[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 <a href="http://www.irs.ustreas.gov/prod/tax__regs/
comments.html">http://www.irs.ustreas.gov/prod/tax__regs/
comments.html</a>.

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

[[Page 20157]]

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

[[Page 20158]]

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