Internet exchange point denied business-league exemption

Plain-English summary

A nonprofit internet exchange point sought exemption as a business league under section 501(c)(6). It connected members to shared switching infrastructure for internet traffic exchange and route peering, charging service-based fees that covered the equipment and operating costs. Those services improved members' network performance, reduced latency and broadband delivery costs, and increased network redundancy. The IRS concluded that the organization primarily performed paid technical services for individual members, a type of activity ordinarily carried on for profit, rather than improving the business conditions of an industry as a whole. It therefore denied exemption under section 501(c)(6).

Ruling snapshot

• Question: Does an internet exchange point that provides fee-based peering and technical services to members 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. 56-65; Rev. Rul. 66-338; Rev. Rul. 71-175; Indiana Retail Hardware Ass'n, Inc. v. United States

Full text (IRS public release)

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

Date:
January 14, 2020
Employer ID number:

Number: 202015025
Release Date: 4/10/2020

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

Tax years:

UIL Number: 501.00-00, 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
P.O. Box 2508
Cincinnati, OH 45201
Date:
November 21, 2019

Employer ID number:

Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:

B = State 501.00-00

C = Date 501.06-00
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 were incorporated in the state of B on C. Your Articles of Incorporation state that you were formed
specifically to aid, support, and assist the facilitation of physical and internet protocol interconnection and the
efficient transmission of educational, scientific, medical, and other information and communications by creating
and maintaining direct communications interconnections between and among members, and between and
among members and internet access service providers.

You said your most important activity is facilitating the exchange of internet traffic among and between
members. This activity will consist of soliciting members, establishing membership agreements, activating
member ports on the exchange equipment, establishing efficient routing of traffic, and maintaining the ongoing
exchange of traffic across the exchange platform. The purpose of this exchange of internet traffic is to increase
the efficiency and performance of member networks, reduce operating costs for broadband service delivery by
members, and increase the survivability of internet access in the region. This activity will constitute
approximately percent of all of your activities.

You operate an internet exchange point (IXP) through which you provide connections to a common switching
fabric for Border Gateway Protocol (BGP) route peering along with other associated technical services to your
members. BGP route peering at the IXP increases the redundancy in the members’ networks, improves user

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

2

experience by reducing latency when accessing content at the IXP or on another member’s network, and
provide the opportunity to lower a member’s operating expense by moving traffic off their internet transit
connections.

Besides operating the IXP, you co-organize and participate in an annual event for those interested in network
peering. You help plan, organize, and host this event by securing a venue, facilitating registrations, and securing
guest speakers from industry, government, and nonprofits to present on topics of current interest.

Per your service contract, members shall select at least one service option and pay the corresponding fee. Host
sites may charge additional cross-connect or access fees for physical port connections. Members will be charged
quarterly fees and a one-time fee based on the type of service they request. Members share in the cost of
providing and maintaining the IXP's switching fabric and point of presence (PoP), along with other costs
associated with your operations.

Per your membership agreement, your goals include sharing resources and information, providing aggregate
services, fostering collaboration among members, and providing technical resources to support economic and
workforce development within your region. Participant members must meet various technical requirements to
connect to the IXP as defined in your Service Agreement. Parties that would like to become members but not
participate in the IXP may become affiliate members but have no voting rights in the election of board
members.

Your current members are ISPs, content providers, a large research and education focused network, and
nonprofit organizations interested in improving the internet efficiencies, access and availability though
education and interconnection of networks.

Most of your revenue is derived from member fees, with the remainder from educational events. Your biggest
expense is for equipment space rental.

Law
IRC Section 501(c)(6) 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 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 56-65, 1956-1 C.B. 199, denied exemption to a local organization whose principal activity
consisted 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. These services include, but not limited to, promoting efficiency among members by

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

3

producing a publication that provides a list of specific projects from whom bids and quotations may be obtained
by members.

Rev. Rul. 66-338, 1966-2 C.B. 226, describes a nonprofit organization formed to promote the interests of a
particular retail trade. Field representatives of the organization call on the members to consult with them and
advise them on their individual business problems. The activities provide the members of the organization with
an economy and convenience in the conduct of their individual businesses by enabling them to secure supplies,
equipment, and services more cheaply than if they had to secure them on an individual basis. Therefore, these
activities constitute the performance of particular services for individual persons as distinguished from activities
aimed at the improvement of business conditions in their trade as a whole. Consequently, the organization was
denied exemption under IRC Section 501(c)(6).

Rev. Rul. 71-175, 1971-1 C.B. 153, ruled on a nonprofit organization whose principal activity was the operation
of a telephone-answering service for member doctors. Providing a telephone-answering service the organization
relieved the individual members of securing this service commercially, resulting in a convenience or economy
in the conduct of the medical practice of its individual members. Therefore, the organization was rendering
particular services for individual persons as distinguished from the improvement of business conditions in the
medical profession and public health area generally. Thus, the organization was not exempt under IRC Section
501(c)(6).

In Indiana Retail Hardware Asso., Inc., v. United States, 177 Ct. Cl. 288 (1966), 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 IRC Section 501(c)(6).

Application of law

You are not a business league as described in IRC Section 501(c)(6) and Treas. Reg. Section 1.501(c)(6)-1
because your activities are not directed to improving business conditions of one or more lines of business as
defined under this subsection. Rather, you are formed to provide particular services to your members for a fee.
You engage in a regular business of the kind ordinarily carried on for profit in that you provide specific services
that would otherwise be necessary for each individual member to conduct on their own or through another
entity.

Like the organization described in Rev. Rul. 56-65, you provide services to your members for a fee. You are
also analogous to the organization described in Indiana Retail Hardware Asso., Inc., which failed to qualify for
exemption under IRC Section 501(c)(6) because conducting services for members was a substantial activity.
Because your primary activity is providing a service for your members, you are not exempt under Section
501(c)(6).

Similar to the organizations described in Rev. Rul. 66-338 and Rev. Rul. 71-175, you were formed to provide
an economy and convenience to your members in the performance of individual businesses. Your purpose is to
increase the efficiency and performance of member networks, reduce operating costs for broadband service
delivery by members, and increase the survivability of internet access in the region. Through your subscriber
agreement, you are providing services for the economy and convenience of your members, and not for the
overall improvement of a line of business. Therefore, exemption under IRC Section 501(c)(6) is precluded.

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

Conclusion

Your activities are not directed toward the improvement of business conditions of one or more lines of
businesses, or any other purpose defined in IRC Section 501(c)(6). You provide a service for a fee for your
members for their convenience and economy. 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

• 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)).

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

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.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

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