Business networking group denied tax exemption

Plain-English summary

A membership organization brought together business owners and professionals from many industries for monthly networking meetings, referrals, introductions, and business presentations. Members sought contacts who could become customers, vendors, partners, or referral sources, while outside speakers appeared only quarterly. The organization argued that it promoted common business interests and improved conditions across many lines of business. The IRS concluded that its primary activities promoted members' individual businesses and supplied particular networking and lead-generation services rather than improving conditions in a line of business. It denied exemption under section 501(c)(6), and the denial became final when the organization did not file a protest within 30 days.

Ruling snapshot

• Question: Does a cross-industry networking and referral group 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. Ruls. 59-391, 67-77, and 73-411

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
IRS Cincinnati, OH 45201
Date: September 27, 2017

Employer ID number:

Number: 201751023 Contact person/ID number:
Release Date: 12/22/2017

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: August 9, 2017
Employer ID number:
Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend: UIL:

B = Date of formation 501.06-00
C = State 501.06-01
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 incorporated on B in C as membership organization.

Your Bylaws indicate that only individuals can be members and not entities. Members must be approved by
your Board of Directors or its designee. Membership is comprised of business owners and professionals from a
broad variety of companies and industries.

You described your activities as holding monthly meetings to introduce members and their guests in order to
foster future business relationships. At each meeting two members get to explain their businesses to the
attendees and describe the prime prospects that they request as referrals from the audience. There is informal
networking during the meetings where members introduce themselves to other members. You have a quarterly
speaker to update the members and their guests on business and cultural issues in the metro area.

Members and guests are predominantly small business owners or managers. As such, they are decision-makers
for their enterprises and seek like-minded contacts that may become vendors, customers, strategic partners or
sources to refer new business. Your Member Handbook states that you are a business-to-business networking
group serving your local community.

You indicated that members diligently seek out other members to meet with one-on-one when it appears that a
mutual relationship may develop that will result in introductions to new prospects and the opportunity to act as a
referral source. Members can also pay an additional fee to present their business proposition at a monthly
meeting within 18 months and at least every 48 months thereafter.


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The common business interest amongst your members is to grow their businesses by nurturing relationships
with fellow members who may become referral resources and/or provide introductions to prospects and
potential referral sources.

You are supported by due and assessments of your members.

Law

Section 501(c)(6) of the Code exempts from federal income tax business leagues, chambers of commerce, real
estate boards, boards of trade, and professional football leagues (whether or not administering a pension fund
for football players), which are 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 states activities must 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.

Rev. Rul. 59-391, 1959-2 C.B. 151, describes an association organized for the mutual exchange of business
information among its members; to facilitate the making of business contacts for its members; to encourage all
types of trade expansion for the benefit of its members; and to encourage better business relations among its
members. The bylaws state membership shall be composed of persons each representing a different trade and no
member shall be in competition with another. Each member submits a list of business acquaintances and agrees
to furnish to other members letters of introduction to such acquaintances. The members of the association have
no common business interest other than a mutual desire to increase their individual sales. The organization's
activities are not directed to the improvement of business conditions of one or more lines of business, but rather
to the promotion of the private interests of its members, which membership is limited by the organization's
bylaws to one representative from each line of business. Accordingly, the association is not a business league
within the intendment of Section 501(c)(6) of the Code.

Rev. Rul. 67-77, 1967-1 C.B. 138, states a business league's activities must be directed to the improvement of
business conditions for all the individuals engaged in that trade or occupation, and not to the performance of
particular services for individuals. Thus, an association of dealers selling a particular make of automobile that
engages in financing general advertising campaigns to promote the sale of that make is not exempt because it is
not promoting a line of business; i.e., the automotive industry as a whole, but performing particular services for
its members

Rev. Rul. 73-411, 1973-2 C.B. 180, states a shopping center merchants’ association whose membership is
restricted to and required of the tenants of a one owner shopping center and their common lessor does not direct
its activities to the improvement of business conditions of one or more lines of business. The activities of
organization are directed to promoting the general business interests of its members, and the organization
performs particular services for its members.

Application of law

You are not described in Section 501(c)(6) of the Code and Treas. Reg. Section 1.501(c)(6)-1 because you are
not formed to promote the common business interests of a particular industry or trade. You are also not formed
for the improvement of one or more lines of business; rather, you are formed to benefit your members’ business
interests.

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


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You are similar to the organization described in Rev. Rul. 59-391 because you are operated primarily to aid
your members in their individual business endeavors. Much like that ruling, your membership is comprised of
various persons each representing a different trade, business, occupation or profession. Your activities are not
directed toward the improvement of one or more lines of business, but rather to the promotion of the private
interests of your members. Accordingly, you do not qualify for exemption under Section 501(c)(6) of the Code.

Similar to the organizations described in Rev. Rul. 67-77 and 73-411, your activities are not directed toward
improvements in any particular line of business. Instead, you provide a service for your members. Specifically,
you provide your members with networking and business promotion opportunities. Your meetings focus on
networking and referrals and generating business leads for members, not on improving business conditions. As
you are serving the private interests of your members, rather than an industry as a whole, you do not qualify as a
business league within Section 501(c)(6) of the Code.

Your position

You assert that Rev. Rul. 59-391 is not applicable to you because only individuals are accepted as members,
there is no restriction that prohibits membership by a competitor to an existing member, and members do not
furnish other members with a list of business acquaintances. Instead, you are 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. You also state that members share in regularly
scheduled presentations by non-member speakers on business topics and information valuable to members’
businesses. You said your activities are directed to the improvement of business conditions for many different
lines of business.

Our response to your position

Your activities include networking, referrals, and fostering future business relationships. Limiting your
membership to just individuals does not distinguish from Rev. Rul. 59-391. Although your members do not
exchange a list, you do exchange referrals verbally between members. In fact, you indicated that members
diligently seek out members to meet with one-on-one when it appears that a mutual relationship may develop
that will result in introductions to new prospects and the opportunity to act as a referral resource.

Although you provide presentations by non-member speakers on business topics and information valuable to
members’ businesses, this is not your primary activity. Your members have no common business interest other
than a mutual desire to increase their individual sales through their businesses. Therefore, your activities are
serving the private interests of your members and not providing for the improvement of overall business
conditions in your community.

Conclusion

Your activities are directed toward the improvement of your members' businesses, which furthers their private
interests, and does not contribute to the improvement of business conditions of one or more lines of business as
described in Section 501(c)(6) of the Code. Accordingly, you do not qualify for exemption as an organization
described in Section 501(c)(6) and you must file income tax returns.

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:

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


4

• 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.

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).

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


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.

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