Most of us have been solicited by a nonprofit association to take advantage of their travel tour programs. You look through any association publication and you will find advertisements for various sponsored travel tours. Associations see a way to provide affordable and attractive travel for their members while generating additional income for their organization without large expenditures. Travel programs can be great revenue raisers for associations, but be aware that this activity is likely subject to unrelated business taxable income (UBTI) for the exempt organization.
According to the Internal Revenue Service, travel tour activities are unrelated trade or business if the activities aren’t substantially related to the purpose for which tax exemptions was granted to the organization. The IRS provides an example of a university alumni association that provides a travel program for its members and relatives. The alumni association works with various travel agencies and schedules approximately ten trips per year to various locations. It mails out promotional material and accepts reservations for fees paid by the travel agencies on a per-person basis. The alumni association provides an employee for each tour as a tour leader. There is no formal educational program conducted with these tours and they don’t differ from regular commercially operated tours, as there is an intent to make a profit. By providing travel tours to its members, the alumni association is engaged in a regularly conducted trade or business. Even if the tours it offers to support the university, financially and otherwise, the travel program doesn’t contribute importantly to the alumni association’s exempt purpose of promoting education. Therefore, the sale of the travel tour is an unrelated trade or business subject to income taxes.
The IRS provides an alternative example in contrast to the first example above. An exempt organization formed for the purpose of educating individuals about geography and the culture of the United States provides study tours to national parks and other locations within the United States. The tours are conducted by teachers and primarily designed for students enrolled in degree programs but are open to all who agree to participate in the required study program associated with the tour taken. During the tour, 5 or 6 hours per day are devoted to organized study, preparation of reports, lectures, instruction, and recitation by the students. Examinations are given at the end of each tour. In this second example, because the tours are substantially related to the organizations’ exempt purpose, they are not an unrelated trade or business.
Section 513(a) of the Internal Revenue Code states that unrelated trade or business means any trade or business which is not substantially related to the performance of the organization’s purpose for the basis of its exemption under section 501, aside from its need for income or funds or the use it makes of the profits derived. IRS Regulation 1.513-1(c)(1) notes that to determine whether a trade or business is “regularly carried on,” one must look to the frequency and continuity with which the activities productive of the income are conducted and the manner in which they are pursued. By offering travel tours to its members, an alumni association is furnishing its members a regularly carried on commercial service not substantially related to the educational purposes. Providing travel tours is not in itself an educational activity. Because of this, the sale of travel tours by an alumni association to its members is unrelated trade or business within the meaning of section 513.
Certain intermittent income-producing activities occur so infrequently that neither their occurrence nor their conduct will cause them to be regarded as trade or business regularly carried on. Fundraising activities lasting only a short period of time will not ordinarily be treated as regularly carried on if they occur only occasionally or sporadically. Fundraising activities held annually are generally not regarded as regularly carried on. Accordingly, income derived from the conduct of an annual fundraising gala would not be income from trade or business regularly carried on. Intermittent travel tours that are commonly provided by a number of exempt organizations, such as the annual fundraising event which maybe also for the convenience of members, are not generally subject to UBTI, because the tours occur so infrequently that neither their occurrence nor the manner of their conduct will cause them to be regarded as regularly carried on. However, as noted in the first IRS example above, an alumni association sponsoring ten travel tours per year would trip over the regularly carried on the threshold and would be subject to UBTI.
If you have concerns that your travel tour program may be exposing your exempt organization to unrelated business taxable income, contact a PBMares tax professional to discuss your specific facts and circumstances. There may be ways to modify your travel tour program offerings so that the activity is not unrelated trade or business activity.
