Single-brand dealership association denied business-league exemption

Plain-English summary

An association limited membership to purchasing, finance, fleet, and related employees of dealerships selling one redacted brand. It held annual meetings to share purchasing practices, standardize procedures, network, and educate members for the benefit of those dealers and the larger brand organization. The IRS found that these activities improved the business practices of one company’s dealer network rather than conditions across an entire line of business. It compared the association to prior dealer and computer-user groups that served a single brand and performed particular services for members. Because the organization did not promote a line of business as a whole, the IRS denied exemption under section 501(c)(6), and the denial became final when no protest was filed.

Ruling snapshot

• Question: Does an association serving employees of one brand’s dealerships qualify as a section 501(c)(6) business league?
• Outcome: Denied.
• Key authorities: IRC § 501(c)(6); Treas. Reg. § 1.501(c)(6)-1; Rev. Ruls. 55-444, 67-77, 67-295, 83-164; American Automobile Association v. Commissioner; National Muffler Dealers Association v. United States; Guide International Corporation v. United States.

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201

Date: February 25, 2016

Release Number: 201621017 Employer ID number:
Release Date: 5/20/2016
UIL Code: 501.06-03 Contact person/ID number:

Customer Service
Contact telephone 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.

Letter 4040 (Rev. 7-2014)
Catalog Number 47635Z

Sincerely,

Jeffrey I. Cooper
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

Letter 4040 (Rev. 7-2014)
Catalog Number 47635Z

Department of the Treasury
Internal Revenue Service

Cincinnati, OH 45201

Date: December 16, 2015

Employer ID number:

Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend:
UIL:
X = Brand 501.06-00
501.06-03
Dear :

We considered your application for recognition of exemption from federal income tax under section 501(a) of
the Internal Revenue Code (the Code). Based on the information provided, we determined that you don’t qualify
for exemption under section 501(c)(6) of the Code. This letter explains the basis for our conclusion. Please keep
it for your records.

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

Facts

You are a membership association open exclusively to employees of X dealerships who serve as Purchasing
Managers, Directors, Supply Chain Positions, Finance Managers and/or their designated associates, Fleet
Managers and/or their designated associates. Employment in this capacity within an X dealership provides
automatic membership. No formal dues are assessed.

You were formed to raise the level of procurement professionals among your X dealers by:
• Sharing best practices,

• Promoting the benefits of standard policies and procedures,

• Networking with other dealers, and

• Encouraging continuous education.

The benefits you provide are:
• A purchasing strategy aligned with dealership goals,
• Top management support for future purchasing iniatives,

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K

• Improved efficiencies,
• Increased value to the organization, and
• Increased value to the dealer organization and the extended X organization.

Your primary activity is hosting annual meetings where you encourage members to improve their level of
professionalism for the benefit of X dealers and the extended X organization. Members elect your officers and
general board members at the annual meetings.

You will be supported primarily through financial sponsorship from vendor suppliers of X products to help off-
set the cost of the annual conference. Each attending member will be billed for any residual outstanding costs, if
any.

Law

Section 501(c)(6) of the Internal Revenue Code of 1986 provides exemption from federal income tax for
business leagues not organized for profit, and no part of the net earnings of which inures to the benefit of any
private shareholder or individual.

Section 1.501(c)(6)-1 of the Income Tax Regulations 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 55-444 states that an organization formed to promote the business of a particular industry that
carries out its purposes primarily by conducting a general advertising campaign to encourage the use of
products and services of the industry as a whole is exempt from tax notwithstanding that such advertising to a
minor extent constitutes the performance of particular services for its members.

Revenue Ruling 67-77 states that an organization composed of dealers in a certain make of automobile in a
designated area is organized and operated for the primary purpose of financing general advertising campaigns to
promote, with funds contributed by dealer members, the sale of that make of automobile. Held, the
organization is performing particular services for its members and is not entitled to exemption from Federal
income tax as a business league under section 501(c)(6) of the Internal Revenue Code of 1954.

Revenue Ruling 67-295 states that an organization composed of businessmen may qualify for exemption where
its activities are limited to holding luncheon meetings devoted to a discussion, review, and consideration of the
various problems in a particular industry directed to the improvement of business conditions for the industry as
a whole.

An organization whose members represent diversified businesses that own, rent, or lease computers produced
by a single computer manufacturer does not qualify for exemption under IRC 501(c)(6). Rev. Rul. 83-164,
1983-2 C.B. 95.

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K

The Tax Court held that the American Automobile Association, a national association of individual auto owners
and affiliated auto clubs, did not qualify as a business league because the Association's principal activities
consisted of securing benefits and performing particular services for members. American Automobile
Association v. Commissioner, 19 T.C. 1146 (1953).

In National Muffler Dealers Association v. United States, 440 U.S. 472 (1979), the Supreme Court held that an
association of a particular brand name of muffler dealers did not qualify for IRC 501(c)(6) status because it was
not engaged in the improvement of business conditions of a line of business. This effectively settled the "line of
business" issue

In Guide International Corporation v. United States, 948 F.2d 360 (7th Cir. 1991), the court concluded that an
association of computer users did not qualify for exemption under IRC 501(c)(6) because it essentially
benefited users of I.B.M. equipment.

Application of law

You are not a business league as described in IRC 501(c)(6) and section 1.501(c)(6)-1 of the Income Tax
Regulations because you are not organized to improve the business conditions of one or more lines of business
as a whole. Instead, you were formed to improve the business practices of one company, X.

You are not similar to the organizations described in Revenue Rulings 55-444 and 67-295. In these rulings, the
organizations worked to improve the business conditions of entire industries. In contrast, your purpose and
activities are directed at the promotion of X dealers, their employees, and the extended X organization. You are
not improving the business conditions of an industry as a whole.

Like the organizations in Revenue Ruling 67-77 and 83-164, your membership is restricted to dealers and
employees of a specific make of equipment. You were formed to promote practices solely intended to facilitate
and promote the products and services for specific brand of equipment, X.

You are similar to the organization in American Automobile Association v. Commissioner, 19 T.C. 1146 (1953)
in that your services are intended to increase sales of X brand products.

Your operations are remarkably similar to National Muffler Dealers Association v. United States, 440 U.S. 472
(1979), and Guide International Corporation v. United States, 948 F.2d 360 (7th Cir. 1991). You are an
association of members who are employees of X dealers. Your activities are directed to improving and
promoting X products, and you do not intend to extend any of your activities to improvement of business
conditions of one or more lines of business as required by IRC 501(c)(6).

Conclusion
You were not formed for the improvement of one or more lines of business, or any other purpose described in

section 501(c)(6) of the Code. Instead, you were formed for the betterment X dealers and their employees.
Accordingly, you do not qualify for exemption under section 501(c)(6) of the Code.

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K

If you don’t agree

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

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

• A copy of this letter highlighting the findings you disagree with
• An explanation of why you disagree, including any supporting documents
• The law or authority, if any, you are relying on

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

• One of the following declarations:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I examined this protest statement, including

accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts and such facts are true, correct, and complete.

For authorized representatives:

Under penalties of perjury, I declare that I prepared this protest statement, including
accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts 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 he or she hasn’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 provided a basis for us to reconsider our determination. If
so, we'll continue to process your case considering the information you provided. If you haven’t provided a
basis for reconsideration, we’ll forward your case to the Office of Appeals and notify you. You can find more
information about the role of the Appeals Office in Publication 892, How to Appeal an IRS Decision on Tax-
Exempt Status.

Where to send your protest
Please send your protest statement, Form 2848, if needed, and any supporting documents to the applicable
address:

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K

U.S. mail: Street address for delivery service:

Internal Revenue Service Internal Revenue Service

EO Determinations Quality Assurance EO Determinations Quality Assurance
Room 7-008 550 Main Street, Room 7-008

P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

You can also fax your statement 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 he or she received
it.

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.

You can find all forms and publications mentioned in this letter on our website at www.irs.gov/formspubs. If

you have questions, you can contact the person listed at the top of this letter.

Sincerely,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K