Travel and tour activities of tax-exempt organizations.

In recent years, tax-exempt organizations have expanded the activities in which they are involved substantially. With this expansion has come criticism from for-profit entities involved in the same activities, as well as increased scrutiny by the IRS, in considering how the income from those additional activities should be taxed.

UNRELATED BUSINESS TAXABLE INCOME

Even if exempt, organizations must pay tax under the general federal income tax rules on income from any trade or business not related substantially to the exercise or performance of their charitable, educational or other exempt purpose. There must be a "substantial causal relationship" between the entity's business activities and its exempt purpose; an activity must "contribute importantly" to the achievement of this purpose. If there is not a sufficient connection, the organization will be charged with unrelated business taxable income (UBTI).

The key to whether an activity constitutes a trade or business, even if conducted by an exempt organization, is whether it is carried on for the production of income--that is, whether there is a profit motive. In addition, an activity conducted for the production of income does not lose its character as a business merely because it is carried on within the framework of a larger aggregate of similar activities or within a larger complex of other endeavors that may or may not be related to an organization's exempt purpose. Thus, for UBTI purposes, there may be different tax treatments for related activities within a single organization's overall activity.

TRAVEL AND TOUR ACTIVITIES

One area in which UBTI issues frequently arise is with income generated from travel and tour activities conducted or sponsored by exempt organizations. The basic issue is whether the recreational and social aspects of those tours outweigh their educational (or religious) aspects.

Over the last 20 years, the IRS has issued many rulings on this type of travel, all focusing on the degree of educational (or religious) content participants are expected to receive in determining whether the activity serves an exempt purpose. In April 1998, the service issued proposed regulations intended to supplement the guidance provided by these rulings. In general, the factors the IRS will consider include

* Scheduled instruction. Tours that encourage "lifelong learning" but do not include any scheduled instruction are suspect; their purpose is considered simply to be to generate revenue. Tours in which participants are given substantial amounts of free time to pursue their own interests, even if optional guided tours are available, probably will not be viewed as key contributions to an organization's exempt status.

Similarly, tours involving destinations that are principally recreational rather than of historic or cultural significance may be called into question as not sufficiently related.

* Established curriculums. The existence of an established curriculum will be a positive factor. These curriculums may relate to the destinations being visited or the organization's educational or social welfare purpose.

* Required minimum time commitments for organized study, report preparation and lectures. Tours that involve a substantial amount of required study, preparation of reports and lectures and instruction conducted by teachers and other educational professionals should be viewed as furthering an organization's educational purpose and should receive favorable treatment.

* Examinations and availability of academic credit. Tours in which participants are awarded academic credit, either for participation or as a result of examination, will be viewed as furthering an educational purpose.

For a discussion of these proposed regulations, as well as other recent developments, see the Tax Clinic, edited by Frank O'Connell, in the September 1998 issue of The Tax Adviser.