TECHNOLOGY
UBIT AND VIRTUAL TRADESHOWS: WHAT ASSOCIATIONS NEED TO KNOW By Jeff Tenenbaum, managing partner, Tenenbaum Law Group PLLC
T
he IRS has made clear that revenue from traditional in-person tradeshows is not subject to unrelated business income tax. Does this safeharbor exception apply to today’s virtual or hybrid versions? Unfortunately, the answer to that question is as clear as mud. The transition from in-person to virtual events during the COVID-19 pandemic has raised a critical question for associations seeking to maximize sources of nondues revenue while also minimizing unrelated business income tax (UBIT): How is virtual tradeshow revenue treated for UBIT purposes? Guidance issued 17 years ago by the Internal Revenue Service was the last time the association community received direction on this issue. Applying it to today’s world is challenging, to say the least – leaving associations that hold virtual or hybrid tradeshows exposed to UBIT risk unless and until the IRS issues clarifying guidance. Although associations are granted a general exemption from federal corporate income tax for income derived from activities that are substantially related to their tax-exempt purposes, income from unrelated business activities is potentially taxable. Unrelated business income comes from a trade or business that is regularly carried on and that is not substantially related to the organization’s tax-exempt purposes. The most common form of unrelated business income for associations, by far, is advertising income. However, there are numerous statutory exclusions and exceptions that can exempt otherwise taxable income from UBIT. Since 1976, one of those exceptions is for income received from “qualified convention and tradeshow activities.” To qualify for this exception, an association must “regularly conduct as one of its substantial exempt purposes a show which stimulates interest in, and demand for, the products of a particular industry or segment of an industry or which educates persons in attendance regarding new
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developments or products and services related to the exempt activities of the organization.” The safe-harbor exception applies to 501(c)(6) tax-exempt entities, as well as to 501(c)(3), (c)(4) and (c)(5) organizations. Before 1976, the IRS had started to treat associations’ tradeshow exhibit fees as subject to UBIT, arguing that such fees were akin to taxable advertising income.
2004 IRS Revenue Ruling
In 2004, the IRS issued Revenue Ruling 2004-112 on the subject of virtual tradeshows. With the then-increasing prevalence of the internet and the ability to offer virtual tradeshows, questions began to arise as to whether the offering of a web-based tradeshow is the type of activity that is “of a kind traditionally conducted at … tradeshows.” The guidance describes two hypothetical scenarios: one involving a Section 501(c)(6) association that offers a semi-annual virtual tradeshow in connection with each inperson tradeshow; the other involving a Section 501(c)(6) association that offers a virtual tradeshow only. The Revenue Ruling made clear that the key factor in the IRS’s analysis of the applicability of the UBIT exception to a virtual tradeshow is whether or not the virtual show is conducted ancillary to a live show.
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