Internal Revenue Service
Rev. Rul. 68-505
1968-2 C.B. 248
An exempt county fair association that conducts a horse racing meet with
pari-mutual betting is engaged in unrelated trade or business within the
meaning of section 513 of the Code.
Rev. Rul. 68-505
Advice has been requested whether a county fair association exempt from
Federal income tax under section 501(c)(3) of the Internal Revenue Code of
1954 carries on unrelated business within the meaning of section 513 of the
Code where it conducts a horse racing meet with pari-mutuel betting.
The organization qualifies for exemption from Federal income tax under
section 501(c)(3) of the Code. See Rev. Rul. 67-216, C.B. 1967-2, 180.
However, in conjunction with its annual fair the organization also conducts
a two-week horse racing meet featuring pari-mutuel betting. The races are
conducted in the same general manner as at commercial tracks. Under the
pari-mutual system the organization receives a commission on the total
amount wagered. Other race income is derived from gate admissions and the
sale of programs. Disbursements are for purses and race expenses. The net
income from the races is used for the exempt purposes of the organization.
Section 511 of the Code imposes a tax upon unrelated business taxable
income of organizations exempt from Federal income tax under section
501(c)(3) of the Code, with certain exceptions not here pertinent.
Section 513 of the Code defines the term `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 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
forming the basis for its exemption under section 501 of the Code.
Section 1.513-1(a) of the Income Tax Regulations provides that gross income
of an exempt organization subject to the tax imposed by section 511 is
includible in the computation of unrelated business taxable income if (1)
it is income from a 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.
Since the races, with pari-mutual betting, are carried on in a manner
similar to commercial race tracks, they constitute a trade or business.
Furthermore, the business is regularly carried on because it is usual to
carry on such trade or business only during a particular season. See
section 1.513-1(c)(2)(i) of the regulations.
The conduct of the racing meet with pari-mutual betting is not related to
the organization's exempt purpose because it neither contributes
importantly to the educational objectives of the fair (section
1.513-1(d)(2) of the regulations), nor is it the type of recreational
activity that is intended to attract the public to the fair's educational
Accordingly, the conduct of the horse racing meet with pari-mutuel betting
by the organization constitutes unrelated trade or business under section
513 of the Code, and the organization is subject to the tax imposed by
section 511 of the Code on unrelated taxable income with respect to the
income derived from such activity.