Vehicle-brand dealer group denied exemption

Plain-English summary

An association of vehicle dealers sought exemption as a business league under section 501(c)(6). Its membership was limited to dealers of one brand in a particular area, and its sole activity was advertising and promoting those dealers' products and services. The IRS concluded that these activities provided particular services to members and promoted only one brand, rather than improving conditions across the automotive industry or another full line of business. The group therefore did not qualify as a tax-exempt business league. The denial became final after the organization did not protest within 30 days.

Ruling snapshot

• Question: Does an association that advertises for dealers of one vehicle brand qualify as a business league under section 501(c)(6)?
• Outcome: denied
• Key authorities: IRC § 501(c)(6); Treas. Reg. § 1.501(c)(6)-1; Rev. Rul. 67-77

Full text (IRS public release)

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

Date: SEPTEMBER 19, 2017

Release Number: 201750020
Release Date: 12/15/2017 Employer ID number:

Contact person/ID number:
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 14, 2017
Employer ID number:
Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend: UIL:

T = State 501.06-00
U = Date of formation 501.06-01
V = Brand

W = 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 T on U. Your Articles of Incorporation state that your purpose is to advertise
and promote the products and services of the dealers of a particular brand of vehicle, V. The V dealers are your
members. Your Articles also state that your general purposes are:
• To foster and promote retail trade and commerce in connection with the products and services of your
members, and to protect the same from unjust and unlawful exactions and impositions
• To foster and promote the interest of those persons, firms, and corporations engaged in the retailing of
V vehicles in the Central T area
• To conduct and operate means and places of disseminating information relative to the use of motor
vehicles and promote the sale of motor vehicles, and for such purposes to establish, conduct, and
manage advertising and promotional campaigns, exhibitions, displays, tests, trials and demonstrations,
and
• To promote the establishment and maintenance of a high standard of business ethics by your members
and by all other automobile dealers, and to discourage the use of false or misleading advertising or any
other business practice which may be detrimental to the public and the retail automobile industry.

Your Bylaws state that you have one class of members. Your members are limited to those persons, firms, and
corporations actively engaged in the retailing of new V brand vehicles, who are duly authorized holders of sales
and service agreements for W vehicles for the V brand. In order to be eligible to become a member, you must
be doing business in or about Central T. Your application additionally states that your members must be

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participating in W’s local marketing program and contributing funds to the program at a rate established by the
board.

According to your application for exemption, your sole purpose is to advertise and promote the products and
services of V dealers in Central T, who are your members. Your members all have a common business interest
of selling new and used V vehicles, parts and service. Your board members consist of representatives from your
member dealerships.

Your application states that you are not operating for or conducting business intended to produce a profit of any
kind, but only to further the common business interests of your members. Your activities are intended to
improve the business conditions of the V dealers in Central T by promoting the common products and services
offered, which will in turn enhance the business viability of each of your members.

You provided a transcript of one of your advertisements. The advertisement displays the awards V vehicles
have won. It also mentions the current offers available to consumers when purchasing a V vehicle. At the end of
the advertisement, it instructs the audience to visit the V dealers located in Central T.

Your members contribute funds on a monthly basis to cover your cost of doing business. Upon dissolution your
remaining assets will be distributed to the members on a prorated basis.

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
members.

Rev. Rul. 67-77, 1967-1 C.B. 138, provides that an association of dealers which sold a particular make of
automobile and that engaged in financing general advertising campaigns to promote the sale of that make was not
exempt because it performed particular services for its members rather than promoting a line of business; i.e., the
automotive industry as a whole.

In National Muffler Dealers Association, Inc. v. United States, 440 U.S. 472 (1979), the court held that a trade
organization that confines its membership to dealers franchised by a particular corporation and its activities to
promoting the business interests of its members does not satisfy the "line of business" test of Treas. Reg. Section
1.501(c)(6)-1 and is not a business league under Section 501(c)(6) of the Code.

In National Prime Users Group, Inc. v. U.S., 667 F. Supp. 250 (D.C. Md. 1987), the Court held that an organization
which served the needs of users of a specific brand of computers promoted only a segment of a line of business and
was not exempt under Section 501(c)(6) of the Code. The court concluded that the existence of an organization
whose activities center on the needs of users of one particular product is indeed a useful sales tool in persuading
potential customers to buy that particular computer brand and the manufacturer of that computer brand gains a
competitive advantage over other computer manufacturers through such an organization.

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

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In Guide International Corporation v. U.S., 948 F.2d 360 (7th Cir. 1991), the Court concluded that an
association of computer users did not qualify for exemption under Section 501(c)(6) of the Code because it
benefited essentially users of IBM equipment. The court stated that the organization also served as an influential
marketing tool for IBM because the conferences it held allowed IBM to showcase its products and services.

Application of law

You are not a business league as described in Section 501(c)(6) of the Code and Treas. Reg. Section
1.501(c)(6)-1 because your activities do not improve the business conditions of one or more lines of business;
rather, you provide advertising services to your members.

You are nearly identical to the organization described in Rev. Rul. 67-77. Your advertising services further the
business interests of your members. Your activities do not benefit the entire auto industry or improve the
business conditions of the auto industry as a whole, precluding you from exemption under Section 501(c)(6) of
the Code.

Like National Muffler Dealers Association, Inc., National Prime Users Group, Inc. and Guide International
Corporation, your membership consists of dealers of V, a particular brand. V dealers only represent a segment
of the industry and not an entire line of business. Therefore, you do not qualify from exemption under Section
501(c)(6) of the Code.

Conclusion

Your activities are not directed to the improvement of business conditions of one or more lines of business. You
are performing services for your members, who are dealers of a particular brand of vehicle, by providing
advertising on their behalf. Therefore, you 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

• 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.

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

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

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.

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

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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