Healthcare investor group denied business league exemption

Plain-English summary

A membership organization of accredited healthcare investors sought exemption as a business league under section 501(c)(6). It screened healthcare startups, selected companies to present at investment meetings, and connected entrepreneurs with members who could choose to invest. The IRS concluded that these activities primarily gave individual members access to investment opportunities and related services instead of improving business conditions for an entire industry or trade. The possibility that successful healthcare startups might benefit society did not change the particular-service character of the organization's work. After the organization did not protest the proposed denial within 30 days, the IRS made the adverse determination final.

Ruling snapshot

• Question: Did the healthcare investor membership organization qualify as a tax-exempt business league under section 501(c)(6)?
• Outcome: denied (its activities primarily provided particular services and economic benefits to individual members)
• Key authorities: IRC § 501(c)(6); Treas. Reg. § 1.501(c)(6)-1; Rev. Rul. 56-65; Produce Exchange Stock Clearing Association v. Helvering, 71 F.2d 142 (2d Cir. 1934); MIB, Inc. v. Commissioner, 734 F.2d 71 (1986)

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
IRS P.O. Box 2508
Cincinnati, OH 45201
Date: February 4, 2020
Number: 202018008
Release Date: 5/1/2020 Employer ID number:

UIL: 501.06-00, 501.06-01, 501.06- Contact person/ID number:

Contact telephone number:

Form you must file:

Tax years: All

Dear Applicant:

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: December 3, 2019

Employer ID number:

Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:

B= State 501.06-00
C= Name 501.06-01
D= Name 501.06-02
E= Name

F= Date

G= Number

x dollars= Amount
y dollars= Amount
z dollars= Amount

Dear

We considered your application for recognition of exemption from federal income tax under IRC Section .
501(a). We determined that you don’t qualify for exemption under IRC Section 501(c)(6) of the Code. 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 on F under the laws of B. Your Articles of Incorporation state you are established to
support healthcare startup companies by helping them develop their clinical concepts into viable business
opportunities. Your goal is to support promising companies in the health care industry by providing them access
to financial assistance as well as access to clinical advice and clinical study design, including access to pilot
studies at affiliated institutions.

You will accomplish your purpose through your membership which is composed of health care professionals
including physicians, healthcare entrepreneurs, executives, and others in healthcare dedicated to supporting
healthcare startup companies. All members must be accredited investors as defined by the SEC; generally, to be

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

2

an accredited investor in the United States, one must have a net worth of at least x dollars, excluding the value
of one's primary residence, or have income at least y dollars each year for the last years (or z dollars
combined income if married) and have the expectation to make the same amount this year. Members must also
have meaningful experiences in life science operations and investing. Your board of directors will select
individuals to become members. Furthermore, only members of your board of directors will have the right to
vote on organizational matters.

In order to receive assistance from you, interested startup companies must provide you an in-depth business
plan with detailed budgets through a link on the C website where applicants enter details on the due diligence
worksheet about their company for funding and technical consideration.

To review each startup company’s information, you will appoint a screening committee who will consider
relevant factors including but not limited to the experience of the entrepreneurial team, the clarity of the
entrepreneur's business plan, the market potential and the company's competitive advantages it believes are
relevant in its discretion in making a determination on whether to advance an entrepreneur to the members.

The screening committee will then select up to G startup companies to present to the members at a regularly
scheduled investment meeting. Questions from each member in regard to the company may be directed to the
entrepreneur or the screening committee and each member will determine their interest in investment in a
company in their sole and absolute discretion. If a member is interested in pursuing an investment opportunity,
they will be responsible for conducting such diligence as they deem appropriate. The exact amount of an
investment and the terms of such investments will be determined between the entrepreneur and the individual

member making the investment.
You promote your activities on your website. Some phrases on your website include you:

• Bring clinical expertise, connections, knowledge, mentoring, and operational assistance to bold early-
State entrepreneurs with game-changing ideas;
Allow startups to raise smart capital from strategic partners;
Are actively seeking great healthcare startups to fund;
Support healthcare innovation by connecting healthcare entrepreneurs with physician investors.

Your website also solicits for potential sponsors and states that “our founding sponsors are D and E.” D is the
premier banking organization for startups and early stage venture capital firms in the country and E is a venture
capital-oriented law firm with a national presence.

You are supported by membership dues. Member volunteers conduct your activities.

Law

IRC Section 501(c)(6) provides exemption from federal income tax for “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.”

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

3

Treasury Regulation Section 1.501(c)(6)-1 states, “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 the 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, holds that a local organization whose principal activity consists of
furnishing particular information and specialized individual services to its individual members engaged in a
particular industry, through publications and other means to effect economies in the operation of their individual
businesses is performing particular services, for individual persons. Such organization, therefore, is not entitled
to exemption under Section 501(c)(6) of the Code as a business league even though it performs functions which
are of benefit to the particular industry and the public generally.

In Produce Exchange Stock Clearing Association v. Helvering, 71 F.2d 142 (2nd Cir. 1934), the Second Circuit
held that there was no reason apparent for granting exemption as a business league to a clearing house
association that served each member as a convenience or economy in his business by providing facilities for
dealings in securities and commodities. The court found that nothing was being done by the organization to
advance the interests of the community or to improve the standards or conditions of a particular trade, and that
the purpose of the organization was to provide a business economy or convenience for individual traders. In
denying the exemption under section 103 of the Revenue Act of 1928 (predecessor statute to Section 501(c)(6)
of the Code), the court explained that merely serving as a convenience to members is not a characteristic shared
by the entities listed in the statute.

In MIB, Inc. v. Commissioner of Internal Revenue, 734 F.2d 71 (1986), an organization whose membership
consisted of insurance companies was denied exemption as a business league under IRC Section 501(c)(6) of the
Internal Revenue Code. The principal activity carried on by MIB was the maintenance and operation of a
computerized system for compiling, storing and distributing information about applicants for life insurance. MIB
argued that its activities created a deterrent to fraud which created benefits to the industry through reduced
investigation expenses and reduced losses due to misclassification of applicants. The Court held MIB’s activities by
their nature consisted of rendering particular services for individual member companies and served to benefit the
individual members’ businesses. The Court also stated that even though the services produced various indirect and
intangible benefits for the industry as a whole, the fact remained that the rendered services were in form and
substance particular services for individual member companies.

Application of law

You are not described in IRC Section 501(c)(6) and in Treas. Reg. Section 1.501(c)(6). The main focus of your
activities is to provide lucrative business opportunities in health care startups for individual members. For
example, startup companies apply for funding through your website. You have a screening committee who will
choose up to G startup companies to present to your members at your investment meetings. The members will
decide if they wish to invest in these companies. These facts indicate you are not primarily operating to promote
the common business interests of a particular industry or trade, but rather you are operated for the economic
benefit of your individual members.

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

You are like the organization described in Rev. Rul. 56-65. You are providing specialized services to members
who are accredited investors in order to help them find lucrative investments. Even the business services you
provide to startup companies have the goal of helping your members maximize their individual investments.
This precludes exemption under IRC Section 501(c)(6).

You are like the organization in Produce Exchange Stock Clearing Association v. Helvering. You are not
primarily advancing the interests of the community or improving the standards of a particular trade, but rather
you are providing services to members for their economic convenience. These include conducting screening
activities on potential companies that members may invest in as well as providing a forum for these startup
businesses and members to meet. Therefore, you do not meet IRC Section 501(c)(6).

You are also similar to the organization described in MIB, Inc. v. Commissioner of Internal Revenue, 734 F.2d 71
(1986) You believe that promoting investment in health care startups will benefit society as a whole. Like the
organization in the court case, the fact that society may receive some benefits does not negate the fact that in form
and substance, your activities constitute particular services to your members.

Your position

You stated that you are an association of persons who have a common interest of guiding, advising, and
mentoring healthcare startups. The purpose of the quarterly meetings is to review companies and provide
strategic guidance that can promote company development, guide the company on fundraising, and ultimately
improve the healthcare industry by providing startups with the tools to come to market. You also indicated your
membership is voluntary and open to members of the healthcare profession with an emphasis on physicians and
that dues will only be charged to sufficiently cover operating expenses.

You also emphasize that no net earnings will inure to the benefit of any individual in your organization. You
further state that your activities, which will take place by your non-paid volunteer members, will lead to the
improvement of business conditions for startups and that such guidance, advice and mentoring will help to
improve the odds of success, given that the majority of startups will fail in the first two years of business.

Our response to your position

You failed to provide any additional information from which it can be concluded that your activities primarily
advance a purpose described in IRC Section 501(c)(6). Furthermore, you did not substantiate how your
activities are directed to the improvement of business conditions within the meaning of Section 501(c)(6). You
are operating for the economic benefit of individual members as explained previously and do not qualify under
Section 501(c)(6).

Conclusion

Based on the facts presented above, we conclude that you do not meet the requirements for tax exemption under
IRC Section 501(c)(6). Your activities are not directed to the improvement of business conditions of one or
more lines of businesses, Rather, your activities consist of rendering particular services to members for their
economic benefit. Therefore, exemption under Section 501(c)(6) is denied.

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

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)).

Where to send your protest

Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address:

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

6

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.

We sent a copy of this letter to your representative as indicated in your power of attorney.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

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