INTERNAL REVENUE SERVICE

199901002

SEP 2 ig

INTERNAL REVENUE SERVICE

NATIONAL OFFICE TECHNICAL ADVICE MEMORANDUM

S.I.N. 0511.00-00

S.I.N. 0512.06-00

NO THIRD PARTY CONTACT

District Director

Taxpayer's Name: XXXXXXXXXXXKXXXXXKXXXXXXXK

XXXXXXXXXXXXXXXXXXX

Taxpayer's Address: XXXXXXXXXXXXXX

XXXXXXXXXXXXXXXXXXXXXXXXXXXX

Taxpayer's EIN: XXXXKXXXXXX

Conference Held: XXXXXXXXXXXXXXXX

Legend:

= XXXXXXXXXXXXXXXXXXXXXKXXXXXXXXXXXXKXXXXXXXKX

= XXXXXXXXXXXXXXXKXXXXXXXXXX

= XXXXXXXXXXXXXXXXXXXXXXX

t= XXXXXX

u= XXXXXX

v= XXXXXX

p= XXXXX

issue:

1. Whether the subject organization's income from the

storage of cars, boats, motorhomes, trailers, etc., during the

winter months constitute unrelated business income under sections

511 and 512 of the Internal Revenue Code.

2. Whether the above constitutes the rental of real property

as defined in section 512 (b) (3) of the Code.

Facts:

Y¥ was incorporated on July 18, 1945, and was recognized as

exempt under section 101(6) (now section 501(c) (3)) of the Code.

Y¥’s Articles of Incorporation state that its purpose is:

"Co promote and advance the interest of agriculture,

horticulture, household arts and mechanic arts and

sciences, and all kindred sciences and arts of their

varied branches; and to promote and conduct

agricultural, industrial, educational fairs and

exhibits, and to provide entertainment and amusement

therewith for the purpose of drawing the attention to

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the public thereto, and to do and perform any and all

acts authorized by law to be done by a corporation

The information furnished shows that Y operates X, which is

an annual fair conducted over a period of 5 or 6 days

approximately 3 weeks before Labor Day. It is represented that X

has a variety of activities and exhibits, including carnival

rides and musical entertainment. It is represented that the

exhibits are open to children who are residents of Z and who are

under the age of 21.

¥'s primary source of income is from fair receipts, which

include gate admissions, concessions, live entertainment, exhibit

fees and State funds.

The information shows that X is located on a 157 acre tract

of land on which there are approximately 50 buildings. Y rents

these facilities to other Code section 501(c) (3) organizations

and other exempt entities during those periods between Mid-April

to Mid-October when the X is not operating.

The information furnished shows that from Mid-October to

Early April, Y leases out some of their buildings for the storage

of cars, boats, motorhomes, trailers, etc. Each lessee signs a

contract for the real property space leased. It is represented

that after the building is fully leased out, the building is

secured until the Spring pick-up. Further, it is represented that

Y performs no services for the lessees during this time period.

For the tax years ended 9409, 9509, and 9609, the gross

income received from winter storage was St, $u, $v respectively.

For 9409 the Form 990 reflects the following:

Public support - $ 19p

Fair Income - $732p

Interest - § 3p

Summer Activity- $135p

Winter Storage - $ 5lp

For 9509 the Form 990 reflects tne following:

Public support - $ 18p

Fair Income - $681p

Interest ~ § 3p

Summer Activity- $190p

Winter Storage - $ 49p

State Grant - $ 39p

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For 9609 the Form 990 reflects the following:

Public support - $ 16p

Fair Income - $690p

Interest - § 2p

Summer Activity- $189p

Winter Storage - $ 58p

State Grant ~ § 48p

The information furnished reflects that the Agent has

concluded that none of Y’s income, other than the income from

Winter Storage is unrelated business taxable income. The Agent

states that the summer rental of the facilities is not

challenged. Further the Agent states that the services provided

in connection with the summer rentals are the usual and customary

services provided to similar rentals.

Finally, with respect to the winter rentals, the Agent

states that the rental of space for cars, motorhomes, trailers,

boats, etc, is considered analogous to the rental of spaces in

parking garages, warehouses, and storage facilities. Also, it is

alleged Y is competing against local storage companies. For these

reasons, the Agent concludes that the income from the lease of

parking spaces is not rent within the meaning of section

512(b) (3) of the Code, and thus is unrelated business taxable

income.

In addition, the Agent noted that nothing was uncovered that

would adversely affect Y's tax exempt status under section

501(c) (3) of the Code.

Law:

Section 501(c) (3) of the Code provides, in part, for the

recognition of exemption from federal income tax of organizations

that are organized and operated exclusively for charitable or

educational purposes, no part of the net earnings of which inures

to the benefit of any private share-holder or individual.

Section 51l(a) of the Internal Revenue Code subjects

organizations described in section 50l(c) to a tax on their

“unrelated business taxable income," as defined in section 512.

Section 512(a) of the Code provides that the term "unrelated

business taxable income" means the gross income derived by any

organization from any unrelated trade or business (as defined in

section 513) regularly carried on by it, less the deductions

allowed by this chapter which are directly connected with the

carrying on of such trade or business, both computed with the

modifications provided in subsection (b).

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Section 512(b) (3) (A) of the Code modifies the definition of

unrelated trade or business by excluding (except as provided in

subparagraph (B)):

(i) all rents from real property (including property

described in section 1245(a) (3) (C)), and

(ii) all rents from personal property (including for

purposes of this paragraph as personal property any

property described in section 1245(a) (3) (B)) leased

with such real property, if the rents attributable to

such personal property are an incidental amount of the

total rents received or accrued under the lease,

determined at the time the personal property is placed

in service.

Section 512 (b) (3) (B) of the Code provides that subparagraph

(A) shall not apply:

(i) if more than 50 percent of the total rent

received or accrued under the lease is attributable to

personal property described in Subparagraph (A) (ii), or

(ii) if the determination of the amount of such

rent depends in whole or in part on the income or

profits derived by any person from the property leased

(other than an amount based on a fixed percentage or

percentages of receipts or sales).

Section 513(a) of the Code states that the term “unrelated

trade or business" means 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 section

501(c).

Section 513(d) (1) of the Code states that the term

"unrelated trade or business" does not include "qualified public

entertainment activities" of an organization described in section

513 (da) (2) (C) of the Code.

Section 513(d) (2) (A) of the Code defines the term "public

entertainment activities" to include any entertainment or

recreational activity of a kind traditionally conducted at fairs

or expositions promoting agriculture and educational purposes

including any activity one of the purposes of which is to attract

the public to fairs or expositions or to promote the breeding of

animals or the development of products or equipment.

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Section 513(d) (2) (B) of the Code defines the term "qualified

public entertainment activities" to mean a public entertainment

activity conducted by a "qualifying organization" described in

section 513(d) (2) (C) of the Code.

Section 513(d) (2) (C) of the Code states, in pertinent part,

that a "qualifying" organization is an organization described in

section 501(c) (3) of the Code which regularly conducts, as one of

its substantial exempt purposes, an agricultural and educational

fair or exposition.

Section 1.512(a)-1(a) of the Income Tax Regulations defines

the term “unrelated business taxable income" as the gross income

derived from any unrelated trade or business regularly carried

on, less those deductions allowed by chapter 1 of the Code which

are directly connected with the carrying on of such trade or

business. To be deductible in computing unrelated business

taxable income, therefore, expenses, depreciation, and similar

items not only must qualify as deductions allowed by chapter 1 of

the Code, but also must be directly connected with the carrying

on of unrelated trade or business. To be "directly connected

with" the conduct of unrelated business for purposes of section

512, an item of deduction must have proximate and primary

relationship to the carrying on of that business.

Section 1.512(a)-1(b) of the regulations provides, in

pertinent part, that expenses attributable solely to unrelated

business activities are proximately and primarily related to that

business activity, and therefore qualify for deduction to the

extent that they meet the requirements of section 162, or other

relevant provisions of the Code. However, where facilities are

used both to carry on exempt activities and to conduct unrelated

trade or business activities, expenses, depreciation and similar

items attributable to such facilities shall be allocated between

the two uses on a reasonable basis. Similarly, where personnel

are used both to carry on exempt activities and to conduct

unrelated trade or business activities, expenses and similar

items attributable to such personnel shall be allocated between

the two uses on a reasonable basis. (See section 1.512(a)-1(c) of

the regulations).

Section 1.512 (b)-1(c) (2) (i) of the regulations excludes

rents from property described in subdivision (ii) of this

subparagraph, and the deductions directly connected therewith,in

computing unrelated business taxable income (except as provided

in subdivision (iii) of this subparagraph). However,

notwithstanding subdivision (ii) of this subparagraph, certain

rents from and certain deductions in connection with

debt -financed property,as defined in section 514(b)),shall be

included in computing unrelated business taxable income.

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Section 1.512(b)-1(c) (2) (ii) of the regulations excludes

from unrelated business income, (a) all rents from real property;

and (b) all rents from personal property leased with real

property if the rents attributable to such personal property are

an incidental amount of the total rents received or accrued under

the lease. Rents attributable to personal property generally are

not an incidental amount of the total rents if such rents exceed

10 percent of the total rents from all the property leased.

Section 1.512(b)-1(c) (5) of the regulations provide that

payments for the use or occupancy of rooms and other space where

services are also rendered to the occupant, such as for the use

or occupancy of rooms or other quarters in hotels, boarding

houses, or apartment houses furnishing hotel services, or in

tourist camps or tourist homes, motor courts, or motels, or for

the use of occupancy of space in parking lots, warehouses, or

storage garages, does not constitute rent from real property.

Generally, services are considered rendered to the occupant if

they are primarily for his convenience and are other than those

usually or customarily rendered in connection with the rental of

rooms or other space for occupancy only. The supplying of maid

service, for example, constitutes such service; whereas the

furnishing of heat and light, the cleaning of public entrances,

exits, stairways, and lobbies, the collection of trash, etc., are

not considered as services rendered to the occupant. Payments

for the use or occupancy of entire private residences or living

quarters in duplex or multiple housing units, of offices in any

office building, etc., are generally treated as rent from real

property.

Section 1.513-1(d) (2) of the regulations provides that a

trade or business is "substantially related" to an organization's

exempt purposes when the business activity has a substantial

causal relationship to the achievement of the exempt purposes for

which such organization was formed.

Taxpayers Views:

Y states that it does not provide any services to the

individuals renting space in its facilities. Y cites as authority

section 1.512(b)-1l(c) (5) of the regulations which provides that:

payments for the use or occupancy of rooms and other

space where services are also rendered to the occupant,

such as for the use or occupancy of rooms or other

quarters in hotels, boarding houses, or apartment

houses furnishing hotel services, or in tourist camps

or tourist homes, motor courts, or motels, or for the

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use of occupancy of space in parking lots, warehouses,

or storage garages, does not constitute rent from real

property.

Rationale:

The information furnished shows that Y is recognized as

exempt from federal income tax under section S01(c) (3) of the

Code and that its predominant activity is the operation of an

annual agricultural/educational fair. Therefore, based on the

information furnished, Y is a qualifying organization within the

meaning of section 513(d) (2) (C) of the Code. Because ¥ isa

qualifying organization and because ¥ offers "qualified public

entertainment activities" to attract the public to X, which is an

agricultural/ educational fair, the conduct of X is not an

"unrelated trade or business" within the meaning of section

513(a) of the Code.

The information furnished shows that Y rents some or all

of its land and buildings to other entities to conduct horse

shows and other events during the summer. The information

furnished shows that these "Summer Rentals" are rentals of real

property and that the income derived from this activity is rental

income within the meaning of section 512(b) (3) (A) of the Code.

Further, the information furnished establishes that the

income derived from restroom care, barn and ground maintenance,

and related services are services that are usual and customary

services provided to lessees. Accordingly, pursuant to section

1.512 (b)-1(c) (5) of the regulations, the income derived from the

performance of these services is not ‘unrelated business income".

However, with respect to the "Winter Rentals", the

information furnished shows that Y enters into storage contracts

with individuals who lease floor space from it in which to store

cars, motorhomes, trailers, and boats. The information furnished

shows that ¥ does not lease these buildings to an individual or

individuals to operate as a storage facility. ¥’s leasing of this

space is analogous to the renting of parking space in a parking

garage. (See Section 1.512(b)-1(c) (£) of the regulations).

Y has misinterpreted section 1.512 (b)-1(c) (5) of the

regulations concerning the phrase "where services are also

rendered to the occupant". That phrase specifically refers to the

use or occupancy of rooms or other quarters in hotels, boarding

houses, or apartment houses furnishing hotel services, or in

tourist camps or tourist homes, motor courts, or motels. The

phrase does not refer to the use of occupancy of space in parking

lots, warehouses, or storage garages.

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Section 1.512(b)-1(c) (5) of the regulations closely tracks

the legislative history of section 512(b) (3) of the Code in which

it is stated that parking lot income is not rental income. (See

House Report at 36, 110, 1950-2 C.B. 409, 459).

Moreover, since section 1.512(b)-1(c) (5) of the regulations

states categorically that parking lot revenue and revenue from

warehouses, or storage garages are not rent from real property,

income from the operation of a storage garage by an exempt

organization does not constitute “rent" as defined in section

512 (b) (3). Because the operation of a storage garage does not

yield "rent," within the ambit of section 512(b) (3), it is not

necessary to determine whether the exempt organization performs

any services primarily for the convenience of the occupant.

Therefore, the income from the "Winter Rentals" is not

rental income within the meaning of section 512(b) (3) (A) of the

Code. Accordingly, the "Winter Rental" income is unrelated

business taxable income.

Conclusions:

1. ¥'s income from the storage of cars, boats, motorhomes,

trailers, etc., during the winter months constitutes unrelated

business income under sections 511 and 512 of the Internal

Revenue Code.

2. The leasing of space for the storage of cars, boats,

motorhomes, trailers, etc., during the winter months does not

constitute the rental of real property as defined in section

512(b) (3) of the Code.

End