The IRS recently ruled that the conduct of certain website activities by a trade association in conjunction with its trade shows does not constitute an unrelated trade or business for purposes of determining whether the association has unrelated business taxable income. The ruling, Rev. Rul. 2004-112, released Dec. 2, 2004, confirms that the conduct of such activities i.e., a virtual trade show will avoid raising an unrelated business income tax (UBIT) risk, provided these activities are ancillary to other qualified trade show activities of the trade association.

Qualified Trade Show Safe Harbor

In general, any organization that is exempt from tax under section 501(a) of the Internal Revenue Code (the Code) is potentially subject to unrelated business income tax (UBIT). An unrelated trade or business is one that is regularly carried on and is not substantially related to the exempt purpose of the organization. The Code provides that qualified convention and trade show activities of certain exempt organizations do not constitute an unrelated trade or business.

The Qualified Trade Show safe harbor is available only for qualifying organizations exempt organizations described in section 501(c)(3), (4), (5), or (6) that regularly conduct trade shows, which promote the industry or educate attendees about products and services related to the organizations exempt activities. The Code limits this safe harbor to activities traditionally conducted at trade shows, such as activities undertaken to attract industry exhibitors, stimulate interest and demand for industry products and services, or educate attendees about new industry products, services, or regulations. Thus, the safe harbor by its terms applies only to a qualifying organizations trade show activities that further these purposes.

Website Activities

Rev. Rul. 2004-112 illustrates the types of website activities that will qualify for the trade show safe harbor with two factual situations. In the first situation, the taxpayer is a tax-exempt trade association that regularly conducts a trade show to promote public interest in its industry. The show includes conferences, seminars, and exhibits sponsored by members and suppliers. In conjunction with the trade show, the association creates a supplementary website that provides the same information that is available at the trade show, including product information and links to the websites of exhibitors at the show. The website also permits on-line purchases from the members and suppliers represented at the show. This virtual trade show is on-line during the period in which the trade show occurs, and for three days before and three days after the show. The association charges its exhibitors a fee for displaying their information on the website.

The ruling holds that the website activities constitute qualified convention and trade show activities. These activities are of a kind traditionally conducted at trade shows, and are designed to further the purposes of the trade show itself. Although these activities do not take place on the premises of the trade show, they are carried out in conjunction with the show and augment and enhance the show by providing the same information available at the trade show in an alternative medium. Even though the information is posted on the website for a few days before and after the trade show, this period is reasonably brief and allows attendees to preview the show in advance, and to follow up on information gathered at the show. Accordingly, the ruling holds that the associations virtual trade show meets the Codes trade show safe harbor and thus does not constitute an unrelated trade or business triggering a UBIT risk.

The second situation involves a trade association operating a temporary website which contains substantially the same features, but which is not on-line during any trade show conducted by the organization. The ruling holds that the operation of the website does not satisfy the Codes safe harbor because the website is neither a trade show itself, nor does it coincide with any physical trade show conducted by the organization. Because the website fails the safe harbor, the associations operation of the website may constitute an unrelated trade or business, such that the fees received by the association from its exhibitors may be taxable advertising income.

Practical Effects

Rev. Rul. 2004-112 confirms that certain website activities carried on in conjunction with a qualified trade show will also satisfy the Codes trade show safe harbor. Based on the facts described in the ruling, the website must be no more than ancillary to the trade show, by containing the same information that is available at the show and being on-line during the same period of time as the show, although it may be on-line for a brief period both before and after the show.

This ruling benefits trade associations that conduct trade show activities that already satisfy the Codes safe harbor, by providing comfort that certain website activities carried on in conjunction with the shows will not raise an additional UBIT risk. Because the safe harbor does not extend to the website activities of trade associations whose trade show activities do not themselves meet the safe harbor, such associations must determine whether their website activities trigger a UBIT risk under the general principles of the Code and regulations.