February 24, 2000 | Read Time: 2 minutes
The Internal Revenue Service has issued rules to guide universities, museums, and other tax-exempt organizations that run travel tours on how to avoid owing taxes on revenue they earn. Non-profit groups must pay the unrelated-business income tax, known as UBIT, on income from activities that are not “substantially related” to their charitable missions. The regulations took effect February 7.
Travel-industry representatives have long accused some non-profit groups of competing unfairly by sponsoring trips that have little or no educational purpose. Over the years, the I.R.S. has made a number of rulings on travel activities involving charities, but confusion has lingered over what kind of tour operations are exempt — or not exempt — from tax.
The new regulations stop short of laying down specific standards that charities should use to evaluate whether their travel tours are related to their missions and thus exempt from taxation. “No one set of factors could be sufficiently comprehensive as to define relatedness for the variety of exempt organizations to which these travel tour regulations apply,” the I.R.S. said.
Instead, the tax agency said that whether a charity’s travel tours are substantially related to its tax-exempt purpose “is determined by looking at all relevant facts and circumstances.” But in a nod to for-profit tour operators, the I.R.S. makes clear that it would consider “how a travel tour is developed, promoted, and operated.”
The service gives examples to suggest how it would treat different kinds of charity-sponsored travel arrangements.
In one example, an educational organization devoted to studying the performing arts and staging musical and theatrical works offers its donors the chance to travel as a group to major cities. The charity provides participants with tickets to shows, receptions, and sightseeing tours, and gets help from a travel agency.
The I.R.S. concludes that although the charity’s tours may foster good will among its members, they do not “contribute importantly” to the organization’s mission because they are primarily social and recreational in nature and are not part of a “coordinated educational program.” Thus, the charity would owe unrelated-business income tax on revenue from the program.
In another example, the I.R.S. says that an advocacy group could avoid taxes on trips arranged to Washington, D.C., for members who meet with policy makers and attend briefings related to the organization’s mission.
The I.R.S.’s regulations were published in the February 7 issue of the Federal Register, Pages 5,771-5,775. The rules can also be found by following the instructions for reading the Federal Register on a government Web site at http://www.access.gpo.gov/su_docs/fedreg/frcont00.html.
