UBIT and the COVID-19 Pandemic: What Associations Need to Know

The COVID-19 pandemic has caused great financial distress and pressure for countless associations, making the need to maximize revenues even greater. As traditional revenue sources such as conference registration fees, exhibitor fees, membership dues, and the like are down for many associations, there has been a new focus by some on how to maximize sources of non-dues revenue and at the same time minimize unrelated business income.

One area of recent discussion by association executives and their tax and legal advisors has been on virtual trade show revenue, specifically fees paid by virtual exhibitors. Guidance issued 17 years ago by the Internal Revenue Service (IRS) was the last time the association community received direction on this issue. Applying it to today’s world is challenging, to say the least.

As such, associations that hold virtual or hybrid (both in-person and virtual) trade shows face unrelated business income tax (UBIT) risk unless and until the IRS issues clarifying guidance.

This article discusses the potential taxation of associations’ virtual and hybrid trade show revenue, but also revisits the basic UBIT rules and two key exceptions to enable associations to strategically plan to maximize their revenues in these difficult economic times.

UBIT Background

Although associations are granted a general exemption from federal corporate income tax by the Internal Revenue Code (the Code) – for income from activities that are substantially related to the purposes for which the association’s tax-exempt status was recognized by the IRS – they nevertheless are potentially taxable for income derived from unrelated business activities. The Code defines an unrelated trade or business as “any trade or business the conduct of which is not substantially related (aside from the need of such organization for income . . .) to the exercise or performance by such organization of its . . . purpose or function constituting the basis for its exemption . . .”

The tax on unrelated business income first appeared in the Code in 1950. Congress' principal purpose in enacting UBIT was to provide a level competitive playing field for tax-paying business – so that tax-exempt organizations could not use their privileged tax status to unfairly compete with tax-paying businesses in activities unrelated to their purposes. But instead of prohibiting tax-exempt entities from engaging in any business activities at all (and denying or revoking tax exemption because of such activities) – which it had considered doing – it chose to specifically permit a certain degree of business activity by tax-exempt organizations, but to tax it like any other for-profit business. Thus, such business activities are permissible, so long as the activities are not a “substantial part of its activities.” The tax applies to virtually all tax-exempt organizations, including associations and their related foundations.

The most common form of unrelated business income for associations, by far, is advertising income (e.g., in periodicals, on websites, on social media).

The imposition of the unrelated business income tax is at the 21% flat federal corporate income tax rate. Deductions are permitted for expenses that are “directly connected” with the carrying on of the unrelated trade or business, and net operating losses are allowed to be carried forward and backward (with certain limitation). Losses from one unrelated business activity are not able to offset gains in another; profits and losses are determined per activity.

Three-Prong UBIT Test. It is important to note that not all business income is subject to taxation or to limitations: only “unrelated business income” as defined in the Code. Unrelated business income will only exist if three conditions are satisfied; if any one of the three is not present, then income from the activity will not be taxable. The income must be:

(1) from a trade or business;
(2) that is regularly carried on; and
(3) that is not substantially related to the purposes which form the basis of the organization’s tax-exempt status.

Exclusions. Even if all three conditions of the UBIT test are satisfied, there are numerous statutory exclusions (i) from the definition of an unrelated trade or business, and (ii) in the computation of unrelated business taxable income, which can exempt otherwise taxable income from UBIT. Many such exclusions are potentially applicable to associations and their related foundations, while many are not. The most relevant exclusions for associations tend to include:

  • Qualified corporate sponsorship income
  • Royalties
  • Qualified convention or trade show income
  • Interest, dividends, annuities, and certain capital gains
  • Certain rental income
  • Volunteer labor exception

Taxable Subsidiaries. If the gross revenue, net income, and/or staff time devoted to unrelated business activities become “substantial” in relation to the tax-exempt functions of an association (thereby jeopardizing its tax-exempt status), the association can “spin off” one or more of the unrelated activities into a separate but affiliated, wholly owned entity, commonly referred to as a taxable subsidiary. Such a taxable subsidiary will pay corporate income tax on its net income but can remit the after-tax profits to the parent association as tax-free dividends; however, the dividends are not tax-deductible to the taxable subsidiary as business expenses.

Filing and Payment Requirements. In computing UBIT, a specific deduction of $1,000 is permitted. If an association has gross unrelated business taxable income of $1,000 or more during its fiscal year, it must file a completed IRS Form 990-T to report such income and pay any tax due. The Form 990-T is due at the same time as the Form 990, however, if an association expects its annual UBIT (after certain adjustments) to be $500 or more, then it must make estimated tax payments throughout the year. The Form 990-T is subject to public disclosure like the Form 990, however, certain schedules, attachments and supporting documents that do not relate to the imposition of UBIT do not have to be made available for public inspection.

Corporate Sponsorships

Overview. “Qualified corporate sponsorship payments” are excluded in computing the unrelated business taxable income of tax-exempt associations. A “qualified sponsorship payment” is defined as “any payment [of money, property or services] by any person engaged in a trade or business with respect to which there is no arrangement or expectation that the person will receive any substantial return benefit.” In determining whether a payment is a qualified sponsorship payment, it is irrelevant whether the sponsored activity is related or unrelated to the recipient organization's tax-exempt purposes. It also is irrelevant whether the sponsored activity is temporary or permanent.

Definition of Substantial Return Benefit. A “substantial return benefit” is defined as any benefit other than: (i) goods, services or other benefits of “insubstantial value” (as described below); or (ii) a “use or acknowledgment” (as described below). Good, services or other benefits of “insubstantial value” are those that have an aggregate fair market value of not more than 2% of the amount of the payment. Note that if the fair market value of the benefits exceeds 2%, the entire fair market value (as opposed to the cost) of such benefits, not merely the excess amount, is considered a substantial return benefit.

A substantial return benefit includes:

  • advertising (as described below);
  • providing facilities, services or other privileges to the sponsor (or persons designated by the sponsor), unless such privileges are of “insubstantial value” (as described above);
  • granting the sponsor (or persons designated by the sponsor) an exclusive or non-exclusive right to use an intangible asset (e.g., name, logo, trademark, copyright, patent) of the tax-exempt organization; note that while payment for providing a sponsor with the right to use such an intangible asset will not constitute a qualified sponsorship payment, it may constitute a tax-free royalty; or
  • designating a sponsor as an “exclusive provider” (as defined below).

Use or Acknowledgment. As stated above, a substantial return benefit does not include a “use or acknowledgment” of the name or logo (or product lines) of the sponsor's trade or business in connection with the activities of the tax-exempt organization. Use or acknowledgment does not include advertising (as described below), but may include:

  • sponsor logos and slogans that do not contain qualitative or comparative descriptions of the sponsor's products, services, facilities, or company;
  • a list of the sponsor's locations (e.g., street addresses), telephone numbers, or website URLs;
  • value-neutral descriptions (including displays or visual depictions) of the sponsor's product line(s) or services;
  • sponsor brand or trade names and product or service listings; and
  • designating a sponsor as an "exclusive sponsor" (defined below).

Logos or slogans that are an established part of the sponsor's identity are not considered to contain qualitative or comparative descriptions. Mere display or distribution (whether for free or remuneration) of a sponsor's product by the sponsor or the tax-exempt organization to the general public at a sponsored activity will not be considered an inducement to purchase, sell or use the sponsor's product and thus will not affect the determination as to whether a payment constitutes a qualified sponsorship payment.

Advertising. “Advertising” is defined as any message or other programming material that is broadcast or otherwise transmitted, published, displayed, or distributed, and that promotes or markets any trade or business, or any service, facility or product. Advertising includes:

  • messages containing qualitative or comparative language;
  • price information or other indications of savings or value;
  • an endorsement; or
  • an inducement to purchase, sell or use any company, service, facility, or product.

A single message that contains both advertising and an acknowledgment is considered advertising. The above rules do not apply to activities conducted by a sponsor on its own.


Overview. “Royalties” are excluded in computing the unrelated business taxable income of tax-exempt associations. This exclusion does not apply to debt-financed income or to royalties received from a “controlled subsidiary.” The IRS defines a royalty as any payment received in consideration for the use of a valuable intangible property right, whether or not payment is based on the use made of the intangible property. Payments for the use (even on an exclusive basis) of trademarks, trade names, service marks, copyrights, photographs, facsimile signatures, and members’ names are ordinarily considered royalties and are tax-free. However, payments for services (such as marketing or administrative services) provided in connection with the granting of this type of right are not royalties – and are generally taxable as unrelated business income (unless such services are substantially related to the association's purposes, which, in most cases, they are not).


1. In an example provided by a federal appeals court in the Sierra Club case, if the Sierra Club manufactured and sold T-shirts with the organization's logo or other designs on them, the income earned from the sale of such T-shirts would be taxable, as the activity of manufacturing and selling T-shirts is not substantially related to the Sierra Club's tax-exempt purposes. However, if the Sierra Club created the designs to be screened onto the T-shirts and then licensed those designs to a T-shirt manufacturer in exchange for a fee (perhaps calculated as a percentage of gross T-shirt sales), that income would constitute tax-free royalty income.

2. In an example provided by the IRS in a pair of Revenue Rulings, payments for the use of a professional athlete's name, photograph, likeness, and/or facsimile signature (provided by and through a tax-exempt organization) are generally considered royalties. However, payments for personal appearances and interviews by the athlete (similarly provided by and through a tax-exempt organization) are not excluded as royalties and must be included as income from an unrelated trade or business.

Endorsements. When an association endorses a vendor’s product or service (often referred to as an association “affinity” program) but does nothing to market the product or service to its members (leaving this task to the vendor), this can be viewed as, in essence, nothing more than an exclusive license of the association’s name, logo and (sometimes) membership list to the vendor (in connection with the vendor’s promotion and sale of that product or service to the association’s members, and possibly to others in the industry or profession as well). As stated above, if the association gets paid for this exclusive license – even if such payments are calculated as a percentage of gross sales of the endorsed product or service to the association's members – then the payments will constitute royalties and will be tax-free to the association. If, however, the association does market the product or service to its members, then the tax issues become more complex, as described below.

Endorsements can be a useful means for associations to generate non-dues revenue from both members and non-members, promote the association’s name and brand, and, by extension, the industry or profession in general, and provide a service (e.g., “tailored” products and services, discounted rates/fees, etc.) to association members.

Options for Structuring Endorsement Arrangements.

1. Royalties-Only. The endorsement or licensing contract that carries the lowest risk of UBIT liability is one in which the association licenses its name, logo and/or membership list, exercises quality control over the use of its intangible property by the vendor, and not much more. However, even under this scheme, the IRS and the courts have indicated that the association may engage in certain limited activities without jeopardizing the tax-free royalty treatment of its income.

2. Royalties to Association; Services Income to Third-Party or Taxable Subsidiary. If administrative and/or marketing services are required, from a tax perspective, it is generally preferable to outsource such services to an unrelated third-party, or to the association's taxable subsidiary (with the association and subsidiary entering into separate, independent contracts with the vendor). In a 1999 Private Letter Ruling issued to AARP, the IRS validated the use of an AARP-wholly owned taxable subsidiary to provide such administrative and/or marketing services, provided it is done on an arm's length basis (e.g., fair market valuation of the payments to each entity, financial separation, employee time records, etc.).

3. Royalties to Association; Services Income to Association. If such services must be provided by the association directly, then association contracts with the vendor should provide for separate, distinct provisions of the contract – one for the name, logo and/or membership list licensing on the one hand, and one for the administrative and/or marketing services. The fees earned by the association should be divided between the two sections pursuant to a fair market valuation. The former should be treated as tax-exempt royalty income; the latter as taxable unrelated business income.

Virtual Trade Show Income

Background. Since 1976, one of the Code’s exceptions to unrelated business taxable is for income received from “qualified convention and trade show activities.” In order to qualify for the safe harbor exception, the 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 developments or products and services related to the exempt activities of the organization.” The exception applies to 501(c)(6) tax-exempt entities, as well as to 501(c)(3), (c)(4) and (c)(5) organizations. Prior to 1976, the IRS had started to treat associations’ trade show exhibit fees as taxable unrelated business income, arguing that such fees were akin to taxable advertising income. Note that these UBIT issues generally do not apply to most of the non-trade show-related convention activities of associations – such as the provision of educational content – as such activities are usually substantially related to the tax-exempt purposes of the association.

2004 IRS Revenue Ruling. In 2004, the IRS issued Revenue Ruling 2004-112 on the subject of virtual trade shows. With the then-increasing prevalence of the Internet and the ability to offer virtual trade shows, questions began to arise as to whether the offering of a web-based trade show is the type of activity that is “of a kind traditionally conducted at … trade shows” (quoting from Section 513(d) of the Code). The guidance describes two hypothetical scenarios – one involving a Section 501(c)(6) association that offers a semi-annual virtual trade show in connection with each in-person trade show; the other involving a Section 501(c)(6) association that offers a virtual trade show not in relation to any in-person trade show.

The Revenue Ruling made clear that the key factor in the IRS’ analysis of whether virtual trade show activity will be considered subject to the Code’s safe harbor is whether or not the virtual show is conducted ancillary to a live show.

In the first hypothetical scenario, an association conducts two trade shows a year. In conjunction with such shows, the association has a separate virtual trade show section of its website available for viewing at all times during such shows as well as for three days preceding and three days following such shows. The in-person shows in this first scenario are similar to most trade or professional association shows – they include members of the association and suppliers to the industry and exhibitors are charged a fee by the association in order to participate. The website contains “information and visual displays…and links to the websites of exhibitors represented at the [in-person] trade show.” The website also contains order forms and a function that allows on-line purchases from exhibitors. The association charges a fee to exhibitors that desire to have information listed on this web page.

According to the IRS, the web activities described above fit within the safe harbor for qualified convention and trade show activities because:

  • The web activities are “ancillary” to the in-person trade shows;
  • The content of the web section serves to “augment and enhance” the in-person trade shows by making available “in an alternative medium the same information available at the show”; and
  • The web page is available “during essentially the same limited time period that each trade show is in operation.”

Thus, income generated by the web page will not be subject to UBIT in this scenario.

The second hypothetical scenario provided by the IRS is very similar to the first, except that the organization in the second scenario offers two-week-long virtual trade shows without any connected in-person events. According to the IRS, such activity will not qualify for the safe harbor. The IRS reasoned that the website in this example is “not itself a convention, annual meeting or trade show” within the meaning of the Code, due to the lack of an in-person, face-to-face component.

Current-Day Virtual Trade Shows. Fast forward to 2021. The virtual trade shows of 2021 – compared to 2004 – are much more interactive. As those associations who have had to transition in 2020 and 2021 from in-person conferences and trade shows to virtual (or hybrid) ones due to the COVID-19 pandemic know, the educational and networking aspects were notable and done in a way not possible in 2004. Today’s virtual conferences and trade shows resemble in many respects their in-person counterparts for which the safe harbor was written. But with no guidance from the IRS since 2004, it is very difficult to say how the IRS would interpret the safe harbor today and apply it to the 2021 virtual (or hybrid) trade show.

Hybrid Trade Shows. Due to the COVID-19 pandemic, it is likely that at least for 2021, and perhaps into 2022, nonprofits will plan to hold many hybrid in-person and virtual conferences and trade shows. The virtual trade show in the first example of the Revenue Ruling featured only “the same information that is available at the [in-person] show” and a function that allows purchases from “members and suppliers represented at the trade show.” But if an association offered a virtual show in connection with a live show and allowed companies that are not exhibiting at the live show to participate in the virtual show, would this cause the IRS to determine that the virtual show is no longer “ancillary” to the live show and thus not able to qualify as part of the safe harbor? It is simply unclear – as is the application of the 2004 Revenue Ruling to the modern-day virtual-only or hybrid trade show.

No Safe Harbor Does Not Necessarily Mean UBIT. It should be noted that a failure to qualify for the safe harbor does not necessarily mean that the income generated from a virtual trade show will be subject to UBIT. While, in most instances, the IRS likely would take the position that the net income is generated by the sale of advertising-type services and thus subject to UBIT, there may be instances when an association is able to demonstrate that its activity is substantially related to its tax-exempt purposes even without the help of the safe harbor. Further, if the arrangements with otherwise-exhibiting companies are restructured accordingly, other Code exceptions from UBIT – such as exceptions for corporate sponsorship payments and royalties – may apply to some or all of the income in question.

Conclusion. While the analysis of whether and how the safe harbor applies to current-day virtual or hybrid trade shows is as clear as mud, the ongoing fallout from the pandemic will continue to force associations to consider alternatives to in-person-only conferences and trade shows. The existence of the 2004 Revenue Ruling – unless and until modified by the IRS, which is not likely anytime soon – will continue to pose UBIT risks to associations in the virtual or hybrid trade show environment.

That being said, the 2004 Revenue Ruling, although on the books, does not supersede the clear intent of the Code to provide a safe harbor exception to unrelated business income where an association conducts an event to educate persons or stimulate interest and demand for products or services of the membership. Therefore, it is arguable that it may not matter whether the activities traditionally conducted at trade shows are done in person or virtually. It would certainly be helpful if the IRS provides guidance in a new and updated Revenue Ruling. Until then, it would be advisable to document how the activities of the trade show meet the Code definitions of the safe harbor.

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While paying UBIT is certainly not a bad thing – and associations generally should not let the federal tax laws be the tail that wags the dog – having a thorough understanding of the rules in this area can help associations to plan strategically and attempt to mitigate UBIT to the greatest extent possible.

For more information, contact Mr. Tenenbaum at jtenenbaum@TenenbaumLegal.com.