20156 Federal Register / Vol. 63, No. 78 /Thursday, April 23, 1998 / Proposed Rules

Common or usual name of crabmeat Scientific name of crab

Lithodes crabmeat Neolithodes brodiei.

Red crabmeat Geryon quinquedens.

Rock crabmeat Cancer irroratus and Cancer pagurus.

Snow crabmeat Chionoecetes angulatus, Chionoecetes bairdi, Chionoecetes opilio, and

Chionoecetes tanneri.

Spider crabmeat Jacquinotia edwardsii and Maja squinado.

Stone crabmeat Menippi adina and Menippi mercenaria.

Swimming crabmeat Callinectes arcuatus, Callinectes toxotes, Portunus pelagicus, and

Portunus puber.

Dated: April 17, 1998.

William K. Hubbard,

Associate Commissioner for Policy

Coordination.

[FR Doc. 98–10743 Filed 4–22–98; 8:45 am]

BILLING CODE 4160–01–F

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.

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/

taxlregs/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
Federal Register / Vol. 63, No. 78 /Thursday, April 23, 1998 / Proposed Rules 20157

a commercial travel agency. The ruling

concludes that the organization’s

activities are not ‘‘educational’’ as that

term is defined in Treas. Reg.

§ 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

§ 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
20158 Federal Register / Vol. 63, No. 78 /Thursday, April 23, 1998 / Proposed Rules

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:

§ 1.513–7 Travel and tour activities of tax

exempt organizations.

(a) Travel tour activities that

constitute a trade or business, as defined

in § 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 § 1.513–1(b) also apply to travel

tour activity. Application of the rules of

section 513(c) and § 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

ENVIRONMENTAL PROTECTION

AGENCY

40 CFR Part 62

[NE 052–1052b; FRL–6002–3]

Approval and Promulgation of State

Plans for Designated Facilities and

Pollutants; Nebraska; Control of

Landfill Gas Emissions From Existing

Municipal Solid Waste Landfills

AGENCY: Environmental Protection

Agency (EPA).

ACTION: Proposed rule.

SUMMARY: The EPA proposes to approve

the Nebraska state 111(d) plan for

controlling landfill gas emissions from

existing municipal solid waste (MSW)

landfills. The plan was submitted to

fulfill the requirements of the Clean Air

Act. The state plan establishes emission

limits for existing MSW landfills, and