Travel & Tour Activities of
Tax-Exempt Organizations

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [TD 8874] RIN 1545-AW10

TITLE: Travel and Tour Activities of Tax-Exempt Organizations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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:

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.
§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.

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.3 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. § 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 (5 Cir. 1982) th (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 (5 Cir. 1982) (resolution
of the substantial th 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. §1.512(b)-1(b) and Sierra Club v.
Commissioner, 86 F.3d 1526 (9 Cir. 1996). th.6 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, 81 Cong., 2d Sess. (1950), reprinted
in 1950-2 st C.B. 380, 409; S. Rep. No. 2375, 81 Cong., 2d Sess.
(1950), reprinted in 1950-2 C.B. st 483, 504; Portland Golf Club v.
Commissioner, 497 U.S. 154, 161-162, fn. 12 (1990); Treas. Reg.
§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 (5 Cir. 1982).
Following this approach, th 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. §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), 91 Cong., 1 Sess.,
44, 50 (1969), st st 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.
§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. §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 Regu ations

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:

§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, including, but not limited to, how a travel tour is
developed, promoted and operated. 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. 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 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. 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 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).

Deputy Commissioner of Internal Revenue
Approved:
Assistant Secretary of the Treasury

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