Business referral group denied business-league exemption

Plain-English summary

An unincorporated association of professionals sought exemption as a business league under section 501(c)(6). Its members met weekly to learn about one another's businesses, exchange referrals, and track resulting transactions. Membership was limited to one person from each profession, which kept members from competing with one another inside the group. The IRS found that these activities promoted the private sales interests of individual members rather than improving conditions in any line of business. It therefore denied exemption because the group performed particular services for members and lacked a program benefiting an industry or trade as a whole.

Ruling snapshot

• Question: Does a professionals' 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. 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:
January 16, 2020

Number: 202015020 Employer ID number:

Release Date: 4/10/2020

Contact person/ID number:
Contact telephone number:
Form you must file:

Tax years:

UIL Number: 501.06-00, 501.06-01

Dear

This letter is our final determination that you don’t qualify for tax-exempt status under Internal Revenue Code
(IRC) Section 501(c)(6). 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 IRC Section 6110) 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
P.O. Box 2508
Cincinnati, OH 45201
Date:

November 6, 2019
Employer ID number:

Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:
Y = Date 501.06-00
Z = State 501.06-01

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 IRC Section 501(c)(6)? No, for the reasons stated below.

Facts

You formed as an unincorporated association in Z on Y to assist member business owners with networking and
business referrals. You are a group of professionals who meet weekly to help generate business for each
another. You likened your activities to those of a chamber of commerce or business league in that you
organized with the common business interest of helping member businesses grow.

You have one membership class that is available for anyone in business or representing a business, but you

restrict membership to one person per profession. You limit your memberships in such a way to keep your
group exclusive.

Your members are required to learn about the other professional classifications within your membership.
Members use meeting time to describe their businesses to the other members and explain how other members
can provide referrals. Referral cards and business transactions are tracked, and reporting will be provided to the
group on a regular basis.

You provide your members with member-to-member slips to be used when a member requests a private

meeting to learn the details of a member’s professional classification outside of your scheduled meetings. You

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

2

also provide members with referral slips, which are completed when a member provides a referral to a fellow
member. Slips are submitted at the next scheduled meeting.

Law

IRC Section 501(c)(6) provides for the exemption from federal income tax of 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.

Treasury Regulation Section 1.501(c)(6)-1 provides 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 IRC
Section 501(c)(6).

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 IRC Section 501(c)(6). 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 consisted of business and
professional persons in the community. It was formed to bring together members and their guests to exchange
ideas for improving business conditions within the community. It did not have any specific program directed to

the improvement of business conditions in the community. Since the organization had no program designed to

improve business conditions of one or more lines of business, it was held not to qualify as exempt from federal
income tax under IRC Section 501(c)(6).

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 promote the interests of your
members. This is done through networking and providing business referrals to each other. Since you have no
program designed to improve business conditions along one or more lines of business, you do not qualify under
IRC Section 501(c)(6).

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

3

Like the organization in Revenue Ruling 59-391, you are an association composed of individuals in non-
competing professions. This is evident in that only one member of each profession is allowed at one time. Your
members provide referrals to other members. 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. 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. Since you conduct no programs designed to improve
business conditions of one or more lines of business, you do not qualify under IRC Section 501(c)(6).

Conclusion

Based on the information provided, you fail to qualify for exemption under IRC Section 501(c)(6) because you
provide services to your members that further their private interests and are not directed toward the
improvement of business conditions of one or more lines of business. Accordingly, you do not qualify for
exemption under IRC 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

• 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

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

4

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.

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.

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

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

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