Rev. Rul. 75-517

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.

As an integral part of the convention, the organization operates a display show designed to provide information on the availability of various products and services of interest to those attending the convention. Unlike an industry trade show of the type described in Rev. Rul. 67-219, 1967-2 C.B. 210, in which only members of an industry join in an exhibition of products and services of their industry, the organization in this situation operates a display show where suppliers and exhibitors are permitted to exhibit products and services used by the members in their businesses.

The organization's rental contracts for display space at the convention are silent on whether selling or order-taking will be permitted. However, in its promotional materials describing the show, the organization encourages selling and order-taking by emphasizing the convenience and economy of purchasing needed products and services at the convention facility.

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) 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.

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 1.513-1(d)(2) of the regulations provides that trade or business is substantially related to exempt purposes only if the performance of services or other activity from which a particular amount of gross income is derived contributes importantly to the accomplishment of these purposes.

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 non-exempt organizations.

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 trade or business regularly carried on. The controlling question 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 encouraged in the manner described indicates that 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 accomplishment of the organization's exempt purposes. See Rev. Rul. 58-224, 1958-1 C.B. 242, which 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 distributors. 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 subject organization's convention is conducted annually and runs a full week. 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, income derived from the rental of display space, under the circumstances described above, constitutes unrelated business taxable income within the meaning of 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 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.