In general, net income received by a tax-exempt association may be subject to federal corporate income taxation if such income is generated by the performance of an activity that is a trade or business, regularly carried on, and not substantially related to the association’s tax-exempt purposes. In many instances, income so generated will be subject to the federal unrelated business income tax (UBIT). However, there has been much debate surrounding whether a particular activity is of the type that generally would qualify as substantially related to a Section 501(c)(6) or Section 501(c)(3) organization’s tax-exempt purposes. One such area of debate in the 1970s had to do with whether an association’s production of a convention or trade show was an activity that was substantially related to the association’s tax-exempt purposes.
That debate was settled when Section 513(d) was added by Congress to the Internal Revenue Code. That provision created a safe harbor from UBIT for income produced by “qualified convention and trade show activities” of associations. (The original language allowed the safe harbor only for Section 501(c)(5) and 501(c)(6) organizations, but it was subsequently amended to include Section 501(c)(3) and 501(c)(4) organizations as well.) Thus, rather than being forced to argue to the IRS or a court that an organization’s convention or trade show was a substantially related activity, associations were able to simply treat the income received from such events as not subject to UBIT by virtue of the safe harbor.
Of course, with the advent of the Internet and the ability to offer “virtual trade shows,” questions began to arise as to whether the offering of such a web-based trade show is the type of activity that is “of a kind traditionally conducted at … trade shows” (quoting from the Section 513(d) of the tax code).
New Revenue Ruling
The guidance (Rev. Rul. 2004-112) (issued more than four years after the IRS had published an announcement seeking comments from the exempt organization community regarding the tax treatment of certain Internet activities) describes two hypothetical scenarios — one involving a Section 501(c)(6) association that offers a semi-annual virtual trade show in connection with each in-person trade show; the other involving a Section 501(c)(6) association that offers a virtual trade show not in relation to any in-person trade show. (Note that while the hypothetical examples focus only on Section 501(c)(6) associations, it is very likely that the same principles and reasoning would apply to Section 501(c)(3) groups and other organizations that are subject to the safe-harbor provisions.)
The revenue ruling makes clear that the key factor in the IRS’ analysis of whether virtual trade show activity will be considered subject to the tax code safe harbor is whether or not the virtual show is ancillary to a “live” show.
In the first hypothetical scenario provided in the revenue ruling, an association conducts two trade shows a year. In conjunction with such shows the association has a separate virtual trade show section of its website available for viewing at all times during such shows as well as for three days preceding and three days following such shows. The in-person shows in this first scenario are similar to most trade or professional association shows — they include members of the association and suppliers to the industry, and exhibitors are charged a fee by the association in order to participate. This hypothetical association’s trade show section of its website contains “information and visual displays…and links to the websites of exhibitors represented at the [in-person] trade show.” The website also contains order forms and a function that allows on-line purchases from exhibitors. The association charges a fee to exhibitors that wish to have information listed on this web page.
According to the IRS, the web activities described above fit within the general tax code safe harbor for qualified convention and trade show activities because:
- The web activities are “ancillary” to the in-person trade shows;
- The content of the web section serves to “augment and enhance” the in-person trade shows by making available “in an alternative medium the same information available at the show”; and
- The web page is available “during essentially the same limited time period that each trade show is in operation.
- Thus, income generated by the web page will not be subject to UBIT in this situation.
The second hypothetical scenario provided by the IRS is very similar to the first, except that the organization in the second scenario offers two-week-long virtual trade shows without any connected “in-person” events. According to the IRS, such activity will not qualify for the tax code safe harbor. The IRS reasons that the website in this example is “not itself a convention, annual meeting or trade show” within the meaning of the tax code, due to the lack of an in-person, face-to-face component.
It should be noted that a failure to qualify for the convention and trade show safe harbor does not necessarily mean that the income generated from such a virtual trade show will be subject to UBIT. While, in most instances, the IRS likely would take the position that the net income is generated by the sale of advertising and thus subject to UBIT, there may be instances when an association is able to demonstrate that its activity is substantially related to its tax-exempt purposes even without the help of the tax code safe harbor for convention and trade show activities. Further, other tax code exceptions from UBIT, such as the exception for qualified sponsorship payments, may apply to some or all of the income in question.
The IRS revenue ruling offers needed clarity, but grey areas remain. For example, the hypothetical association in the first example offers its virtual show three days prior to the live show and keeps it accessible on the Internet for three days subsequent to the end of the live show. In that instance, the IRS states that the extension of time before and after the live show is acceptable because it is “reasonably brief and serves to allow for previewing the show … or following up on information gathered at the show.” What is not clear is how many “extra” days the IRS would not view as being “reasonably brief.” Moreover, the virtual trade show in the first example featured only “the same information that is available at the [in-person] show” and a function that allows purchases from “members and suppliers represented at the trade show.” What if an association offered a virtual trade show in connection with a live show but allowed companies that are not exhibiting at the live show to participate in the virtual show? Would such a fact cause the IRS to determine that the virtual show is no longer “ancillary” to the live show and thus not able to qualify as part of the tax code safe harbor?
While such questions likely only will be addressed through future IRS enforcement actions and the publication of IRS private letter rulings and technical advice memoranda, this new revenue ruling makes clear that there are circumstances in which an association may offer a virtual component to its actual trade show and not face increased tax risks. In addition, the revenue ruling makes clear that the IRS will not allow stand-alone virtual trade shows to qualify for the tax code’s safe harbor from UBIT.
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