Rev. Rul. 75-518

Advice has been requested whether, under the circumstances described below, income received from charges made for display privileges at a convention by an organization exempt from Federal income tax under section 501(c)(5) of the Internal Revenue Code of 1954 is derived from unrelated trade or business within the meaning of section 513.

An organization of teachers in a particular state conducts an annual convention where its members participate in meetings, seminars, and lectures concerning the general improvement and technical advances made in their profession. In addition, the members elect officers, vote on operating rules and regulations, and conduct other administrative functions.

The displays in question are an integral part of the organization's convention and are designed to provide information on the availability of various products and services of interest to those attending the show. The convention displays and exhibits are directed toward the members of the teachers' organization. The organization rents display space to exhibitors of products, equipment, and services used by the members in their professions.

The organization's rental contracts for display space at the convention contain a clause which prohibits sales and order-taking from occurring on the convention floor or at any convention facility and the organization does not advertise in its promotional materials that sales will be allowed. However, at the convention the sponsoring organization does not take steps to enforce the "no sales" clause in its agreements and, as a result, sales and order-taking are conducted by the exhibitors.

Section 511 of the Code imposes a tax upon the unrelated business taxable income of certain tax exempt organizations, including labor organizations described in section 501(c)(5) of the Code.

The term "unrelated business taxable income" is defined in section 512(a) of the Code, with certain modifications, as the gross income derived by any organization from any unrelated trade or business regularly carried on by it, less allowable deductions directly connected with the carrying on of such trade or business.

Section 513(a) of the Code defines the term "unrelated trade or business" as any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its exempt functions.

Section 1.513-1(d)(2) of the Income Tax Regulations provides that trade or business is substantially related to exempt purposes if the performance of services from which the gross income is derived "contributes importantly" to the accomplishment of those purposes.

The issue is whether the gross income received by the organization from charges it makes for the use of display space in the manner and subject to the conditions described above derives from the conduct of unrelated trade or business. The controlling question in that regard is whether making the display space available in the manner and subject to the conditions previously described contributes importantly to the accomplishment of any purpose that forms the basis of the organization's exemption.

Conducting a convention in which sales and order-taking are condoned in the manner described indicates the organization's purpose in providing the display space is to furnish a sales facility. Providing a sales facility does not contribute importantly to the organization's exempt purposes. Compare Rev. Rul. 58-224, 1958-1 C.B. 242, which holds that an organization whose sole activity is conducting a merchandise show where sales and order-taking are encouraged is not exempt under section 501(c)(6) of the Code.

Accordingly, income received from charges made for display privileges, under the circumstances described above, is derived from unrelated trade or business within the meaning of section 513 of the Code.

The Internal Revenue Service stated in Announcement 69-3, 1969-5 I.R.B. 37, that it was studying the effect of revised regulations under sections 512 and 513 of the Code on the rental income received from displays at conventions or other meetings conducted by organizations exempt from Federal income tax under section 501. The announcement further stated that if the study concluded that such income was taxable under section 511, the position would be applied without retroactive effect.

Pursuant to the authority contained in section 7805(b) of the Code, this Revenue Ruling will not be applied to cause adverse tax consequences to any organization with respect to: (1) any trade show held before December 1, 1975, (the date that this Revenue Ruling appeared in the Internal Revenue Bulletin), or (2) any trade show scheduled but not held before that date where the organization has entered into binding contracts for the production of the show, if the terms in such contracts are in effect on that date, cannot be altered to avoid the adverse tax consequences, and the trade show is held in accordance with said contractual terms.

¹ Also released as TIR-1409, dated October 31, 1975.