Exempt organization travel and tour activities.

• Author: Whitman, Kelcy M.
• Position: Taxation

For years, Ilks officials have stated that income derived by tax-exempt organizations from conducting travel tours is a major examination area. The issue is whether the recreational and social aspects of tours outweigh their educational aspects. In addition, the commercial travel industry has strongly stated that tax-exempt organizations are unfairly competing in the marketplace.

In response to concerns by taxpayers and Congress, the Service published several revenue rulings addressing situations in which an exempt organization conducted travel tours. Prop. Regs. Sec. 1.513-7 augments the existing guidance on whether travel tour arrangements are unrelated trade or business income.

General Law

A tax-exempt entity must pay tax on its unrelated business taxable income (UBTI). Generally, an unrelated trade or business includes any activity not substantially related to an organization's basis for tax exemption. A substantial causal relationship must exist for an exemption. Simply put, the activity conducted must substantially contribute to the organization's exempt purpose.

Situational Examples

Prop. Regs. Sec. 1.513-7 sets forth the following four examples, illustrating how the Service determines whether an activity generates UBTI.

Example 1: A university alumni association is exempt from Federal income tax as an educational organization. The association operates a travel tour program open to all members and their guests. Travel agencies, acting on behalf of the association; schedule approximately 10 tours each year to various destinations around the world. The travel agencies receive fees from the members; in turn, the travel agency pays the association a fee for each participant.

The literature advertising the tours encourages the members to continue their lifelong learning. However, none of the tours specifically includes any scheduled instruction or curriculum related to the destinations.

IRS position: Due to the lack of scheduled instruction or curriculum related to the destinations being visited, the conduct of these tours does not contribute importantly to the association's educational purpose. The tours' primary purpose appears to be generation of revenues. Accordingly, this tour program is an unrelated trade or business.

Comment: Example 1 does not address the possibility that the revenue from the travel agencies could be classified as fee income for the use of the association's name and mailing lists. If properly structured, this...