Final Regs. on Travel and Tour Activities

The IRS has issued Regs. Sec. 1.513-7, clarifying when travel and tour activities of a tax-exempt organization are substantially related to its exempt purpose and when such activities may be subject to tax as an unrelated trade or business. These regulations are especially pertinent to college, university, alumni association and membership organizations. The regulations adopt, with modifications, the proposed regulations published on April 23, 1998. The new regulations are effective for tax years beginning after Feb. 7, 2000.

Code and Present Regulations

Sec. 513(a) generally defines an unrelated trade or business as any trade or business in which the conduct is not substantially related to the exercise or performance by the organization of the charitable, educational or other purpose or function that constitutes the basis for its exemption under Sec. 501(a). Regs. 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 the 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 is a facts-and-circumstances analysis. This rule applies to travel and tour activities conducted by exempt organizations.

Final Regs.

Because exempt organizations have a variety of purposes, Regs. Sec. 1.513-7 does not enumerate specific factors that determine relatedness of travel and tour activities to exempt purposes; instead, it adopts the general facts-and-circumstances approach of the proposed regulations. However, Regs. Sec. 1.513-7 includes seven examples that provide additional guidance for applying the facts-and-circumstances approach in both educational and noneducational contexts. The relevant facts and circumstances include (but are not limited to) how a travel tour is developed, promoted and operated. Note: Individual tour travel programs need to be addressed separately, as the determination of relatedness must be made for each one.

The seven examples clarify that the nature of the related activities and the practicalities of engaging in such activities (e.g., the hours during which the activity normally would be conducted) must also be taken into account. The examples illustrate that, if the tour is purported to be an educational program, scheduled instruction and curriculum are essential. Study, lectures, reports, preparation, examinations and academic credit are all factors that indicate the tours are substantially related to educational purposes. Tours of historical or cultural significance, rather than for recreational purposes, also indicate educational purposes. Tours by nonscientists to assist the scientific purposes or research of an organization may also indicate an educational purpose. On the other hand, tours to build goodwill or that are primarily social and recreational in nature may not. However, tours by a social welfare organization devoted to advocacy that spends the day lobbying members of a legislature may also qualify, even though there are social and recreational activities at night.

Regs. Sec. 1.513-7 does not specifically address the effect of an organization's travel and tour activities competing with taxable entities. As long as the organization's activities are substantially related to its exempt purposes, the unrelated business income tax is not imposed, regardless of possible competition.

Finally, Regs. Sec. 1.513-7 is silent as to the imposition of additional recordkeeping requirements. However, the examples illustrate that contemporaneous documentation showing how an organization develops, promotes and operates a tour is relevant to the facts-and-circumstances analysis.

From Randy Snowling, J.D., Don Herskovitz, J.D., and Jennifer Deutsch, CPA, Washington, DC