
that section 553(b) of the Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regulations, and because the
regulation does not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Internal Revenue Code, this
notice of proposed rulemaking will be submitted to the Chief Counsel
for Advocacy of the Small Business Administration for comment on its
impact on small business.
Comments and Requests for a Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed original
and eight (8) copies) that are submitted timely to the IRS. All
comments will be available for public inspection and copying. A public
hearing may be scheduled if requested in writing by a person that
timely submits written comments. If a public hearing is
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scheduled, notice of the date, time, and place for the hearing will be
published in the Federal Register.
Drafting Information
The principal author of these regulations is Robin Ehrenberg,
Office of Associate Chief Counsel (Employee Benefits and Exempt
Organizations). However, other personnel from the IRS and Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.513-7 is added to read as follows:
Sec. 1.513-7 Travel and tour activities of tax exempt organizations.
(a) Travel tour activities that constitute a trade or business, as
defined in Sec. 1.513-1(b), and that are not substantially related to
the purposes for which exemption has been granted to the organization
constitute an unrelated trade or business with respect to that
organization. Whether travel tour activities conducted by an
organization are substantially related to the organization's exempt
purpose is determined by looking at all relevant facts and
circumstances. Section 513(c) and Sec. 1.513-1(b) also apply to travel
tour activity. Application of the rules of section 513(c) and
Sec. 1.513-1(b) may result in different treatment for individual tours
within an organization's travel tour program.
(b) Examples. The provisions of this section are illustrated by the
following examples:
Example 1. O, a university alumni association, is exempt from
federal income tax under section 501(a) as an educational
organization described in section 501(c)(3). As part of its
activities, O operates a travel tour program. The program is open to
all current members of O and their guests. O works with travel
agencies to schedule approximately 10 tours annually to various
destinations around the world. Members of O pay $X to the organizing
travel agency to participate in a tour. The travel agency pays O a
per person fee for each participant. Although the literature
advertising the tours encourages O's members to continue their
lifelong learning by joining the tours, and a faculty member of O's
related university is invited to join the tour as a guest of the
alumni association, none of the tours includes any scheduled
instruction or curriculum related to the destinations being visited.
By arranging to make travel tours available to its members, O is not
contributing importantly to the accomplishment of its educational
purpose. Rather, O's program is designed to generate revenues for O
by regularly offering its members travel services. Accordingly, O's
tour program is an unrelated trade or business within the meaning of
section 513(a) of the Code.
Example 2. N is an organization formed for the purpose of
educating individuals about the geography and culture of the United
States. It is exempt from federal income tax under section 501(a) as
an educational and cultural organization described in section
501(c)(3). N engages in a number of activities to accomplish its
purposes, including offering courses and publishing periodicals and
books. As one of its activities, N conducts study tours to national
parks and other locations within the United States. The study tours
are conducted by teachers and other education professionals. The
tours are open to all who agree to participate in the required study
program. The study program consists of community college level
courses related to the location being visited by the tour. While the
students are on the tour, five or six hours per day are devoted to
organized study, preparation of reports, lectures, instruction and
recitation by the students. Each tour group brings along a library
of material related to the subject being studied on the tour.
Examinations are given at the end of each tour and N's state board
of education awards academic credit for tour participation. Because
the tours offered by N include a substantial amount of required
study, lectures, report preparation, examinations and qualify for
academic credit, the tours clearly further N's educational purpose.
Accordingly, N's tour program is not an unrelated trade or business
within the meaning of section 513(a) of the Code.
Example 3. R is a section 501(c)(4) social welfare organization
devoted to advocacy on a particular issue. On a regular basis
throughout the year, R organizes a travel tour for its members to
Washington, D.C. The tours are priced to produce a profit for R.
While in Washington, the members follow a schedule according to
which they spend substantially all of their time over several days
attending meetings with legislators and government officials and
receiving briefings on policy developments related to the issue that
is R's focus. Bringing members to Washington to participate in
advocacy on behalf of the organization and learn about developments
relating to the organization s principal focus is substantially
related to R's social welfare purpose. Therefore, R's operation of
the travel tours does not constitute an unrelated trade or business.
Example 4. S is a membership organization formed to foster
cultural unity and to educate X Americans about X, their country of
origin. It is exempt from federal income tax under section 501(a)
and is described in section 501(c)(3) as an educational and cultural
organization. Membership in S is open to all Americans interested in
the X heritage. As part of its activities, S sponsors a program of
travel tours to X. All of S's tours are priced to produce a profit
for S. The tours are divided into two categories. Category A tours
are trips to X that are designed to immerse participants in the X
history, culture and language. The itinerary is designed to have
participants spend substantially all of their time while in X
receiving instruction on the X language, history and cultural
heritage. Destinations are selected because of their historical or
cultural significance or because of instructional resources they
offer. Category B tours are also trips to X, but rather than
offering scheduled instruction, participants are given the option of
taking guided tours of various X locations included in their
itinerary. Other than the optional guided tours, Category B tours
offer no instruction or curriculum. Even if participants take all of
the tours offered, they have a substantial amount of time free to
pursue their own interests once in X. Destinations of principally
recreational interest, rather than historical or cultural interest,
are regularly included on Category B tour itineraries. Based on the
facts and circumstances, sponsoring Category A tours is an activity
substantially related to S's exempt purposes, and does not
constitute an unrelated trade or business with respect to S.
However, sponsoring Category B tours does not contribute importantly
to S's accomplishment of its exempt purposes and is designed to
generate a profit for S. Therefore, sponsoring the Category B tours
constitutes an unrelated trade or business with respect to S.
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
[FR Doc. 98-10747 Filed 4-20-98; 2:48 pm]
BILLING CODE 4830-01-U