Rev. Rul. 75-516

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 displays in question are a part of the organization's convention. The organization makes available display space to exhibitors to exhibit and demonstrate products and services used by the members in their businesses. In this respect, the convention displays differ from industry trade shows described in Rev. Rul. 67-219, 1967-2 C.B. 210, in which members join in an exhibition of the products and services of their industry.

The organization solicits exhibits on the basis of their potential informational value and on the understanding that the exhibits will not be oriented to order-taking or selling. In this regard, the organization discourages selling by stating in its brochures describing the convention that sales and order-taking are not permitted and by including a "no sales or order-taking" clause in its rental agreements with the exhibitors.

In addition, the organization vigorously enforces the "no sales" clause in order to prevent selling and order-taking from occurring in the display area or within other convention facilities provided. At the organization's suggestion, exhibitors provide various instructional features that normally include personnel qualified to explain products and answer questions, films, pamphlets, or working models.

Section 501(c)(6) of the Code provides for the exemption 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.

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 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. 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.

The organization is a business league whose exemption is based on the promotion of the common business interest of its members. This includes imparting general information to members about changing business conditions and the availability of new products and services. The displays are conducted in a manner reasonably calculated to impart useful information to members of the organization about new products and technology in their field of interest. The display and presentation of instructional material concerning the common business interests of the members, as a part of an annual membership convention, contribute importantly to the advancement of the organization's exempt purpose. The purpose of the display is not to furnish a sales facility for exhibitors. Compare Rev. Rul. 58-224, 1958-1 C.B. 242, which holds that where an organization provides direct advertising and selling opportunities for exhibitors, its primary purpose is to furnish a sales facility and hence is rendering particular services to individuals rather than improving business conditions generally.

Accordingly, income derived from the rental of display space, under the circumstances described above, does not constitute unrelated business taxable income within the meaning of section 512 of the Code.

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