IRS written determination 201440023

Private letter rulings and published taxpayer determination letters. Native document type is retained separately; a determination letter is not labeled a private letter ruling. These taxpayer-specific releases cannot be used or cited as precedent under 26 USC 6110(k)(3); applicability and current legal force are not independently certified. Keep repeated UILC subjects attached to one actual numbered document.

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION
Number: 201440023
Release Date: 10/3/2014
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224
July 8, 2014
Contact Person:
Identification Number:
Telephone Number:
Employer Identification Number:
Uniform Issue List Numbers:
501.03-08
513.00-00
Legend:
Q
=
_g
=
Q
=
M..
=
0
=
.E
=
Dear
This responds to your request for rulings on the effect
of the Agreement (described below) on
your status as an organization described
in§§ 501 (c)(3), 509(a)(1 ), and 170(b)(1 )(A)( vi) of the
Internal Revenue Code (the "I.R.C.") and on your liability for unrelated business income tax
under§§ 511 through 513.
You are exempt from federal income tax
under§ 501 (c)(3) of the Internal Revenue Code. You
are not a private foundation within the meaning of§ 509(a) because you are described in§§
509(a)(1) and 170(b)(1 )(A)(vi). Your mission is to inform and educate the American public
about Q, to advocate for _g, and conduct research on g. You attempt to disseminate the results
of your research as broadly as possible.
You distribute your research results primarily through
your website,
0, and through the media, including print, radio, television, and online media. You
maintain an archive of Q data known as your .E product. The .E product can be accessed over
your website, 0, for non-commercial purposes. You may allow commercial use of the .E product
for a fee.
You have entered into an agreement (the "Agreement") with
M, a for-profit, major media
organization. The Agreement has an initial term of three years, subject to certain early
termination and renewal rights. Under the Agreement, you agree to provide substantial portions
of the results of your research (the "Information") to M, and M agrees to pay a periodic fixed fee
to you and to make the Information available to users of its electronic products and services.

2
The Agreement defines the Information as current data delivered on a monthly basis and a
historical file of data going back several years. The Information shall consist of your entire
.E
product.
Specifically, you agree to collect, code and process the Information, and to deliver the
Information
toM in a format and at the delivery frequency specified in the Agreement. You
grant M
a nonexclusive, worldwide right to use, store, reproduce, create derivative works from,
display, and deliver the Information or any part thereof.
In addition, M has the right to use the
Information for internal business purposes, to market and
sell its services, for research and
reporting by its multimedia news operation,
in its generic, "fair value", composite or theoretical
prices or ratings, or other similar pricing or rating models, and the development and distribution
of its proprietary and descriptive databases, and for educational purposes. During the term of
the Agreement, you agree not to deliver all or a substantial portion (i.e., 25 percent or more) of
the Information to any of the twelve companies listed
on a schedule of the Agreement. M
acknowledges that substantial portions of the Information are
in the public domain and that you
do not purport to grant to M any intellectual property rights
in such information that is in the
public domain. M represents, warrants and covenants that it will use commercially reasonable
efforts to incorporate the Information into its product so as to support your objective of broadly
disseminating the Information.
If M exercises its right to terminate the Agreement (other than for cause) before the expiration
of
the initial term, it is obligated to pay you a fixed "termination fee." In addition, upon termination
of the Agreement, M has an option to purchase, for a separate fee, a perpetual license to use
the information preyiously provided to it during the Agreement's term.
Rulings Requested
You have requested the following rulings:
1. Your performance of the Agreement and receipt of fees thereunder will not jeopardize
your status as
an organization exempt from tax under§ 501 (c)(3) or as an organization
that
is not a private foundation.
2. Your performance of the Agreement is not an unrelated trade or business.
3. The periodic and termination fees that are or may be payable to you under the
Agreement are not royalties.
I.R.C. §
501 (a) exempts from federal income taxation organizations described in § 501 (c).
I.R.C. §
501 (c)(3) describes organizations organized and operated for charitable, educational,
and other enumerated exempt purposes.
I.R.C. § 511 imposes a tax on the unrelated business taxable income of organizations described

3
in§ 501 (c).
I.R.C. § 512(a)(1) defines the term "unrelated business taxable income" as the gross income
derived from any unrelated trade or business (as defined
in § 513) regularly carried on, less
certain allowable deductions that are directly connected with the carrying on of such trade or
business, both computed with the modifications provided
in subsection (b).
I.R.C. § 512(b)(2) excludes all royalties from unrelated business taxable income.
I.R.C. § 513(a) 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 constituting the
basis for its exemption
under§ 501.
Treas.
Reg.§ 1.501(c)(3)-1(a)(1) provides that, to be exempt as an organization described in§
501 (c)(3), an organization must be both organized and operated exclusively for one or more of
the purposes specified
in such section.
Treas.
Reg.§ 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as "operated
exclusively"
for one or more exempt purposes only if it engages primarily in activities which
accomplish one or more of such exempt purposes specified
in § 501 (c)(3).
Treas. Reg. § 1.501 (c)(3)-1 (d)(1)(i) includes "educational" among the list of purposes for which
an organization described in§ 501(c)(3) may be exclusively organized and operated.
Treas.
Reg.§ 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized and operated
exclusively for one or more of the purposes specified
in subdivision (i), above, unless it serves a
public rather than a private interest. Thus, to meet the requirement of this subdivision, it is
necessary for an organization to establish that it
is not organized or operated for the benefit of
private interests such as designated individuals, the creator or his family, shareholders of the
organization, or persons controlled, directly or indirectly, by such private interests.
Treas. Reg. § 1.501 (c)(3)-1 (d)(3)(i) provides that the term "educational," as used
in§ 501 (c)(3)
relates to: (a) the instruction or training of the individual for the purpose of improving or
developing his capabilities; or (b) the instruction of the public on subjects useful to the individual
and beneficial to the community.
Treas. Reg. § 1.513-1 (d)(1) provides,
in general, that gross income derives from unrelated trade
or business, within the meaning of§ 513(a), if the conduct of the trade or business which
produces the income is not substantially related (other than through the production of funds) to
the purposes for which exemption is granted. The presence of this requirement necessitates an
examination of the
relationship between the business activities which generate the particular
income
in question-the activities, that is, of producing or distributing the goods or performing
the services
involved-and the accomplishment of the organization's exempt purposes.

4
Treas. Reg. § 1.513-1 (d)(2) provides that a trade or business is related to exempt purposes, in
the relevant sense, only where the conduct of the business activities has causal relationship to
the achievement of exempt purposes (other than through the production of income); and it is
substantially related, for purposes
of§ 513, only if the causal relationship is a substantial one.
Thus, for the conduct of trade or business from which a particular amount of gross income is
derived to be substantially related to purposes for which exemption is granted, the production or
distribution of the goods or the performance of the services from which the gross income is
derived must contribute importantly to the accomplishment of those purposes. Where the
production or distribution of the goods or the performance of the services does not contribute
importantly to the accomplishment of the exempt purposes of
an organization, the income from
the sale of the goods or the performance of the services does not derive from the conduct of
related trade or business. Whether activities productive of gross income contribute importantly
to the accomplishment of any purpose for which an organization
is granted exemption depends
in each case upon the facts and circumstances involved.
Rev.
Rul. 70-186, 1970-1
C. B. 129, concerns an organization that was formed to preserve a
lake
as a public recreational facility and to improve the condition of the water in the lake to
enhance its recreational features It
is financed by contributions from lake front property
owners, from members of the community adjacent to the lake, and from municipalities bordering
the lake. The organization's principal activity is to treat the water, to remove algae, and to
otherwise improve the condition of the water for recreational purposes. These activities
constitute charitable activities insofar
as they insure the continued use of the lake for public
recreational purposes. The benefits to be derived from the organization's activities flow
principally to the general public through the maintenance and improvement of public
recreational activities. Any private benefits derived by the lake front property owners do not
lessen the public benefits flowing from the organization's operations.
In fact, it would be
impossible for the organization to accomplish its purposes without providing benefits to the lake
front property owners. Accordingly,
it is held that the organization is exempt from Federal
income tax
under§ 501 (c)(3).
Rev. Rul. 75-196, 1975-1 C. B. 155, concerns an organization, the principal activity of which is to
maintain a law library that
is located in the same building as the headquarters of the local bar
association, an organization described
in § 501 (c)(6). The organization's support is derived
primarily from contributions by the
local bar association. The rules of the library provide that the
facilities are available for use only by members of the local bar association. Membership
in the
bar association
is open to all members of the legal profession in good standing with an office or
residence in the municipality. The fact that access to and use of the library facilities are limited
to a designated class of persons is not necessarily a bar to recognition of exemption under §
501 (c)(3). What is of importance is that the class benefited be broad enough to warrant a
conclusion that the educational facility or activity is serving a broad public interest rather than a
private interest, and is therefore exclusively educational
in nature. The library facilities are
available to a significant number of people. The fact that attorneys who use the library may
derive personal benefit
in the practice of their profession from the information garnered thereby
is incidental to this purpose and
is, in most instances, a logical by-product of an educational
process. Therefore, the limitation of the use of the facilities is reasonable and does not
prejudice the exclusively educational nature and purpose of the facility. Accordingly, the

5
organization qualifies for exemption under§ 501 (c)(3).
Rev.
Rul. 80-295, 1980-2
C. B. 194, concerns an organization that was created as a national
governing body for amateur athletics to promote systematic physical exercise and education,
and foster interest
in amateur sports among the public at large, and to encourage widespread
public participation
in athletics and recreational sports. The organization sponsors, supervises,
and regulates programs
in a number of different amateur sports. It also arranges for and
coordinates open competition for amateur
athletics at the local, state, regional, and national
levels. The organization receives income each year from the sale of exclusive television and
radio broadcasting rights to an independent producer, who contracts with a commercial network
to broadcast many of the
athletic events sponsored, supervised, and regulated by the
organization. The broadcasting of the
athletic events promotes the various amateur sports,
fosters
widespread
public interest
in the benefits of its nationwide amateur athletic program, and
encourages
public participation. Therefore, the organization's sale of broadcasting rights and
the
resultant broadcasting of its athletic events contributes importantly to the accomplishment of
its exempt purposes, is
substantially related to the purposes constituting the basis for the
organization's exemption, and, therefore, is not
unrelated trade
or business within the meaning
of§513.
Section 8.01 of Rev. Proc. 2014-4, 2014-1 I.R.S. 125, states that "[t]he Service may decline to
issue a
letter ruling or a determination letter when appropriate in the interest of sound tax
administration
or on other grounds whenever warranted by the facts or circumstances of a
particular case."
Analysis
Issue 1 A: Whether the performance of the Agreement and the receipt of fees thereunder would
jeopardize
your status as an organization exempt from tax under§ 501(c)(3)
To be described in§ 501(c)(3), an organization must be operated exclusively for an exempt
purpose. Treas. Reg. § 1.501 (c)(3)-1 (a)(1
). An organization is regarded as "operated
exclusively" of exempt purposes only if it engages primarily
in activities which accomplish one or
more exempt purposes. Treas. Reg. 1.501 (c)(3)-1 (c)(1 ). Exempt purposes include
"educational" purposes. Treas. Reg. § 1.501 (c)(3)-1 (d)(1
)(f). The term "educational" relates to
the instruction of the public
on subjects useful to the individual and beneficial to the community.
Treas.
Reg.§ 1.501(c)(3)-1(d)(3).
Your exempt educational purpose
is to inform and educate the American public about Q and to
advocate
for~-You achieve this purpose by tracking, assembling and disseminating unbiased
information regarding
g. Your performance of the Agreement serves to disseminate the
Information more broadly and thus helps to accomplish your educational purposes.
However, the Agreement
also benefits M by allowing it to use the Information to market and sell
its services, for research and reporting by its news operations, and to develop and distribute its
proprietary databases. Although an organization's operations may be deemed to be beneficial
to the public, if they also serve private interests other than incidentally, the organization is not

6
entitled to exemption under§ 501(c)(3). Treas. Reg.§ 1.501(c)(3)-1(c)(1); Treas. Reg.§
1.501 (c)(3)-1 (d)(1 )(ii). The word "incidental" in this context has both qualitative and quantitative
connotations. To be "incidental"
in the "qualitative" sense, the private benefit must be a
necessary concomitant of the activity which benefits the public at large;
in other words, the
benefit to the public cannot
be achieved without necessarily benefiting certain private
individuals. A benefit
is quantitatively insubstantial only if it is insubstantial as measured in the
context of the overall public benefit conferred by the activity. See Rev. Rul. 70-186.
Under the circumstances, we conclude that the benefit conferred on M under the Agreement is
both
qualitatively and quantitatively incidental. It
is qualitatively incidental because the benefits
under the Agreement flow primarily to the general public by enabling you to disseminate the
Information to a wider audience, i.e., the subscribers
toM's services. M does not have an
exclusive right to, or exclusive use of, the Information, which is otherwise available to the
general public for free over your website. M is merely a means by which to broaden the
dissemination of the Information and thereby to accomplish your exempt purposes more
effectively. In addition, the benefit conferred on M is quantitatively incidental because the
benefit derived by M
in being able to include the Information in its package of services is
insubstantial
in comparison with the benefit obtained by the users of those services.
In addition, the Agreement does not confer an impermissible private benefit on M's subscribers.
By their nature, exempt
educational activities serve public purposes by providing direct benefits
to private parties. The public policy sought to be effected necessitates the dissemination of
information and training to individuals, whose increased capabilities may generally serve to
improve the public welfare. Further,
in an educational context, an organization may be
determined to be operating for public purposes even if the general public does not have the
same direct access to the
educational program
as does some smaller, restricted group. See
Rev. Rul. 75-196. Although the Agreement will benefit only subscribers
toM's services, the
population served is broad enough to warrant a conclusion that the Agreement serves a broad
public interest.
Therefore, your performance of the Agreement and your receipt of fees thereunder furthers your
exempt purpose, serves a public and not a private interest, and, consequently, will not
jeopardize your status as an organization described
in § 501 (c)(3).
Issue 18: Whether the performance
of the Agreement and the receipt of fees thereunder would
jeopardize your status as an organization that is not
a private foundation.
We decline to rule on whether the performance of the Agreement and the receipt of fees
thereunder would jeopardize your status as
an organization that is not a private foundation
because of the
factual nature of the issue. See Rev. Proc. 2014-4, 2014-1 I.R.S. 125, section
8.01.
Issue 2: Whether the performance
of the Agreement is an unrelated trade or business
For purposes of the tax imposed
under§ 511 on an exempt organization's unrelated business
taxable income (as defined
in§ 512), an "unrelated trade or business" is a trade or business the

7
conduct of which is not substantially related to the organization's performance of its ·exempt
functions. I.R.C. § 513(a). A trade or business
is "substantially related" to exempt purposes if
the production or distribution of the goods or the performance of the services from which the
gross income is derived contributes
importantly to the accomplishment of the organization's
exempt purposes. Treas. Reg. § 1.513-1 (d)(2).
Your exempt educational purpose is to inform and educate the American public about
Q and to
advocate for
g. You accomplish this purpose by disseminating unbiased information on the
subject of
g over your website and through various media outlets. M is a global news and
media organization with a large subscriber base for its information services. The performance
of the Agreement will enable you to disseminate the Information to M's subscribers, thus making
the
Information more widely available and contributing importantly to the accomplishment of
your exempt purpose of informing and educating the American public about
Q and g. See Rev.
Rul. 80-295. Consequently, the performance of the Agreement is substantially related to your
exempt purpose and not an unrelated trade or business.
Issue 3: Whether the fees that are payable to you under the Agreement constitute royalties
within the meaning
of§ 512(b)(2).
I.R.C. § 511 imposes a tax on the unrelated business taxable income of organizations described
in§ 501 (c)(3). I.R.C. § 512(a)(1) defines "unrelated business taxable income" as gross income
derived from an unrelated trade or business. I.R.C. § 512(b)(2) excludes all royalties from
unrelated business taxable income. Thus, the issue of whether the fees payable to you under
the Agreement constitute
royalties would be relevant only if such fees were gross income
derived from an unrelated trade or business. Since we have concluded that the performance of
the Agreement is not an unrelated trade or business, the fees payable under the Agreement are
not gross income derived from
an unrelated trade or business. Consequently, there is no need
to address this issue.
Rulings
Accordingly, based
on the information submitted, we rule as follows:
1A. Your performance of the Agreement and receipt of fees thereunder will not jeopardize
your status as an organization exempt from tax
under§ 501 (c)(3) of the Code.
1
B. Because of the factual nature of the issue, we decline to rule on whether your
performance of the Agreement and receipt of fees thereunder would jeopardize your status
as an organization that is not a private foundation.
2. Your performance of the Agreement is not an unrelated trade or business within the
meaning of§ 513(a) of the Code.

8
3. Insofar as the periodic and termination fees payable to you under the Agreement are
not gross income derived from
an unrelated trade or business, there is no need to rule on
whether such fees are royalties.
This ruling will be made available for public inspection under section 6110 of the Code after
certain
deletions of identifying information are made. For details, see enclosed Notice 437,
Notice
of Intention to Disclose. A copy of this ruling with deletions that we intend to make
available for public inspection is attached to Notice 437. If you disagree with our proposed
deletions, you should follow the instructions
in Notice 437.
This
ruling is directed only to the organization that requested
it. Section 611 O(k)(3) of the Code
provides that it may not
be used or cited by others as precedent.
This ruling is based on the facts
as they were presented and on the understanding that there will
be no material changes in these facts. This ruling does not address the applicability of any
section of the Code or regulations to the facts submitted other than with respect to the sections
described. Because it
could help resolve questions concerning your federal income tax status,
this ruling should be kept
in your permanent records.
If you have any questions about this ruling, please contact the person whose name and
telephone number are shown
in the heading of this letter.
In accordance with the Power of Attorney currently on file with the Internal Revenue Service, we
are sending a copy of this letter to your authorized representative.
Enclosure
Notice 437
Sincerely,
Michael Seta
Manager
Exempt Organizations, Technical