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Organization Denied Exemption as Business League

MAY 9, 2019

LTR 201931009

DATED MAY 9, 2019
DOCUMENT ATTRIBUTES
  • Institutional Authors
    Internal Revenue Service
  • Code Sections
  • Subject Area/Tax Topics
  • Industry Groups
    Nonprofit sector
  • Jurisdictions
  • Tax Analysts Document Number
    2019-29758
  • Tax Analysts Electronic Citation
    2019 TNTF 150-29
    2019 EOR 9-26
  • Magazine Citation
    The Exempt Organization Tax Review, Sept. 2019, p. 272
    84 Exempt Org. Tax Rev. 272 (2019)
Citations: LTR 201931009

Contact person/ID number: * * *
Contact telephone number: * * *

UIL: 501.06-00
Release Date: 8/2/2019

Date: May 9, 2019

Employer ID number: * * *

Form you must file: * * *

Tax years: * * *

Dear * * *:

This letter is our final determination that you don't qualify for tax-exempt status under Section 501(c)(6) of the Internal Revenue Code (the Code). Recently, we sent you a proposed adverse determination in response to your application. The proposed adverse determination explained the facts, law, and basis for our conclusion, and it gave you 30 days to file a protest. Because we didn't receive a protest within the required 30 days, the proposed determination is now final.

You must file federal income tax returns for the tax years listed at the top of this letter using the required form (also listed at the top of this letter) within 30 days of this letter unless you request an extension of time to file.

We'll make this final adverse determination letter and the proposed adverse determination letter available for public inspection (as required under Section 6110 of the Code) after deleting certain identifying information. Please read the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Notice 437 on how to notify us. If you agree with our deletions, you don't need to take any further action.

If you have questions about this letter, you can contact the person listed at the top of this letter. If you have questions about your federal income tax status and responsibilities, call our customer service number at 1-800-829-1040 (TTY 1-800-829-4933 for deaf or hard of hearing) or customer service for businesses at 1-800-829-4933.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures: 
Notice 437
Redacted Letter 4034, Proposed Adverse Determination under IRC Section 501(a) Other Than 501(c)(3)
Redacted Letter 4040, Final Adverse Determination under IRC Section 501(a) Other Than 501(c)(3) — No Protest


Contact person/ID number: * * *
Contact telephone number: * * *
Contact fax number: * * *

UIL: 501.06-00

Date: March 1, 2019

Employer ID number: * * *

LEGEND:

Y = date
Z = state

Dear * * *:

We considered your application for recognition of exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a). We determined that you don't qualify for exemption under IRC Section 501(c)(6). This letter explains the reasons for our conclusion. Please keep it for your records.

Issues

Do you qualify for exemption under Section 501(c)(6) of the Code? No, for the reasons stated below.

Facts

You were incorporated in Z on Y. Your Articles of Incorporation state your purpose is to assist in the growth of small and medium sized businesses.

Per Form 1024, you will hold weekly meetings of members to refer each other business — a business referral group. You aim to inform and educate each other about each other's business, support each other's business endeavor to improve each other's business by means of interaction and learning about each other's business, practices and expertise required to conduct said business. Holding weekly meetings with members will improve member businesses thereby improving the business community and environment in which members conduct business. Weekly breakfast meetings will be held at a local restaurant and led by members and/or your board of directors. Occasionally meetings will be held in the evenings as mixers. The only qualification for membership is being a decision maker for a business, however, only one member of each profession is allowed to be a member at any one time. You did not specify any region or area from which members are selected. Members are required to pay initiation and quarterly dues.

We requested you describe the common business interest of your membership, and how you promote and improve this interest. In response you stated that your common business interest is being a collection of independent business owners networking with one another. As each member sees opportunity, they are looking to refer business to a fellow member for the benefit of that business. You indicated that your networking group is in itself completely non-profit, however, the hope is that the referrals you give one another lends to each business' success.

Law

Section 501(c)(6) of the Code provides that organizations organized as business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues (whether or not administering a pension fund for football players), not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual may be exempt from federal income tax.

Treasury Regulation Section 1.501(c)(6)-1 states that a business league is an association of persons having some common business interest, the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit. It is an organization of the same general class as a chamber of commerce or board of trade. Thus, its activities should be directed to the improvement of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons. An organization, whose purpose is to engage in a regular business of a kind ordinarily carried on for profit, even though the business is conducted on a cooperative basis or produces only sufficient income to be self-sustaining, is not a business league.

Revenue Ruling 59-391, 1959-2 C.B. 151, held that an organization composed of individuals, firms, associations and corporations, each representing a different trade, business, occupation or profession whose purpose is to exchange information on business prospects has no common business interest other than a mutual desire to increase their individual sales. The activities are not directed to the improvement of one or more lines of business, but rather to the promotion of the private interests of its members and is not exempt under Section 501(c)(6) of the Code.

Revenue Ruling 66-338, 1966-2 C.B. 226, held that an organization formed to promote the interests of a particular retail trade which advises its members in the operation of their individual businesses is not exempt from federal income tax under Section 501(c)(6) of the Code. By enabling members to more easily secure consultation services, supplies and equipment, the organization is providing members with an economy and convenience in the conduct of their individual businesses that would not have been available if they had to secure them on an individual basis.

In Revenue Ruling 70-244, 1970-1 CB 132, the organization's membership consists of business and professional persons in the community. Its articles of incorporation state it was formed to bring together members and their guests to exchange ideas for improving business conditions within the community. It does not have any specific program directed to the improvement of business conditions in the community. Since this organization has no program designed to improve business conditions of one or more lines of business, it is held that the organization is not exempt from federal income tax under Section 501(c)(6) of the Code.

Application of Law

You are not described in Treas. Reg. Section 1.501(c)(6)-1 because the facts show you are not formed to promote the common business interest of a particular industry or trade; rather, you address the concerns and promote the interests of your members. This is done through networking and providing business referrals to each other. When asked, you stated the only common interest between members is that of being a collection of independent, local business owners. Since you have no program designed to improve business conditions along one or more lines of business, it is held you are not exempt under Section 501(c)(6) of the Code.

Like the organization in Revenue Ruling 59-391, you are an association comprised of pre-screened noncompeting companies, represented by individual owners whom you have selected as the best representatives for their industry. This is evident in that only one member of each profession is allowed at one time. Your members provide leads to other members. You develop strong interactive relationships among your members by working with one another to exchange new business opportunities. You facilitate leads among your members at your weekly meetings. Your activities are not directed to the improvement of one or more lines of business, but rather to the promotion of the private interests of your members.

You are similar to the organization in Revenue Ruling 66-338 which promoted the interests of a particular retail trade by advising its members in the operation of their individual businesses. This provided members with an economy and convenience in the conduct of their individual businesses that would not have been available if they had to secure them on an individual basis. You conduct weekly meetings with your members to interact and refer business in hopes of improving business sales for each other. As members see opportunity, they look to refer business to a fellow member for the benefit of that business. Your hope is this networking group will lend to each business' success. This not only is performing particular services to members through networking but is also an activity of only looking to promote each member business rather than benefitting any particular industry as a whole.

You are similar to the organization in Revenue Ruling 70-244 in that you do not have any specific program directed to the improvement of business conditions in the community. You have described your activities as weekly meetings of members to refer each other business. While you have stated these meetings will improve the business community, you did not specify any region or area from which members are selected or any connection members have to any particular locality. Since you have described no programs designed to improve business conditions of one or more lines of business, but instead networking opportunities for members, you do not qualify under Section 501(c)(6) of the Code.

Conclusion

Based on the above facts and law, we conclude you do not qualify for exemption under Section 501(c)(6) of the Code. Your activities are not directed to the improvement of business conditions of one or more lines of business nor do you share any common business interest. Rather, your activities and purposes are directed at the improvement of your members' businesses. Accordingly, you do not qualify for exemption as an organization described in Section 501(c)(6).

If you agree

If you agree with our proposed adverse determination, you don't need to do anything. If we don't hear from you within 30 days, we'll issue a final adverse determination letter. That letter will provide information on your income tax filing requirements.

If you don't agree

You have a right to protest if you don't agree with our proposed adverse determination. To do so, send us a protest within 30 days of the date of this letter. You must include:

  • Your name, address, employer identification number (EIN), and a daytime phone number

  • A statement of the facts, law, and arguments supporting your position

  • A statement indicating whether you are requesting an Appeals Office conference

  • The signature of an officer, director, trustee, or other official who is authorized to sign for the organization or your authorized representative

  • The following declaration:

    For an officer, director, trustee, or other official who is authorized to sign for the organization: Under penalties of perjury, I declare that I have examined this request, or this modification to the request, including accompanying documents, and to the best of my knowledge and belief, the request or the modification contains all relevant facts relating to the request, and such facts are true, correct, and complete.

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if they haven't already done so. You can find more information about representation in Publication 947, Practice Before the IRS and Power of Attorney.

We'll review your protest statement and decide if you gave us a basis to reconsider our determination. If so, we'll continue to process your case considering the information you provided. If you haven't given us a basis for reconsideration, we'll send your case to the Appeals Office and notify you. You can find more information in Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status.

If you don't file a protest within 30 days, you can't seek a declaratory judgment in court later because the law requires that you use the IRC administrative process first (IRC Section 7428(b)(2).

Where to send your protest

Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address:

U.S. mail: 

Internal Revenue Service
EO Determinations Quality Assurance
Mail Stop 6403
P.O. Box 2508
Cincinnati, OH 45201

Street address for delivery service:

Internal Revenue Service
EO Determinations Quality Assurance
550 Main Street, Mail Stop 6403
Cincinnati, OH 45202

You can also fax your protest and supporting documents to the fax number listed at the top of this letter. If you fax your statement, please contact the person listed at the top of this letter to confirm that they received it.

You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at the top of this letter.

Contacting the Taxpayer Advocate Service

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or if you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

DOCUMENT ATTRIBUTES
  • Institutional Authors
    Internal Revenue Service
  • Code Sections
  • Subject Area/Tax Topics
  • Industry Groups
    Nonprofit sector
  • Jurisdictions
  • Tax Analysts Document Number
    2019-29758
  • Tax Analysts Electronic Citation
    2019 TNTF 150-29
    2019 EOR 9-26
  • Magazine Citation
    The Exempt Organization Tax Review, Sept. 2019, p. 272
    84 Exempt Org. Tax Rev. 272 (2019)
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