Single-company insurance agents are denied business-league exemption

Plain-English summary

An association was formed for independent agents who sold insurance and financial products offered by one company. It planned education, training, networking events, and an annual awards banquet, all funded by member dues. The IRS found that these activities benefited agents of a single brand rather than improving conditions across the insurance industry as a whole. It also found that the association provided particular services to its individual members. The IRS therefore denied exemption as a section 501(c)(6) business league.

Ruling snapshot

• Question: Does an association limited to agents of one insurance company 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. 58-294, 67-77, 68-182, and 83-164; National Muffler Dealers Association, Inc. v. United States, 440 U.S. 472 (1979)

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201
Date: January 17, 2017

Employer ID number:
Number: 201715003
Release Date: 4/14/2017 Contact person/ID number:

Contact telephone number:

Form you must file:

UIL: 501.06-00, 501.06-01

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.

We sent a copy of this letter to your representative as indicated in your power of attorney.

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
P.O. Box 2508
Cincinnati, OH 45201
Date: November 21, 2016
Employer ID number:
Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend: UIL:

X = State 501.06-00
Y = Date 501.06-01
Z = Company

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.

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

Facts
You incorporated in the State of X on Y.

Your Articles of Incorporation state that you are organized “exclusively for the development of independent
contractor Z agents and to promote a common business interest”.

You intend to schedule multiple events and activities across the State of X where your members will receive
education, training, and networking opportunities. You will also hold an annual banquet where members will
be recognized for their achievements.

Article 3.1 of your Bylaws states “Members shall consist of those persons approved by the Board of Directors
who:
• Are agents licensed to sell insurance and other financial products offered by Z in the State of X.
• Pay all appropriate assessments made by the Board of Directors; and
• Are approved by the Board of directors.

Article 3.2 of the bylaws indicates your Board of Directors, by a two-thirds vote, may suspend, expel, or
terminate the membership of any person for any reason, including the membership of a member whose
relationship with Z is terminated for malfeasance, disciplinary action or other violation of Z’s rules. A member
shall have no right to transfer or assign such member’s membership without prior approval of the Board.

2

There are no classes of membership and all members are entitled to vote. No individuals are required to join.
You will have six members on your Board of Directors. Each Director must be a past or present licensed Z
agent or a past or present employee of Z.

Your financial support is from membership dues. These funds will be used for your member events and annual
banquet.

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 inure to the benefit of any
private shareholder or individual.

Treas. Reg. Section 1.501(c)(6)-1 states that a business league is an association of persons having some
common business interests, 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. The Regulations further state that the activities of a
business league 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 members. For exemption purposes,
a line of business is a trade or occupation, entry into which is not restricted by a patent, trademark, or similar
device which would allow private parties to restrict the right to engage in the business. A "segment" of a line of
business is not considered a line of business under section 501(c)(6) for the Code.

Revenue Ruling 58-294, 1958-1 C.B. 244, holds that an association of licensed dealers in a certain type of
patented product did not qualify as a business league. The association in this ruling owned the controlling
interest in the corporation that held the basic patent of the product, it engaged mainly in furthering the business
interests of its member dealers, and it did not benefit businesses that manufactured competing products of the
same type covered by the patent.

Revenue Ruling 67-77, 1967-1 C.B. 138 ruled that an association of dealers selling a particular make of
automobile that engaged in financing general advertising campaigns to promote the sale of that particular make
was not exempt because it was performing particular services for its members rather than promoting a line of
business, i.e., the automotive industry as a whole. In this ruling, membership in the organization was restricted
to dealers who held franchises for the sale of the automobiles designated in the area.

In Revenue Ruling 68-182, 1968-1 C.B. 263, the Service’s position was stated that organizations promoting a
single brand or product within a line of business do not qualify for exemption under section 501(c)(6) of the
Code.

Revenue Ruling 83-164, 1983-2 C.B. 95 describes an organization whose members represented diversified
businesses that owned, rented, or leased computers produced by a single computer manufacturer that did not
qualify for exemption from federal income tax as a business league under Section 501(c)(6) of the Code.

In National Muffler Dealers Association, Inc. v. United States, 440 U.S. 472, Ct. D. 1997, 1979-1 C.B. 198
(1979), the Court held that an organization of muffler dealers franchised by Midas International Corporation did
not qualify for exemption from federal income tax as a business league under section 501(c)(6) of the Code.

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

3

The organization's purpose was too narrow to satisfy the line of business test of section 1.501(c)(6)-1 of the
regulations.

Application of law

You are not a business league as described in IRC 501(c)(6) because you are not organized to improve business
conditions of one or more lines of business. Instead, you provide training and networking opportunities to
members who are required to be agents of Z which is one specific brand.

You are not described in Treas. Reg. Section 1.501(c)(6)-1 because your activities are directed toward the
benefit of members who are agents of Z, a specific insurance company, rather than to the improvement of
business conditions of one or more lines of business.

You are similar to the organizations described in Revenue Rulings 58-294, and 67-77, because your activities
further the business interests of your members who must be Z agents. You plan to provide activities across the
State of X where your members will receive education, training, and networking opportunities meant to make
them successful as Z agents. Your activities do not benefit the entire insurance industry or improve the business
conditions of the insurance industry as a whole.

You are like the organizations described in Revenue Rulings 68-182 and 83-164, because your activities are
exclusively conducted for agents of Z. You were established for members who must be agents of Z to network
and provide educational events. Because you are only improving business conditions in a segment of a line of a
business, you are precluded from exemption under Section 501(c)(6).

You are similar to the organization described in National Muffler Dealers Association, because your activities
serve members who must be agents of Z, a particular company. You only conduct activities toward agents of Z
which does not represent one or more line of businesses. Therefore, you are precluded from exemption under
Section 501(c)(6).

Conclusion

You do not meet Section 501(c)(6) because your activities are directed toward a segment of a line of a business
because your members are limited to Z agents. Your activities are not directed to the improvement of business
conditions of one or more lines of business, rather they are providing particular services for your individual
members. Accordingly, we conclude that you are not exempt under Section 501(c)(6) of the Code.

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

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

4

• 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.

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

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

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

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

5

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.

We sent a copy of this letter to your representative as indicated in your power of attorney.

Sincerely,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

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