Business league exemption denied for member-specific power contract negotiations

Plain-English summary

An organization of municipal and cooperative electric utilities sought section 501(c)(6) status after forming to negotiate a power purchase arrangement with a natural gas plant developer. Its only activity was pooling member funds to hire a law firm that would negotiate contract terms for those members, with expenses allocated according to each member's usage. The IRS found that this work provided particular services and economic advantages to individual members instead of improving conditions for an entire line of business. The organization also submitted only the power purchase agreement, signed by one person, rather than a document showing that it had been legally formed. Because its activities would end after the member contracts were completed, the IRS denied exemption, and the organization did not file a protest before the denial became final.

Ruling snapshot

• Question: Did pooling legal costs to negotiate a power purchase agreement for particular member utilities qualify as promoting a common business interest under section 501(c)(6)?
• Outcome: denied
• Key authorities: IRC § 501(c)(6); Treas. Reg. § 1.501(c)(6)-1; Rev. Ruls. 56-65, 66-338, and 71-175

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
IRS Cincinnati, OH 45201
Date: September 12, 2017

Employer ID number:

Number: 201749016 Contact person/ID number:

Release Date: 12/8/2017 Contact telephone number:
Form you must file:

Tax years:

UIL: 501.06-00, 501.06-01

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,

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

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


Department of the Treasury

Internal Revenue Service

Cincinnati, OH 45201
Date: July 19, 2017
Employer ID number:
Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend: UIL:

B = Limited Liability Company 501.06-00
C = County 501.06-01
D = Agreement

E = Date

F = Name

G = Number

H = Names

J = Dates

x dollars = Amount
y dollars = Amount

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 were formed for the purpose of negotiating and entering into a power purchase arrangement/agreement that
would be acceptable to your members and B, the developer of a project for a new natural gas fired plant in C.
You entered into such an agreement called D, with B on E which you consider your organizing document. The
D states you were formed for your members to collaborate to facilitate the development of the project, to
develop proposed terms and conditions for the members to buy energy, and to find opportunities forthe
cooperative procurement ofnatural gas, natural gas transportation, natural gas storage and natural gas scheduling
services, and, to evaluate alternatives for the scheduling and taking delivery of your members prorated share of
output. Further, the terms in D will provide additional revenue assurance to help B obtain needed financing of
the project from other sources. B must have this financing before it can begin the detailed engineering and
construction of the project.


2

You have G members who consist of H. All members are municipal and cooperative electric utility entities
from different geographical locations. Your only activities consist of hiring of a law firm to represent your
members as a group for the purpose of negotiating the power purchase arrangement/agreement with B.
Each member has one vote.

You listed F as your only board member on the Form 1024. In addition, D was signed only by F.

Furthermore, you wrote that you were formed to enter into D to achieve the mutual advantage of having
common funding of certain activities for the development of mutually acceptable terms and conditions
associated with the potential purchase of energy and capacity from B.

Your only expenses are for third party legal services. These will be allocated among your members based on the
terms in D which states that your expenses are allocated among members based on their individual usage
divided by the total usage for all members. Your legal expenses to date are x dollars. You expect an additional
y dollars in legal expenses. Once the contracts with B and H are finalized, your operations will terminate.

This will be after J.

Law
Section 501(c)(6) of the Code 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.

Treasury Regulation Section 1.501(c)(6)-1 defines a business league as an association having a common
business interest, whose purpose is to promote the common business interest and not to engage in a regular
business of a kind ordinarily carried on for profit. Its activities are directed to the improvement of business
conditions of one or more lines of business rather than the performance of particular services for individual
persons.

Revenue Ruling 56-65, 1956-1 C.B. 199 describes an organization whose principal activity consists of furnishing
particular information and specialized individual service to its individual members engaged in a particular
industry, through publications and other means to effect economies in the operation of their individual
businesses is performing particular services for individual persons. Such organization, therefore, is not entitled
to exemption from Federal income tax under section 501(c)(6) of the Internal Revenue Code of 1954 as a
business league even though it performs functions which are of benefit to the particular industry and the public
generally.

Revenue Ruling 66-338, 1966-2 C.B. 226 describes an organization that provided business consulting services,
electronic management services and low cost office supplies and store fixtures to members of a particular retail
trade. It allowed its members to secure supplies, equipment and services more cheaply than if they had to secure
them on an individual basis. Its primary purpose was providing services to its members and not improving
business conditions in their trade as a whole. In addition, its activities constituted a business of a kind ordinarily
carried on for profit.

Rev. Rul. 71-175, 1971-1 C.B. 153 states that a nonprofit organization whose principal activity was the
operation of a telephone-answering service for member doctors is not exempt under Section 501(c)(6) of the
Code. By providing a telephone-answering service the organization relieves the individual members of the
necessity of securing this service commercially, resulting in a convenience or economy in the conduct of the

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


3

medical practice of its individual members. Therefore, the organization is rendering particular services for
individual persons as distinguished from the improvement of business conditions in the medical profession and
public health area generally.

The American Automobile Association v. Commissioner of Internal Revenue, 19 T.C. 1146 (1953) held that an
organization whose principal activities consist of performing particular services, and securing benefits, for its
members, does not qualify for exemption under Section 501(c)(6) of the Code.

In Indiana Retail Hardware Assn., Inc. v. United States (1966), 177 Ct. Cl. 288, the Court held that when
conducting particular services for members is a substantial activity of an organization, the organization will be
precluded from exemption under section 501(c)(6) of the Code.

In Bluetooth SIG Inc. v. U.S., 611 F.3d 617 (9th Cir. 2010), the Court examined an organization that was
formed to advance the common business interests of its members in the development and regulation of technical
standards for the compatibility and interoperability of wireless products and devices within a wireless personal
area network. The organization develops specifications and use applications and promotes consumer awareness
and marketing through its Bluetooth technology and trademark. The Court held that the organization was not a
tax-exempt business league under Section 501(c)(6) of the Code because the organization's activities
exclusively benefit its members, rather than an entire line of business. The Court noted that it “strains credulity”
for the organization to argue that its services indirectly benefit the industry as a whole simply by generating
consumer awareness of the availability and reliability of its technology.

Application of law
You are not described in Section 501(c)(6) of the Code because you are primarily organized and operated to
perform particular services for your members.

You are not organized in accordance with Section 501(c)(6) of the Code. You did not submit a document
showing you were legally formed. You only submitted D signed by F which is an agreement with B.

You are not described in Treas. Reg. Section 1.501(c)(6) because you are primarily organized and operated so
members can pool their resources to pay legal expenses to negotiate on their behalf as private, individual
companies as evidenced by the terms in your agreement. In addition, the method in which expenses are
allocated among your members also indicates you are providing services to members. Moreover, your members
formed you to achieve the common advantage of having pooled funding to obtain acceptable terms and
conditions concerning the power purchase arrangement.

You are similar to the organizations in Revenue Rulings 56-65 and 66-368. You are operated primarily to
negotiate the most favorable terms in a power purchase agreement for the individual interests of your members
rather than negotiate for the improvement of business conditions within the industry. Once the agreement is
negotiated and contracts are executed with your members, your operations will cease. Like these organizations
in the revenue rulings you are performing a particular service to your members rather than directing your
activities to the improvement of business conditions of your industry as a whole.

You are similar to the organization in American Automobile Association in that, although the negotiated terms
of the power purchase agreement may benefit the community, your primary activity cannot be characterized as

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


4

fostering the improvement of business conditions throughout the industry. Rather, your services are intended to
improve your members negotiating power with B.

You are similar to the organization in Indiana Retail Hardware Assn because your primary activity is the
performance of services to members. Because this is your sole activity, you are not exempt under Section
501(c)(6) of the Code.

You are similar to the organization described in Bluetooth SIG., Inc. because you were formed to advance the
common business interests of your members to negotiate an agreement to purchase energy. Your activities
exclusively benefit your members, rather than an entire line of business. Similar to the organization in Bluetooth
SIG, Inc., it would be difficult to argue that your services benefit the industry as a whole because you are
paying legal expenses to negotiate the best terms for a power purchase arrangement for your members.

Your position
You believe you meet all the requirements for exemption under Section 501(c)(6) of the Code for the following
reasons:
• You have a common business interest and are not-for profit.
• Your activities are devoted to improving business conditions of the geographic electric utility line of
business to fulfill the needs of your non-for-profit members.
• Interests of the communities that the plant will serve will be advanced to ensure low-cost electric
provided.
• You have no net earnings and are not organized for profit.
• You have meaningful membership support achieved through member assessment/dues.
• You are a membership organization.

Our response to your position

You failed to provide any additional information from which it can be concluded that your activities primarily
accomplish purposes within the meaning of Section 501(c)(6) of the Code. You are paying legal expenses for
negotiating the most favorable terms for a power purchase arrangement for the individual interest of each
member. This illustrates you provide services for your members rather than work to improve the conditions of
a line of business as discussed previously. This precludes exemption under Section 501(c)(6) of the Code.

Conclusion

Negotiating a contract for provision of electricity from a natural gas power plant and associated legal costs for
your members is providing particular services for individual persons and thus does not meet one of the
requirements to be exempt under Section 501(c)(6) of the Code. In addition, your activities are not directed to
the improvement of the business conditions of the line of business of its members as a whole because your
activities are aimed only at improving the interest of your individual members. Therefore, you do not meet the
requirements for exemption and do not qualify for exemption 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

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


• 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.

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:

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


6

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,

Stephen A Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

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