IRS approves a trade association's tournament activities as related to its exempt purpose

Plain-English summary

The IRS considered whether a tax-exempt trade association could reacquire and operate a set of major sporting events. It ruled that operating the events would not harm the association's exemption under IRC § 501(c)(6). It also ruled that ticket sales, volunteer uniform fees, concession commissions, and broadcast-rights income were substantially related to the association's exempt purpose and therefore were not unrelated business taxable income under §§ 511-513. The reasoning focused on the events' role in promoting the sport, serving participants and spectators, and supporting the association's stated mission.

Ruling snapshot

• Question: Would reacquiring and operating the tournaments, and earning income from related activities, affect the association's exemption or create unrelated business taxable income?
• Outcome: Approved. All five requested rulings were favorable.
• Key authorities: IRC §§ 162, 501(c)(6), 511, 512, and 513; Treas. Reg. §§ 1.501(c)(6)-1, 1.513-1, and 1.513-1(d)(4)(i); Rev. Ruls. 58-502, 69-268, 74-399, and 80-294

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

November 13, 2013

Number: 201406020
Release Date: 2/7/2014
UIL: 501.06-00; 511.00-00; 512.00-00; 513.00-00

Legend:

b =
c =
d =
M =
N =
O =
P =
Q =
R =
S =
T =
Year 1 =
Year 2 =
Year 3 =

Dear :

We have considered your letter dated March 9, 2011 (as supplemented by your letters
dated May 21, 2012, February 28, 2013, and May 31, 2013) in which you request
rulings on the applicability of § 501(c)(6) and the unrelated business income tax under
§§ 511-513 to the activities described below.

Facts

M is a trade association that is organized as a not-for-profit corporation under state law.
M is exempt from federal income tax as an organization described in § 501(c)(6) of the
Internal Revenue Code (the “Code”). Members of M include professional d, c
administrators and general managers, and others directly employed in the b industry.

M's mission is to promote the enjoyment and involvement in the game of b, and to
contribute to the growth of the game by providing services to b professionals and the
industry overall. M will accomplish its mission by enhancing the skills of its
professionals, and by enhancing the opportunities available to amateurs, the general
public, and industry employers and manufacturers.

M is responsible for, and owns the rights to conduct, prominent b events and
tournaments such as P, Q, R, and S (individually and collectively, the “T”). P and Q are
annual b events, both of which attract large numbers of in-person spectators and
significant media coverage. Before Year 1, P and Q were operated by a wholly-owned
taxable subsidiary of M. In Year 1, the Internal Revenue Service (the “Service”) ruled
that the transfer to, and subsequent operation by, M of P and Q would not give rise to
unrelated business taxable income. After the Year 1 ruling, M assumed control of P and
Q.

R is a biennial b event. Like P and Q, R attracts large numbers of in-person spectators
as well as significant media coverage. S is designed primarily for television coverage
and, thus, while garnering significant media coverage, has relatively few in-person
spectators.

In Year 2, M entered into an agreement with its subsidiary, O. The agreement gives O
the right to provide all services related to the operation, management, and
administration of the T. Under the terms of the agreement, O is entitled to retain as
compensation the “net revenues” received in connection with each T conducted.

In Year 3, the rights to provide services related to operation of the T were transferred
from O to N, a taxable subsidiary of M. N is currently responsible for all aspects of T
events, including ticketing, marketing, advertising, travel and entertainment for the
members and d, logistics (e.g., parking, sponsor banners, etc.), T site selection,
conferencing facilities, lodging, etc. N also has the right to retain the profits from (or
losses incurred from) the organization of the T. Nevertheless, M retains all broadcast
rights to and receives all broadcast revenues from the T.

In addition to revenues from licensing of television and cable broadcast rights, each T
generates revenue from, among other things:

1. Admission receipts from the viewing public;

2. Hospitality (including a percentage of the gross receipts from sales of food and
   beverages by authorized vendors and concessionaires to attendees); and

3. Fees paid by individuals who participate as volunteers (a portion of the fees is for
   uniform clothing worn at the T).

Admissions

The revenue from admissions is the money charged to members of the viewing public to
enter the premises to watch the T and to gain limited access to portions of the T-hosts’
facilities (e.g., bathrooms, restaurants, parking).

Food and Beverage Concessions

During the T, food and beverages are provided to spectators, volunteers, and T
employees by concessionaires. The concessionaires sell food and beverages to the
general public at drink stands, concession tents, and various public places in the vicinity
of the T. Under its contracts with the concessionaires, N generally is entitled to a stated
percentage of food and beverage income, typically between 30 and 40 percent of gross
receipts.

Volunteer Operations

Much of the actual labor performed at each T is performed by volunteers. Normally,
these volunteers are members or friends of members of the host c. They meet in
advance of the T and receive training for various tasks.

Volunteers are required to wear uniforms while on duty during the T. Each volunteer
pays a “volunteer/uniform’” fee in return for which the volunteer receives a volunteer
uniform, meal and water vouchers, off-site parking and shuttle service to the T, and a
volunteer credential that provides him or her with access to the T-site for each day of
the event. Some volunteers opt to purchase additional uniform items to wear during the
event so as not to have to launder the items daily.

M wishes to reacquire all rights to the T that are currently held by N.

Rulings Requested

M has requested the following rulings:

1. The reacquisition of direct control and operation of the T will not adversely affect
   the tax-exempt status of M as an organization described in § 501(c)(6) of the
   Code;

2. Income from the sale of admission tickets to the general public for admissions to
   the T is substantially related to M’s trade or business [i.e., exempt purpose] and
   is not subject to taxation under § 511 of the Code;

3. Income received from sales of volunteer uniforms to tournament volunteers is
   substantially related to M’s trade or business [i.e., exempt purpose] and is not
   subject to taxation under § 511 of the Code;

4. Commissions received from concessionaires at the T are not taxable as
   unrelated business taxable income because the provision of food and beverages
   to T patrons and volunteers is substantially related to M’s exempt purposes; and

5. Income from the licensing of broadcasting rights with respect to the T will
   continue to be recognized as substantially related to the exempt purposes of M
   for purposes of § 511 of the Code.

Law

Section 501(a) of the Code exempts from federal income taxation organizations
described in § 501(c).

Section 501(c)(6) of the Code describes business leagues, chambers of commerce,
real-estate boards, boards of trade, or professional football 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 1.501(c)(6)-1 of the Income Tax Regulations (the “Regulations”) provides that a
business league is an association of persons having some common business interest,
the purpose of which is to promote such common interest and not to engage in a regular
business of a kind ordinarily carried on for profit. Thus, its 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.
Organizations otherwise exempt from tax under this section are taxable upon their
unrelated business taxable income.

Section 511 of the Code imposes a tax on the unrelated business taxable income (as
defined in § 512) of various tax-exempt organizations, including organizations described
in § 501(c)(6).

Section 512(a)(1) of the Code provides that the term “unrelated business taxable
income” means the gross income derived by an organization from any unrelated trade
or business (as defined in § 513) regularly carried on by it, less allowable deductions

which are directly connected with the carrying on of such trade or business, both
computed with the modifications provided in § 512(b).

Section 513(a) of the Code provides, in relevant part, that the term “unrelated trade or
business” means, in the case of any organization subject to the tax imposed by § 511,
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 charitable, educational, or
other purpose or function constituting the basis for its exemption under § 501, except
that such term does not include any trade or business in which substantially all the work
in carrying on such trade or business is performed for the organization without
compensation, or which is the selling of merchandise, substantially all of which has
been received by the organization as gifts or contributions.

Section 513(c) of the Code provides that the term “trade or business” includes any
activity which is carried on for the production of income from the sale of goods or the
performance of services, and that an activity does not lose identity as a trade or
business merely because it is carried on within a larger aggregate of similar activities or
within a larger complex of other endeavors which may, or may not, be related to the
exempt purposes of the organization. Where an activity carried on for profit constitutes
an unrelated trade or business, no part of such trade or business shall be excluded from
such classification merely because it does not result in profit.

Section 1.513-1(a) of the Regulations provides that the term “unrelated business
taxable income,” as used in § 512, means the gross income derived by an organization
from any unrelated trade or business regularly carried on by it, less the deductions and
subject to the modifications provided in § 512. Section 513 specifies with certain
exceptions that the phrase ‘unrelated trade or business” means, in the case of an
organization subject to the tax imposed by § 511, 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 charitable, educational, or other purpose or function constituting
the basis for its exemption under § 501. Therefore, unless one of the specific
exceptions of § 512 or 513 is applicable, gross income of an exempt organization
subject to the tax imposed by § 511 is includible in the computation of unrelated
business taxable income if: (1) it is income from trade or business; (2) such trade or
business is regularly carried on by the organization; and (3) the conduct of such trade or
business is not substantially related (other than through the production of funds) to the
organization’s performance of its exempt functions.

Section 1.513-1(b) of the Regulations provides that the primary objective of adoption of
the unrelated business income tax was to eliminate a source of unfair competition by

placing the unrelated business activities of certain exempt organizations upon the same
tax basis as the nonexempt business endeavors with which they compete. On the other
hand, where an activity does not possess the characteristics of a trade or business
within the meaning of §162 of the Code, such as when an organization sends out low-
cost articles incidental to the solicitation of charitable contributions, the unrelated
business income tax does not apply since the organization is not in competition with
taxable organizations. However, in general, any activity of a § 511 organization which is
carried on for the production of income and which otherwise possesses the
characteristics required to constitute trade or business within the meaning of § 162 (and
which, in addition, is not substantially related to the performance of exempt functions)
presents sufficient likelihood of unfair competition to be within the policy of the tax.
Accordingly, for purposes of § 513, the term trade or business has the same meaning it
has in § 162, and generally includes any activity carried on for the production of income
from the sale of goods or performance of services. Thus, the term trade or business in §
513 is not limited to integrated aggregates of assets, activities and good will which
comprise businesses for the purposes of certain other provisions of the Code. Activities
of producing or distributing goods or performing services from which a particular amount
of gross income is derived do not lose identity as trade or business merely because
they are carried on within a larger aggregate of similar activities or within a larger
complex of other endeavors which may, or may not, be related to the exempt purposes
of the organization. However, where an activity carried on for the production of income
constitutes an unrelated trade or business, no part of such trade or business shall be
excluded from such classification merely because it does not result in profit.

Section 1.513-1(c)(1) of the Regulations provides that, in determining whether trade or
business from which a particular amount of gross income derives is “regularly carried
on” within the meaning of § 512 of the Code, regard must be had to the frequency and
continuity with which the activities productive of the income are conducted and the
manner in which they are pursued. The requirement must be applied in light of the
purpose of the unrelated business income tax to place exempt organization business
activities upon the same tax basis as the nonexempt business endeavors with which
they compete. Hence, for example, 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 nonexempt organizations.

Section 1.513-1(c)(2)(i) of the Regulations provides that where income producing
activities are of a kind normally conducted by nonexempt commercial organizations on a
year-round basis, the conduct of such activities by an exempt organization over a period
of only a few weeks does not constitute the regular carrying on of trade or business.

For example, the operation of a sandwich stand by a hospital auxiliary for only 2 weeks
at a state fair would not be the regular conduct of trade or business. However, the

conduct of year-round business activities for one day each week would constitute the
regular carrying on of trade or business. Thus, the operation of a commercial parking
lot on Saturday of each week would be the regular conduct of trade or business. Where
income producing activities are of a kind normally undertaken by nonexempt
commercial organizations only on a seasonal basis, the conduct of such activities by an
exempt organization during a significant portion of the season ordinarily constitutes the
regular conduct of trade or business. For example, the operation of a track for horse
racing for several weeks of a year would be considered the regular conduct of trade or
business because it is usual to carry on such trade or business only during a particular
season.

Section 1.513-1(c)(2)(ii) of the Regulations provides that, in determining whether or not
intermittently conducted activities are regularly carried on, the manner of conduct of the
activities must be compared with the manner in which commercial activities are normally
pursued by nonexempt organizations. In general, exempt organization business
activities which are engaged in only discontinuously or periodically will not be
considered regularly carried on if they are conducted without the competitive and
promotional efforts typical of commercial endeavors. For example, the publication of
advertising in programs for sports events or music or drama performances will not
ordinarily be deemed to be the regular carrying on of business. On the other hand,
where the non-qualifying sales are not merely casual, but are systematically and
consistently promoted and carried on by the organization, they meet the § 512
requirement of regularity.

Section 1.513-1(c)(2)(iii) of the Regulations provides that certain intermittent income
producing activities occur so infrequently that neither their recurrence nor the manner of
their conduct will cause them to be regarded as trade or business regularly carried on.
For example, income producing or fund raising activities lasting only a short period of
time will not ordinarily be treated as regularly carried on if they recur only occasionally
or sporadically. Furthermore, such activities will not be regarded as regularly carried on
merely because they are conducted on an annually recurrent basis. Accordingly,
income derived from the conduct of an annual dance or similar fund raising event for
charity would not be income from trade or business regularly carried on.

Section 1.513-1(d)(1) of the Regulations provides that gross income derives from
unrelated trade or business, within the meaning of § 513(a) of the Code, if the conduct
of the trade or business which produces the income is not substantially related (other
than through the production of funds) to the purposes for which exemption is granted.
The presence of this requirement necessitates an examination of the relationship
between the business activities which generate the particular income in question (the
activities, that is, of producing or distributing the goods or performing the services
involved) and the accomplishment of the organization's exempt purposes.

Section 1.513-1(d)(2) of the Regulations provides that trade or business is “related” to
exempt purposes, in the relevant sense, only where the conduct of the business
activities has causal relationship to the achievement of exempt purposes (other than
through the production of income); and it is “substantially related,” for purposes of §
513, only if the causal relationship is a substantial one. Thus, for the conduct of trade or
business from which a particular amount of gross income is derived to be substantially
related to purposes for which exemption is granted, the production or distribution of the
goods or the performance of the services from which the gross income is derived must
contribute importantly to the accomplishment of those purposes. Where the production
or distribution of the goods or the performance of the services does not contribute
importantly to the accomplishment of the exempt purposes of an organization, the
income from the sale of the goods or the performance of the services does not derive
from the conduct of related trade or business. Whether activities productive of gross
income contribute importantly to the accomplishment of any purpose for which an
organization is granted exemption depends in each case upon the facts and
circumstances involved.

Section 1.513-1(d)(4)(i) of the Regulations provides examples of instances where the
gross income derived from charges for the performance of exempt functions does not
constitute gross income from the conduct of unrelated trade or business. In Example
(1), M, an organization described in §501(c)(3), operates a school for training children in
the performing arts, such as acting, singing, and dancing. M presents performances by
its students and derives gross income from admission charges for the performances.
The students’ participation in performances before audiences is an essential part of
their training. Since the income realized from the performances derives from activities
which contribute importantly to the accomplishment of M’s exempt purposes, it does not
constitute gross income from an unrelated trade or business. In Example (3), O, an
industry trade association described in § 501(c)(6), presents a trade show in which
members of its industry join in an exhibition of industry products. O derives income
from charges made to exhibitors for exhibit space and admission fees charged to
patrons or viewers of the show. The purpose of the show is the promotion and
stimulation of interest in, and demand for, the industry’s products in general, and it is
conducted in a manner reasonably calculated to achieve that purpose. The stimulation
of demand for the industry’s products in general is one of the purposes for which
exemption is granted O. Consequently, the activities productive of O’s gross income
from the show -— that is, the promotion, organization, and conduct of the exhibition —
contribute importantly to the achievement of the exempt purpose, and the income does
not constitute gross income from unrelated trade or business.

Rev. Rul. 58-502, 1958-2 C.B. 271, concerns an organization that is exempt under §
501(c)(6) of the Code and was formed for the purpose of promoting and conserving the

best interests and true spirit of a game as embodied in its traditions. The organization's
membership is composed of regularly organized clubs throughout the United States.
The organization is empowered to prescribe and enforce the rules and tests governing
amateur standing, the rules for the playing of the game, and to hold each year
championship tournaments and other such events. The organization acts as the
authoritative national body in the arbitration of controversies and in the final
determination of all questions relating to the game in the country. In addition to the
membership dues it receives, the organization’s income is derived from the
championship tournaments it sponsors, the grant of radio and television broadcasting
rights, and from the sale of booklets containing the rules of the game. The income
derived from the grant of radio and television broadcasting rights is relatively
insignificant in amount. The ruling states that the activities performed by the
organization (the sponsorship of championship tournaments, the sale of publications
relating to rules, etc.) are means for achieving the organization’s primary purpose, and
are directly related to the purpose for which the organization was granted exemption.
The grant of radio and television rights is found to be incidental to the purposes for
which the organization was granted exemption, and the income derived therefrom is not
disproportionate in amount when compared to the size and extent of its tax-exempt
activities. Consequently, it is held that the income derived from the operation of the
championship tournaments, the sale of publications relating to rules, and the grant of
radio and television broadcasting rights, is not subject to the unrelated business income
tax imposed by § 511 of the Code.

Rev. Rul. 69-268, 1969-1 C.B. 160, concerns a hospital, exempt under § 501(c)(3),
which operates a cafeteria and coffee shop in its main building, primarily for its
employees and medical staff. This enables hospital personnel to eat on the premises
so as to be available for emergency situations and other hospital duties. Persons
visiting patients in the hospital are permitted to use the facilities; however the general
public is not encouraged to use them. The ruling states that the maintenance of the
cafeteria and coffee shop on the premises for employees and medical staff enables the
hospital to operate more efficiently and thus contributes importantly to its exempt
purpose. In addition, because visitation of patients constitutes supportive therapy that
assists in patient treatment and recovery, permitting visitors to use the hospital cafeteria
and coffee shop enables them to spend more time with the patients, thus contributing
importantly to the hospital’s exempt purpose. Consequently, the operation of the eating
facilities does not constitute unrelated trade or business within the meaning of § 513 of
the Code.

Rev. Rul. 74-399, 1974-2 C.B. 172, concerns an art museum, exempt under §
501(c)(3), that operates a dining room, cafeteria, and snack bar for use by its staff,
employees, and members of the visiting public. The eating facilities are accessible from
the museum’s galleries and other public areas, but not directly accessible from the

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street. The patronage of the eating facilities by the general public is neither directly nor
indirectly solicited nor are the facilities designed to serve as a public restaurant. The
ruling states that operation of the eating facilities within the museum premises helps to
attract visitors to the museum exhibits and allows visitors to devote more time to the
museum’s collection, exhibits, and other educational facilities than would be the case if
they had to interrupt or terminate their tours to seek outside eating facilities at
mealtimes. In addition, the eating facilities enhance the efficient operation of the
museum by enabling museum staff and employees to remain on its premises
throughout the workday. Thus, the operation of the eating facilities is a service that
contributes importantly to the accomplishment of the museum’s exempt purposes.
Accordingly, the operation of the eating facilities by the museum under these
circumstances is substantially related to the museum’s exempt purposes and is not
unrelated trade or business within the meaning of § 513.

Rev. Rul. 80-294, 1980-2 C.B. 187, concerns an organization recognized as exempt
under § 501(c)(6) of the Code that was formed to promote interest in a particular sport,
to elevate the standards of the sport as a profession, and to sponsor and conduct
tournaments for the encouragement of its members. The organization’s membership is
open to all professional players of the sport in the United States. Among its activities,
the organization conducts apprentice programs, annual conventions and merchandise
shows, and tournaments. Its support is derived primarily from the sale of television
broadcasting rights to its tournaments. In this ruling, the organization's tournament
activities are deemed to be similar to those of the organization described in Rev. Rul.
58-502, with the exception that its primary source of support is the sale of broadcasting
rights. In this latter case, the sponsorship of tournaments and the sale of broadcasting
rights with respect to those tournaments are found to directly promote the interest of
those engaged in the sport by encouraging participation in the sport, and by enhancing
the general public’s awareness of the sport as a profession. The amount of income
derived from the sale of broadcasting rights is not, by itself, determinative of whether the
activity furthers the purposes specified in § 501(c)(6) of the Code. Thus, under the
circumstances described above, sponsoring tournaments and selling broadcasting
rights are activities directly related to the organization’s exempt purposes,
notwithstanding the amount of income it receives from those activities. Accordingly, it is
concluded that an organization exempt from federal income tax under § 501(c)(6) will
not adversely affect its exempt status if its primary source of support is derived from the
sale of broadcasting rights to the sports tournaments it conducts. This ruling clarifies
Rev. Rul. 58-502 to remove the implication that the sale of television broadcasting rights
to an organization’s tournaments furthers exempt purposes within the meaning of
section 501(c)(6) only when the amount of income derived therefrom is insignificant in
amount.

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Analysis
Part 1: Exempt Status Under § 501(c)(6)

Issue:

Whether the reacquisition of direct control and operation of the T would adversely
affect the tax-exempt status of M as an organization described in § 501(c)(6) of
the Code.

M is recognized as an organization described in § 501(c)(6) of the Code. Its mission is
to promote the enjoyment and involvement in the game of b. M accomplishes its
mission by enhancing the skills of its professionals and the opportunities of the general
public.

Rev. Rul. 58-502 recognizes that the sponsorship and operation of championship
tournaments are means by which an organization described in § 501(c)(6) and formed
for the purpose of promoting and preserving a game achieves its primary purpose, and
that such tournaments are directly related to the purpose for which such organizations
are granted exemption. Likewise, the sponsorship and operation of the T are means of
achieving M’s primary purpose of promoting the game of b, and are directly related to
the purpose for which M was granted exemption. Consequently, M’s reacquisition of
direct control and operation of the T from N would not adversely affect M’s tax-exempt
status as an organization described in § 501(c)(6) of the Code.

Part 2: Unrelated Business Taxable Income

Upon the reacquisition of direct control and operation of the T, M would derive income
from a variety of activities conducted in conjunction with the T. M has asked us to rule
on whether the gross income derived from certain of these activities would be
considered unrelated business taxable income under § 512.

To be includible in the computation of M’s unrelated business taxable income, the gross
income must be from a trade or business the conduct of which is not substantially
related (other than through the production of funds) to M’s performance of its exempt
functions, and such trade or business must be regularly carried on. See Treas. Reg. §
1.513-1(a).

Trade or Business

The income that is the subject of the various ruling requests will be derived from
activities that are carried on for the production of income from either the sale of goods

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or the performance of services. Thus, such income is considered income from a trade
or business. See Treas. Reg. § 1.513-1(b).

Regularly Carried On

In determining whether a trade or business from which M derives a particular amount of
gross income is “regularly carried on’, consideration must be given to whether the
activities that produce the income manifest a frequency and continuity, and are pursued
in a manner, generally similar to comparable commercial activities of non-exempt
organizations. See Treas. Reg. § 1.513-1(c)(1) and (2)(i). When the business activities
of an exempt organization are engaged in only discontinuously or periodically, they will
not be considered regularly carried on if they are conducted without the competitive and
promotional efforts typical of commercial endeavors. On the other hand, where the
sales are not merely casual, but are systematically and consistently promoted and
carried on by the organization, they meet the definition of “regularly carried on” for
purposes of § 512. See Treas. Reg. § 1.513-1(c)(2)(ii).

The activities from which M will derive income are integral to the conduct of b
tournaments and other sports tournaments, and, as such, have no meaningfully
comparable commercial counterparts outside the realm of sports competitions. Thus,
the determination of whether such activities are regularly carried on depends on
whether the T are considered regularly carried on when compared to other b
tournaments.

Issue:
Whether the T are regularly carried on.

While there are many b tournaments held throughout the year, only a few of those
tournaments are considered major b tournaments, among which are included the T. In
general, the sport of b is played, and major b tournaments are held, in the Spring,
Summer, and Fall of the year. The four T that M will conduct are held over the course
of the seasons in which major b tournaments are played: Q in the Spring, P in the
Summer, and R and § in the Fall. P, Q and S are held annually; R is held biennially. It
is unlikely that any other organization, exempt or nonexempt, conducts as many as four
major b tournaments in a year. Thus, under the reasoning of Treas. Reg. § 1.513-
1(c)(2)(i), it could be said that the T are regularly carried on. But even if the T were
considered to be conducted intermittently, it cannot be said that the activities that are
integral to the T are conducted casually or without the competitive and promotional
efforts typical of commercial endeavors. As major b tournaments, each T is widely,
heavily, and continuously promoted in both print and online media. Each T has its own
website that solicits ticket sales, sponsors, and volunteers year round. Consequently,

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the T, and the activities integral to the T — ticket sales to the public, concessions, and
the licensing of broadcasting rights — meet the requirements of regularity under the
reasoning of Treas. Reg. § 1.513-1(c)(2)(ii).

Substantially Related

The gross income that M derives from a T-related activity would be includible in M’s
unrelated business taxable income only if the conduct of the trade or business that
produces the income is not substantially related (other than through the production of
funds) to M’s exempt purpose. See Treas. Reg. § 1.513-1(d)(1).

M is recognized exempt from federal income tax as an organization described in §
501(c)(6). M’s exempt purpose is to promote the enjoyment and involvement in the
game of b and to contribute to its growth by providing services to b professionals and
the b industry. M accomplishes its purpose by enhancing the skills of its professional
members, and the opportunities for amateurs, employers, manufacturers, employees,
and the general public. Thus, if M derives income from an activity that does not
contribute importantly to the accomplishment of such purpose within the meaning of §
1.513-1(d)(2) of the Regulations, that income would be considered income from an
unrelated trade or business.

Issue:

Whether the sale of admission tickets to the general public for admissions to the
T is substantially related to M’s exempt purpose.

Example (1) under § 1.513-1(d)(4)(i) of the Regulations explains that income derived
from admission charges to performances before audiences, when such performances
contribute importantly to the accomplishment of the organization’s exempt purposes,
does not constitute gross income from unrelated trade or business. The T are
performances of M’s member d before audiences — performances that promote the
enjoyment and growth of the game of b and contribute to the professional growth and
skill of the d, thereby contributing importantly to M’s exempt purposes. Therefore,
income derived from admissions charges to the T does not constitute gross income
from unrelated trade or business.

Furthermore, example (3) under § 1.513-1(d)(4)(i) of the Regulations explains that
admissions fees charged by a section 501(c)(6) organization to patrons and viewers of
a show in which members of an industry join in an exhibition of industry products for the
purpose of generally promoting and stimulating an interest in, and demand for, the
industry’s products does not constitute gross income from an unrelated trade or
business because the stimulation of demand for the industry's products is one of the

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purposes for which exemption under section 501(c)(6) is granted. Similarly, the sale of
tickets to the general public for admission to T at which d compete in the game of b
does not constitute gross income from an unrelated trade or business, because the T
stimulate interest in the game of b which is one of the purposes for which M was
granted exemption under § 501(c)(6).

Issue:

Whether the sale of volunteer uniforms to T volunteers is substantially related to
M’s exempt purpose.

Much of the actual labor performed at each T is performed by volunteers. Volunteers
are required to wear uniforms while on duty during the T. Each volunteer pays a
volunteer/uniform fee in return for which the volunteer receives a volunteer uniform and
credentials which give access to the grounds of the T for each day of the T.

As explained above, the conduct of the T is substantially related to M’s exempt purpose
because it promotes the enjoyment and involvement in the game of b and contributes to
its growth. The successful conduct of the T is dependent on the work of volunteers.
Just as many employers require their employees to purchase and wear uniforms while
on the job, T volunteers are required to wear uniforms so that they are more identifiable
to the spectators and T officials who might require their services. Furthermore, the
volunteer/uniform fee includes credentials that give the volunteer access to the T site
and, thus, function as the volunteer’s admissions ticket to the T. Because the presence
of a uniformed volunteer corps contributes importantly to the success of the T, sales of
volunteer uniform packages and additional uniform items to volunteers are substantially
related to M’s exempt purpose, and would not be considered an unrelated trade or
business within the meaning of section 513.

issue:

Whether food and beverage concessions to T patrons and volunteers is
substantially related to M’s exempt purpose.

During the T, food and beverages are provided to spectators, volunteers, and T
employees by concessionaires. The T further M’s exempt purpose by giving the
general public an opportunity to learn about, and enjoy, the game of b by watching the
best d compete for the T championship. The d, in turn, are given the opportunity to
display and enhance their b skills by playing before a large gallery of spectators.
Therefore, the presence of spectators at a T is contributes importantly to furthering M’s
mission of promoting the enjoyment and involvement in the game of b.

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Each day of a T lasts for much of the daylight hours. The T site is generally located far
from commercial food and beverage establishments. Without food and beverage
concessions on the T site, many spectators would have to cut short their attendance at
the T when they became hungry or thirsty. Like the operation of the cafeteria and snack
bar by the art museum described in Rev. Rul. 74-399, which allowed visitors to devote
more time to the museum’s collection, the operation of food and beverage concessions
at the T allows spectators to devote more time to watching the d compete. In addition,
like the operation of the cafeteria by the hospital described in Rev. Rul. 69-268, which
enhanced the efficiency of the hospital by enabling medical staff to remain on site and
be continuously available, the T concessions enhance the efficient operation of the T by
enabling volunteers and T officials to remain on the T site and continuously available
throughout the day. Thus, under the circumstances, the food and drink concessions
contribute importantly to the success of the T, and are, consequently, substantially
related to M’s exempt purpose.

Issue:

Whether the licensing of broadcasting rights with respect to the T is substantially
related to M’s exempt purpose.

Rev. Rul. 80-294 explicitly recognizes that an organization exempt under § 501(c)(6) of
the Code will not adversely affect its exempt status if its primary source of support is
derived from the sale of broadcasting rights to the sports tournaments it conducts,
insofar as the sale of such rights directly promotes the interests of those engaged in the
sport. Likewise, broadcasts of the T directly promote the interests of those engaged in
the game of b by encouraging participation in the game and enhancing the public's
awareness of the game of b as a profession. Consequently, the licensing of
broadcasting rights with respect to the T contributes importantly to the success of the T
and is, therefore, substantially related to M’s exempt purpose.

Conclusion
In light of the foregoing, we rule as follows:

1. The reacquisition of direct control and operation of the T by M will not adversely
   affect M’s tax-exempt status as an organization described in § 501(c)(6) of the
   Code
2. Income from the sale of admission tickets to the general public for admissions to

the T is income derived from a trade or business that is substantially related to
the purposes for which M was granted exemption under § 501(c)(6) of the Code,

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and is not considered to be gross income from an unrelated trade or business
that is taxable under § 511.

3. Income from volunteer/uniform fees and from the sale of additional uniform items
   to be worn by volunteers while working at the T is income derived from a trade or
   business that is substantially related to M’s exempt purposes; therefore, such
   income is not considered gross income from an unrelated trade or business that
   is taxable under § 511 of the Code.

4. The commissions that M receives from concessionaires at the T from the
   provision of food and beverages to spectators, T volunteers, and T officials is
   income derived from a trade or business that is substantially related to M’s
   exempt purposes; therefore, such commissions are not considered gross income
   from an unrelated trade or business that is taxable under § 511 of the Code.

5. The licensing of broadcasting rights to the T is substantially related to the
   purposes for which M was granted exemption under § 501(c)(6) of the Code;
   therefore, income from the licensing of broadcasting rights is not considered to
   be gross income from an unrelated trade or business that is taxable under § 511
   of the Code.

This ruling will be made available for public inspection under section 6110 of the Code
after certain deletions of identifying information are made. For details, see enclosed
Notice 437, Notice of Intention to Disclose. A copy of this ruling with deletions that we
intend to make available for public inspection is attached to Notice 437. If you disagree
with our proposed deletions, you should follow the instructions in Notice 437.

This ruling is directed only to the organization that requested it. Section 6110(k)(3) of
the Code provides that it may not be used or cited by others as precedent.

This ruling is based on the facts as they were presented and on the understanding that
there will be no material changes in these facts. This ruling does not address the
applicability of any section of the Code or regulations to the facts submitted other than
with respect to the sections described. Because it could help resolve questions
concerning your federal income tax status, this ruling should be kept in your permanent
records.

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If you have any questions about this ruling, please contact the person whose name and
telephone number are shown in the heading of this letter.

In accordance with the Power of Attorney currently on file with the Internal Revenue
Service, we are sending a copy of this letter to your authorized representative.

Sincerely,

Steven B. Grodnitzky
Manager, Exempt Organizations
Technical Group 1

Enclosure
Notice 437