Business-referral group denied business-league exemption

Plain-English summary

A networking group for owners from different professions sought exemption as a business league under section 501(c)(6). It held weekly meetings where members learned about one another's businesses and exchanged referrals, with only one member permitted from each profession. The IRS found that the members shared no common business interest beyond increasing their individual sales. The group's referral activities promoted the private interests of its members and did not improve conditions for one or more lines of business or a defined local business community. The IRS denied exemption, and the determination became final after no protest was filed.

Ruling snapshot

• Question: Did the cross-industry referral group qualify as a tax-exempt business league under section 501(c)(6)?
• Outcome: denied
• Key authorities: IRC § 501(c)(6); Treas. Reg. § 1.501(c)(6)-1; Rev. Rul. 59-391; Rev. Rul. 66-338; Rev. Rul. 70-244

Full text (IRS public release)

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

Date:
May 9, 2019
Employer ID number:

Number: 201931009
Release Date: 8/2/2019

Contact person/ID number:

Contact telephone number:

Form you must file:

UIL: 501.06-00

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,

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:

March 1, 2019
Employer ID number:

Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:

Y = date 501.06-00
Z = state

Dear

We considered your application for recognition of exemption from federal income tax under Internal Revenue
Code (IRC) Section 501(a). We determined that you don’t qualify for exemption under IRC Section 501(c)(6).
This letter explains the reasons 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 in Z on Y. Your Articles of Incorporation state your purpose is to assist in the growth of
small and medium sized businesses.

Per Form 1024, you will hold weekly meetings of members to refer each other business — a business referral
group. You aim to inform and educate each other about each other’s business, support each other’s business
endeavor to improve each other’s business by means of interaction and learning about each other’s business,
practices and expertise required to conduct said business. Holding weekly meetings with members will improve
member businesses thereby improving the business community and environment in which members conduct
business. Weekly breakfast meetings will be held at a local restaurant and led by members and/or your board of
directors. Occasionally meetings will be held in the evenings as mixers. The only qualification for membership
is being a decision maker for a business, however, only one member of each profession is allowed to be a
member at any one time. You did not specify any region or area from which members are selected. Members
are required to pay initiation and quarterly dues.

We requested you describe the common business interest of your membership, and how you promote and
improve this interest. In response you stated that your common business interest is being a collection of
independent business owners networking with one another. As each member sees opportunity, they are looking
to refer business to a fellow member for the benefit of that business. You indicated that your networking group
is in itself completely non-profit, however, the hope is that the referrals you give one another lends to each
business’ success.

Law

Section 501(c)(6) of the Code provides that organizations organized as business leagues, chambers of
commerce, real-estate boards, boards of trade, or professional football leagues (whether or not administering a
pension fund for football players), not organized for profit and no part of the net earnings of which inures to the
benefit of any private shareholder or individual may be exempt from federal income tax.

Treasury Regulation Section 1.501(c)(6)-1 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 59-391, 1959-2 C.B. 151, held that an organization composed of individuals, firms,
associations and corporations, each representing a different trade, business, occupation or profession whose
purpose is to exchange information on business prospects has no common business interest other than a mutual
desire to increase their individual sales. The activities are not directed to the improvement of one or more lines
of business, but rather to the promotion of the private interests of its members and is not exempt under Section

501(c)(6) of the Code.

Revenue Ruling 66-338, 1966-2 C.B. 226, held that an organization formed to promote the interests of a
particular retail trade which advises its members in the operation of their individual businesses is not exempt
from federal income tax under Section 501(c)(6) of the Code. By enabling members to more easily secure
consultation services, supplies and equipment, the organization is providing members with an economy and
convenience in the conduct of their individual businesses that would not have been available if they had to
secure them on an individual basis.

In Revenue Ruling 70-244, 1970-1 CB 132, the organization's membership consists of business and
professional persons in the community. Its articles of incorporation state it was formed to bring together
members and their guests to exchange ideas for improving business conditions within the community. It does
not have any specific program directed to the improvement of business conditions in the community. Since this
organization has no program designed to improve business conditions of one or more lines of business, it is held
that the organization is not exempt from federal income tax under Section 501(c)(6) of the Code.

Application of Law

You are not described in Treas. Reg. Section 1.501(c)(6)-1 because the facts show you are not formed to
promote the common business interest of a particular industry or trade; rather, you address the concerns and
promote the interests of your members. This is done through networking and providing business referrals to
each other. When asked, you stated the only common interest between members is that of being a collection of
independent, local business owners. Since you have no program designed to improve business conditions along
one or more lines of business, it is held you are not exempt under Section 501(c)(6) of the Code.

Like the organization in Revenue Ruling 59-391, you are an association comprised of pre-screened non-
competing companies, represented by individual owners whom you have selected as the best representatives for

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K


3

their industry. This is evident in that only one member of each profession is allowed at one time. Your members
provide leads to other members. You develop strong interactive relationships among your members by working
with one another to exchange new business opportunities. You facilitate leads among your members at your
weekly meetings. Your activities are not directed to the improvement of one or more lines of business, but
rather to the promotion of the private interests of your members.

You are similar to the organization in Revenue Ruling 66-338 which promoted the interests of a particular retail
trade by advising its members in the operation of their individual businesses. This provided members with an
economy and convenience in the conduct of their individual businesses that would not have been available if
they had to secure them on an individual basis. You conduct weekly meetings with your members to interact
and refer business in hopes of improving business sales for each other. As members see opportunity, they look
to refer business to a fellow member for the benefit of that business. Your hope is this networking group will
lend to each business’ success. This not only is performing particular services to members through networking
but is also an activity of only looking to promote each member business rather than benefitting any particular
industry as a whole.

You are similar to the organization in Revenue Ruling 70-244 in that you do not have any specific program
directed to the improvement of business conditions in the community. You have described your activities as
weekly meetings of members to refer each other business. While you have stated these meetings will improve
the business community, you did not specify any region or area from which members are selected or any
connection members have to any particular locality. Since you have described no programs designed to improve
business conditions of one or more lines of business, but instead networking opportunities for members, you do
not qualify under Section 501(c)(6) of the Code.

Conclusion

Based on the above facts and law, we conclude you do not qualify for exemption under Section 501(c)(6) of the
Code. Your activities are not directed to the improvement of business conditions of one or more lines of
business nor do you share any common business interest. Rather, your activities and purposes are directed at
the improvement of your members’ businesses. Accordingly, you do not qualify for exemption as an
organization described in Section 501(c)(6).

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.

If you don't agree

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

• Your name, address, employer identification number (EIN), and a daytime phone number
• A statement of the facts, law, and arguments supporting your position

• A statement indicating whether you are requesting an Appeals Office conference

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K


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

• The following declaration:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I have examined this request, or this modification to the
request, including accompanying documents, and to the best of my knowledge and belief, the request
or the modification contains all relevant facts relating to the request, 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 they haven’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 gave us a basis to reconsider our determination. If so,
we’ll continue to process your case considering the information you provided. If you haven’t given us a basis
for reconsideration, we’ll send your case to the Appeals Office and notify you. You can find more information
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 later because the
law requires that you use the IRC administrative process first (IRC Section 7428(b)(2).

Where to send your protest
Send your protest, Form 2848, if applicable, 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
Mail Stop 6403 550 Main Street, Mail Stop 6403

P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

You can also fax your protest 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 they received it.

You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-
pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at
the top of this letter.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K


Contacting the Taxpayer Advocate Service
The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your

taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or if you’ve tried but haven’t
been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS
will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K