[Federal Register Volume 65, Number 25 (Monday, February 7, 2000)]
[Rules and Regulations]
[Pages 5771-5775]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-2154]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8874]
RIN 1545-AW10


Travel and Tour Activities of Tax-Exempt Organizations

AGENCY:  Internal Revenue Service (IRS), Treasury.

ACTION:  Final regulations.

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SUMMARY:  This document contains final regulations clarifying when the 
travel and tour activities of tax-exempt organizations are 
substantially related to the purposes for which exemption was granted. 
This action provides needed guidance for tax-exempt organizations 
concerning when travel tour activities may be subject to tax as an 
unrelated trade or business. This action affects tax-exempt 
organizations that engage in travel tour activities.

DATES: Effective Date:
    These regulations are effective on February 7, 2000.
    Applicability Date: These regulations are applicable for taxable 
years beginning after February 7, 2000.

FOR FURTHER INFORMATION CONTACT: Robin Ehrenberg, (202) 622-6080 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:  

[[Page 5772]]

Background

    On April 23, 1998, the IRS published in the Federal Register (63 FR 
20156) a notice of proposed rulemaking under section 513 to clarify 
when the travel and tour activities of tax-exempt organizations are 
substantially related to the purposes for which exemption was granted. 
The notice of proposed rulemaking added Treas. Reg. Sec. 1.513-7, which 
provides that whether travel tour activities are substantially related 
to an organization's exempt purposes is determined by examining all the 
relevant facts and circumstances. The proposed regulations also contain 
examples applying the facts and circumstances test in four situations.
    The notice of proposed rulemaking solicited comments from the 
public. Nineteen commentators submitted written comments. A public 
hearing was held on February 10, 1999, at which eight speakers 
presented testimony. After consideration of all the comments, the 
proposed regulations under section 513 are adopted as revised by this 
Treasury Decision. The comments and revisions are discussed below.

Explanation of Provisions and Summary of Comments

    Many of the commentators welcomed the proposed regulations as 
workable guidance that will promote tax compliance. Commentators 
differed on the approach that the IRS should adopt in final 
regulations. Some commentators suggested that the final regulations 
should adopt specific, weighted standards to be used in evaluating 
relatedness to exempt purpose. Other commentators recommended against 
adopting specific standards, arguing that no single set of standards 
would be appropriate given the broad range of tax-exempt organizations. 
One commentator suggested that the final regulations adopt a set of 
specific standards that would apply to test relatedness of tours in the 
educational context and a more general consistency standard that would 
evaluate whether the marketing, location, and execution of a tour are 
consistent with the organization's core exempt activities.
    Section 513(a) generally defines an unrelated trade or business as 
any trade or business the conduct of which is not substantially related 
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). See also United States v. American 
Bar Endowment, 477 U.S. 105, 109-110 (1986). Treas Reg. Sec. 1.513-
1(d)(2) provides that, for the conduct of a trade or business to be 
substantially related to the purposes for which exemption was granted, 
the production or distribution of the goods or the performance of 
services must contribute importantly to the accomplishment of those 
purposes. Whether activities generating gross income contribute 
importantly to accomplishing any purpose for which an organization was 
granted exemption depends in each case upon the particular facts and 
circumstances. Id. This rule applies to travel tours.
    Organizations exempt from tax under section 501(a) have diverse 
exempt purposes (for example: charities; social welfare organizations; 
labor, agricultural and horticultural organizations; business leagues; 
fraternal beneficiary societies). Accordingly, no one set of factors 
could be sufficiently comprehensive as to define relatedness for the 
variety of exempt organizations to which these travel tour regulations 
apply. Even among exempt organizations that share a common exempt 
purpose, such as education, the methods of accomplishing that purpose 
vary considerably. For this reason, the final regulations do not 
enumerate any specific factors that determine relatedness of travel 
tour activities to exempt purposes. The final regulations adopt the 
general facts and circumstances approach of the proposed regulations. 
See e.g, Hi-Plains Hospital v. United States, 670 F.2d 528 (5th Cir. 
1982) (need for case-by-case analysis identifying exempt purpose and 
analysis of how activity in each case contributes to exempt purpose); 
Louisiana Credit Union League v. United States, 693 F.2d 525, 534 (5th 
Cir. 1982) (resolution of the substantial relationship test requires 
``an examination of the relationship between the business activities 
that generate the income in question* * * and the accomplishment of the 
organization's exempt purposes''). However, as discussed below, the 
final regulations include new examples that provide additional guidance 
regarding the application of this facts and circumstances approach in 
both educational and noneducational contexts.
    Another commentator suggested that the final regulations should 
clarify that the manner in which an organization develops and promotes 
a tour is relevant to determining whether the tour activity is 
substantially related to exempt purposes. The development, promotion 
and operation of a tour are all indicators of whether an organization's 
offering of a tour is related or unrelated to its exempt purpose. See 
International Postgraduate Medical Found. v. Commissioner, 1989-36 T.C. 
Memo., 56 T.C.M. (CCH) 1140 (1989) (brochures promoting the trips 
emphasized recreational sightseeing activity and omitted educational 
course descriptions). Language has been added to the final regulations 
stating that relevant facts and circumstances include (but are not 
limited to) how a travel tour is developed, promoted and operated. 
Examples in the final regulations also illustrate the relevance of 
these factors.
    Many commentators requested more examples addressing specific 
areas. As noted above, examples have been added that further illustrate 
the application of the facts and circumstances rule. Some commentators 
raised concerns regarding the number of hours of related activities a 
travel tour must offer. Examples in the final regulation clarify that 
the number of hours spent on any related travel tour activity is only 
one factor in determining relatedness of the tour as a whole to exempt 
purposes and is not by itself determinative. Examples in the final 
regulation clarify that the nature of the related activities, and the 
practicalities of engaging in such activities (for example, the hours 
during which the activity normally would be conducted), must also be 
taken into account.
    One commentator suggested adding an example addressing whether 
income from travel tour activity is a royalty under section 512(b)(2) 
where the exempt organization does not operate the tour, but provides 
member names to a for-profit tour operator. Section 512(b)(2) excludes 
royalties from the computation of unrelated business taxable income. 
The question of what constitutes a royalty is beyond the scope of these 
regulations. For guidance as to whether income received by a tax-exempt 
organization from travel tour activities is excludable from unrelated 
business taxable income as a royalty, see generally Treas. Reg. 
Sec. 1.512(b)-1(b) and Sierra Club v. Commissioner, 86 F.3d 1526 (9th 
Cir. 1996).
    Some commentators suggested that the final regulations should 
contain provisions that prevent tax-exempt organizations from competing 
unfairly with taxable travel businesses. However, the test under 
section 513 is substantial relatedness to exempt purposes, not the 
presence or absence of unfair competition. Section 513 was enacted to 
prevent unfair competition between exempt organizations and taxable 
businesses. H.R. Rep. No. 2319, 81st Cong., 2d Sess. (1950), reprinted 
in 1950-2 C.B. 380, 409; S. Rep. No. 2375, 81st Cong., 2d Sess. (1950), 
reprinted in 1950-2 C.B. 483, 504; Portland Golf

[[Page 5773]]

Club v. Commissioner, 497 U.S. 154, 161-162, fn. 12 (1990); Treas. Reg. 
Sec. 1.513-1(b). Nevertheless, ``Congress did not force exempt 
organizations to abandon all commercial ventures'', but rather imposed 
a tax on ventures that are not substantially related to an 
organization's exempt purposes. United States v. American College of 
Physicians, 475 U.S. 834, 838 (1986). See also Louisiana Credit Union 
League v. United States, 693 F.2d 525, 541 (5th Cir. 1982). Following 
this approach, the section 513(a) regulations, published in 1967, state 
that ``any activity of a section 511 organization which is carried on 
for the production of income and which otherwise possesses the 
characteristics required to constitute `trade or business' within the 
meaning of section 162--and which, in addition, is not substantially 
related to the performance of exempt functions--presents sufficient 
likelihood of unfair competition to be within the policy of the tax 
[imposed by section 511(a)].'' Treas. Reg. Sec. 1.513-1(b). In 
expanding the categories of organizations subject to unrelated business 
income tax in 1969, Congress revisited the unfair competition issue. 
``[A] business competing with taxpaying organizations should not be 
granted an unfair competitive advantage by operating tax free unless 
the business contributes importantly to the exempt function.'' H.R. 
Rep. No. 413 (Part 1), 91st Cong., 1st Sess., 44, 50 (1969), reprinted 
in 1969 U.S.C.C.A.N. 1645, 1689, 1695 (emphasis added). If an 
organization's trade or business is substantially related to its exempt 
purposes, the tax under section 511 is not imposed, regardless of the 
existence of competition with taxable entities. Accordingly, the final 
regulations continue to focus on relatedness to exempt purposes, as 
required by section 513.
    The preamble to the proposed regulations requested comments on 
whether the final regulations should include documentation and 
recordkeeping requirements specific to travel tours. Commentators split 
on the preferred approach. Some commentators requested general guidance 
as to the types of records that an organization should keep to 
establish a tour's purpose, but did not want the IRS to mandate 
specific recordkeeping requirements. Other commentators asked that the 
IRS specify what documentation is required. Section 6001 authorizes the 
Secretary to prescribe regulations that require taxpayers to keep 
records sufficient to establish whether a taxpayer is liable for any 
tax imposed under the Code. Currently, any person subject to tax under 
subtitle A of the Code, including the tax imposed under section 511, or 
required to file a return of information with respect to income, must 
keep permanent books or records sufficient to establish the amount of 
gross income, deductions, credits or other matters required to be shown 
by such person in any return of tax or information. See Treas. Reg. 
Sec. 1.6001-1(a). In addition, every organization exempt from tax under 
section 501(a) must keep permanent books of account or records 
sufficient to show specifically items of gross income, receipts and 
disbursements, and to substantiate the information required by section 
6033. See Treas. Reg. Sec. 1.6001-1(c).
    The IRS and Treasury Department believe that, with respect to 
travel tours, it is unnecessary to supplement the existing 
recordkeeping requirements under sections 6001 and 6033. Therefore, the 
final regulations do not impose additional recordkeeping requirements. 
However, in response to commentators' suggestions, examples in the 
final regulations illustrate that contemporaneous documentation showing 
how an organization develops, promotes and operates the travel tour is 
relevant to the facts and circumstances analysis.

Special Analyses

    It has been determined that these final regulations are not a 
significant regulatory action as defined in Executive Order 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) and the Regulatory Flexibility Act (5 U.S.C. chapter 
6) do not apply to these regulations, and, therefore, a Regulatory 
Flexibility Analysis is not required. Pursuant to section 7805(f) of 
the Internal Revenue Code, the notice of proposed rulemaking preceding 
these regulations was submitted to the Chief Counsel for Advocacy of 
the Small Business Administration for comment on its impact on small 
business.

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 the Treasury 
Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is 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, including, but not limited to, how a travel tour is 
developed, promoted and operated. 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. In all of these examples, the travel tours are 
priced to produce a profit for the exempt organization. The examples 
are as follows:

    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 frequently joins 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. 
The travel tours made available to O's members do not contribute 
importantly to the accomplishment of O's 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

[[Page 5774]]

business within the meaning of section 513(a).
    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 personnel certified by the Board 
of Education of the State of P. The tours are directed toward 
students enrolled in degree programs at educational institutions in 
P, as reflected in the promotional materials, but are open to all 
who agree to participate in the required study program. Each tour's 
study program consists of instruction on subjects related to the 
location being visited on the tour. During 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 the P 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 are 
substantially related to N's educational purpose. Accordingly, N's 
tour program is not an unrelated trade or business within the 
meaning of section 513(a).
    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 travel tours for its members to 
Washington, DC. While in Washington, the members follow a schedule 
according to which they spend substantially all of their time during 
normal business hours 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. Members 
do have some time on their own in the evenings to engage in 
recreational or social activities of their own choosing. 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 within the 
meaning of section 513(a).
    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. 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. Substantially 
all of the daily itinerary includes scheduled instruction on the X 
language, history and cultural heritage, and visits to destinations 
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. 
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 
within the meaning of section 513(a). However, sponsoring Category B 
tours does not contribute importantly to S's accomplishment of its 
exempt purposes and, thus, constitutes an unrelated trade or 
business within the meaning of section 513(a).
    Example 5. T is a scientific organization engaged in 
environmental research. T is exempt from federal income tax under 
section 501(a ) as an organization described in section 501(c)(3). T 
is engaged in a long-term study of how agricultural pesticide and 
fertilizer use affects the populations of various bird species. T 
collects data at several bases located in an important agricultural 
region of country U. The minutes of a meeting of T's Board of 
Directors state that, after study, the Board has determined that 
non-scientists can reliably perform needed data collection in the 
field, under supervision of T's biologists. The Board minutes 
reflect that the Board approved offering one-week trips to T's bases 
in U, where participants will assist T's biologists in collecting 
data for the study. Tour participants collect data during the same 
hours as T's biologists. Normally, data collection occurs during the 
early morning and evening hours, although the work schedule varies 
by season. Each base has rustic accommodations and few amenities, 
but country U is renowned for its beautiful scenery and abundant 
wildlife. T promotes the trips in its newsletter and on its Internet 
site and through various conservation organizations. The promotional 
materials describe the work schedule and emphasize the valuable 
contribution made by trip participants to T's research activities. 
Based on the facts and circumstances, sponsoring trips to T's bases 
in country U is an activity substantially related to T's exempt 
purpose, and, thus, does not constitute an unrelated trade or 
business within the meaning of section 513(a).
    Example 6. V is an educational organization devoted to the study 
of ancient history and cultures and is exempt from federal income 
tax under section 501(a) as an organization described in section 
501(c)(3). In connection with its educational activities, V conducts 
archaeological expeditions around the world, including in the Y 
region of country Z. In cooperation with the National Museum of Z, V 
recently presented an exhibit on ancient civilizations of the Y 
region of Z, including artifacts from the collection of the Z 
National Museum. V instituted a program of travel tours to V's 
archaeological sites located in the Y region. The tours were 
initially proposed by V staff members as a means of educating the 
public about ongoing field research conducted by V. V engaged a 
travel agency to handle logistics such as accommodations and 
transportation arrangements. In preparation for the tours, V 
developed educational materials relating to each archaeological site 
to be visited on the tour, describing in detail the layout of the 
site, the methods used by V's researchers in exploring the site, the 
discoveries made at the site, and their historical significance. V 
also arranged special guided tours of its exhibit on the Y region 
for individuals registered for the travel tours. Two archaeologists 
from V (both of whom had participated in prior archaeological 
expeditions in the Y region) accompanied the tours. These experts 
led guided tours of each site and explained the significance of the 
sites to tour participants. At several of the sites, tour 
participants also met with a working team of archaeologists from V 
and the National Museum of Z, who shared their experiences. V 
prepared promotional materials describing the educational nature of 
the tours, including the daily trips to V's archaeological sites and 
the educational background of the tour leaders, and providing a 
recommended reading list. The promotional materials do not refer to 
any particular recreational or sightseeing activities. Based on the 
facts and circumstances, sponsoring trips to the Y region is an 
activity substantially related to V's exempt purposes. The scheduled 
activities, which include tours of archaeological sites led by 
experts, are part of a coordinated educational program designed to 
educate tour participants about the ancient history of the Y region 
of Z and V's ongoing field research. Therefore, V's tour program 
does not constitute an unrelated trade or business within the 
meaning of section 513(a).
    Example 7. W is an educational organization devoted to the study 
of the performing arts and is exempt from federal income tax under 
section 501(a) as an organization described in section 501(c)(3). In 
connection with its educational activities, W presents public 
performances of musical and theatrical works. Individuals become 
members of W by making an annual contribution to W of q dollars. 
Each year, W offers members an opportunity to travel as a group to 
one or more major cities in the United States or abroad. In each 
city, tour participants are provided tickets to attend a public 
performance of a play, concert or dance program each evening. W also 
arranges a sightseeing tour of each city and provides evening 
receptions for tour participants. W views its tour program as an 
important means to develop and strengthen bonds between W and its 
members, and to increase their financial and volunteer support of W. 
W engaged a travel agency to handle logistics

[[Page 5775]]

such as accommodations and transportation arrangements. No 
educational materials are prepared by W or provided to tour 
participants in connection with the tours. Apart from attendance at 
the evening cultural events, the tours offer no scheduled 
instruction, organized study or group discussion. Although several 
members of W's administrative staff accompany each tour group, their 
role is to facilitate member interaction. The staff members have no 
special expertise in the performing arts and play no educational 
role in the tours. W prepared promotional materials describing the 
sightseeing opportunities on the tours and emphasizing the 
opportunity for members to socialize informally and interact with 
one another and with W staff members, while pursuing shared 
interests. Although W's tour program may foster goodwill among W 
members, it does not contribute importantly to W's educational 
purposes. W's tour program is primarily social and recreational in 
nature. The scheduled activities, which include sightseeing and 
attendance at various cultural events, are not part of a coordinated 
educational program. Therefore, W's tour program is an unrelated 
trade or business within the meaning of section 513(a).

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
    Approved: January 21, 2000.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 00-2154 Filed 2-4-00; 8:45 am]
BILLING CODE 4830-01-P