Rev. Rul. 75-520

Advice has been requested whether, under the circumstances described below, income derived from the rental of display space at a convention by an organization exempt from Federal income tax under section 501(c)(6) of the Internal Revenue Code of 1954 constitutes unrelated business taxable income within the meaning of section 512.

The organization conducts an annual week-long convention where its members participate in meetings, seminars, and lectures concerning the general improvement and technical advances made in their industry. 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. The organization's members are all part of a particular industry. The organization leases the buildings in which the convention is held and sub-leases the floor space to exhibitors at various rates depending on the size and location of the space allotted and whether sales are permitted. The space rental contracts let by the organization are generally divided into those contracts that specifically permit sales and order-taking to be conducted in the space assigned and those that prohibit sales and order-taking altogether.

The operating structure of the exhibits is broken down into various segments. One segment is composed of members who exhibit their products for purposes of promoting their particular industry line. These members sign space rental contracts with the "no sales or order-taking" clause in them. Similarly, the convention display show is also composed of exhibitors who sign the "no sales or order-taking" agreement and who exhibit products and services used by the members in their respective businesses. In this regard all exhibitors signing the "no sales or order-taking" contracts bring personnel to the convention competent to discuss the exhibits and to present films, working models, and printed material on their particular subject. In addition, the organization takes steps to keep these exhibits educational in nature by strictly enforcing the "no sales or order-taking" agreements consummated with each exhibitor.

Recognizing that some of those attending the convention will be interested in making purchases, the organization allots a segment of its floor space to exhibitors who sign space rental contracts that specifically permit sales and order-taking to occur within the areas designated by their agreement.

Section 501(c)(6) of the Code provides for the exemption from Federal income tax of business leagues not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.

Section 511 of the Code imposes a tax upon the unrelated business taxable income of certain tax exempt organizations, including business leagues described in section 501(c)(6).

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 513(c) of the Code provides that an activity does not lose identity as a trade or 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.

A business league is described in section 1.501(c)(6)-1 of the Income Tax Regulations, in part, as an organization whose activities should be directed to the improvement of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons.

Section 1.512(a)-1(c) of the regulations provides, in part, that where facilities are used both to carry on exempt functions and to conduct unrelated trade or business, expenses, depreciation, and similar items attributable to such facilities shall be allocated between the two uses on a reasonable basis.

The definition of "regularly carried on" is supplied in section 1.513-1(c)(1) of the regulations which states that the specific business activities of an exempt organization will ordinarily be deemed to be regularly carried on if they manifest a frequency and continuity, and are pursued in a manner generally similar to comparable commercial activities of nonexempt organizations.

Section 1.513-1(d)(4)(i), Example (3), of the regulations describes an organization that puts on a trade show whose purpose is the promotion and stimulation of interest in, and demand for the products and services of a particular industry. The organization derives income from the rental of space to members who join in an exhibition of industry products. The show is not a sales facility for individual exhibitors. Based on these facts, it was determined that the activities productive of the organization's income contribute importantly to the achievement of its exempt purposes and do not constitute unrelated trade or business. See also Rev. Rul. 67-219, 1967-2 C.B. 210.

Similarly, Rev. Rul. 75-516, page 220, this Bulletin, holds that an organization deriving income from the rental of convention display space to exhibitors of products used by the members, shall not have that income subject to unrelated business income tax under section 511 of the Code if the organization prohibits sales and order-taking from taking place by its use of measures which include statements in convention brochures that no sales or order-taking will be permitted at the show, a "no sales or order-taking" clause in its rental contracts, strict enforcement of the "no sales or order-taking" provision, and active encouragement of its exhibitors to be educational and communicative in their displays.

On the other hand, Rev. Rul. 58-224, 1958-1 C.B. 242, describes an organization whose sole activity consists of staging an annual merchandise show made up of exhibits by manufacturers. The show is organized and operated by individuals who are salesmen and/or wholesalers. In conducting the show, the organization distributes a buyer's guide stressing the convenience of viewing and making necessary purchases under one roof. The organization's income is derived principally from manufacturers and wholesalers for the use of exhibit space. The Ruling holds that the organization is not exempt under section 501(c)(6) of the Code because it is primarily providing selling opportunities to the exhibitors.

The issue is whether the gross income received by a business league 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 business regularly carried on. The controlling question is whether making 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 trade show in the manner described indicates the organization has structured its show to serve more than one purpose. Based on section 513(c) of the Code, the organization's exhibits are separated into their various components in order to determine whether any are carried on for other than exempt purposes.

In this regard, the exhibits where no sales are permitted under the circumstances described above contribute importantly to the organization's exempt purposes. This follows since the exhibits of the members are conducted in essentially the same manner as those described in section 1.513-1(d)(4)(i) of the regulations and the exhibits of products used by the members closely parallel those described in the aforementioned Rev. Rul. 75-516.

However, the exhibits where sales and order-taking are encouraged in the manner described indicate that the organization's purpose in providing display space is to furnish a sales facility. Providing a sales facility does not contribute importantly to the organization's exempt purposes. In addition, the frequency of the convention and its duration are comparable to trade shows or selling marts carried on by commercial organizations. Thus, the activities manifest a frequency and continuity and are pursued in a manner not materially different from similar commercial activities.

Accordingly, the organization is engaged in unrelated trade or business regularly carried on which consists of providing display space to exhibitors in situations where sales are encouraged, and any income derived from the rental of this display space constitutes unrelated business taxable income within the meaning of section 512 of the Code.

In computing the organization's "unrelated business taxable income," expenses, depreciation, and similar items attributable to the convention shall be allocated between the unrelated trade or business and the exempt activities of the convention on a reasonable basis, in accordance with the regulations under section 512 of the Code.

The Internal Revenue Service stated in Announcement 69-3, 1969-5 I.R.B. 37, that it was studying the effects 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.