202050016: IRS denies 501(c)(6) business-league status to a standards-licensing consortium

Plain-English summary

A member-based organization that develops an open technical standard (for
exchanging video and metadata formats) and licenses it to its members
applied to be recognized as a tax-exempt "business league" under Code
§ 501(c)(6). The IRS denied the application. A business league must
promote the common business interest of an industry, not run a regular
for-profit-type business or perform particular services for individual
members. The IRS found this organization creates and exclusively licenses
valuable intellectual property to a limited, board-approved membership for
tiered fees, giving those members a competitive edge over non-members, who
cannot use the standard at all. That put it squarely within Bluetooth SIG,
Inc. v. United States (a standards body that licensed a wireless protocol
and was held not exempt) and Rev. Rul. 56-65 (specialized services to
individual members), rather than improving business conditions across a
line of business. This is the final adverse determination (the proposed
denial became final when no protest was filed).

Ruling snapshot

• Question: Does a consortium that develops and exclusively licenses a
  technical standard to its members qualify as a § 501(c)(6) business
  league?
• Outcome: Denied (final adverse determination)
• Key authorities: IRC § 501(c)(6); Treas. Reg. § 1.501(c)(6)-1;
  Rev. Rul. 56-65; Bluetooth SIG, Inc. v. United States, 611 F.3d 617
  (9th Cir. 2010); American Plywood Ass'n v. United States, 267 F. Supp.
  830 (W.D. Wash. 1967)

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Date: September 15, 2020

Tax Exempt and Government Entities

Employer ID number:
IRS P.O. Box 2508
Cincinnati, OH 45201
Form you must file:
Tax years:
Person to contact:
Name:
Number: 202050016
ID number:
Release Date: 12/11/2020
Telephone:

UIL: 501.06-00, 501.06-01

Dear

This letter is our final determination that you don't qualify for exemption from federal income tax
under Internal Revenue Code (IRC) Section 501(a) as an organization described in 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 the federal income tax forms for the tax years shown above within 30 days from
the date of this letter unless you request an extension of time to file. For further instructions,
forms, and information, visit www.irs.gov.

We'll make this final adverse determination letter and the proposed adverse determination letter
available for public inspection after deleting certain identifying information, as required by IRC
Section 6110. 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 call the contact person shown above. If you have
questions about your federal income tax status and responsibilities, call our customer service
number at 800-829-1040 (TTY 800-829-4933 for deaf or hard of hearing) or customer service for
businesses at 800-829-4933.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Notice 437
Redacted Letter 4034
Redacted Letter 4038

Letter 4038 (Rev. 5-2020)
Catalog Number 47632S


Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201

Date: July 15, 2020

Employer ID number:
Contact person/ID number:
Contact telephone number:
Contact fax number:

Legend:                              UIL:
B = State                            501.06-00
C = Date                             501.06-01
D = Number
E = Number
F = Number
G = Number
H = Names
v dollars = Amounts
w dollars = Amount
x dollars = Amount

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 on date C under the laws of state B.

Your Articles of Incorporation state you are operated as a member organization for the development and
implementation of an open standard to enable the exchange of formats among members.
Prior to your existence, the industry was using a variety of formats. You were established
to improve the industry through the adoption of one standard/format. To accomplish this,
you are building standards to be licensed to your membership which allow video and metadata to be used across
different applications. These standards which use software provide your members with a
format/language for applications that are used by your members' respective customers who produce or consume
content. Specifically, the standards that you develop and provide to your members allow your
members to build "common language" software products for the industry.

Early on, it was decided that to grow the market, you would provide these standards under a not-for-profit
license, and to allow other vendors to use the information to generate new products for customers, which
would help the market grow. You said you chose to license the technology and protect these standards because
you did not want the standards to be enhanced or made proprietary by a third party, thus hurting the original
intent. You also emphasize that you are the custodian and caretaker of the standards for the ;
industry.

You promote your membership through word of mouth or through your website. You have D Founding
members who invested significant time and money into your purpose. There are no fees or annual dues for these
members. There are also three other classes of membership who pay dollars in annual dues in
the range of v dollars. These consist of the:

• Tier 1 membership: This allows participating corporations to participate the development of existing
standards and work with you to develop new standards. These members are responsible for the election of
your managing directors. There are E Tier 1 members who pay a onetime membership fee of w dollars.

• Tier 2 membership: This allows the licensed technology to be used with any member products, and
effectively is a technology license. If membership lapses, existing products may continue to be shipped.
However, any changes to the licensed technology may not be applied to those existing products. New
products may not be announced which incorporate the licensed technology without a current Tier 2
membership. There are F Tier 2 members who pay a onetime membership fee of x dollars.

• Tier 3 membership: This allows corporations that have an interest in the development of standards used to
propagate the interchange of rich media (video, audio, metadata) between organizations, but may not have
a direct use for the technology and do not wish to actively participate at the Tier 1 level. However,
corporations can participate in more than one membership. There is no one time membership fee. And
there are F Tier 3 members.

In addition, founding members are automatically Tier 1 and Tier 2 members. Your Tier 1 members are
responsible for electing your Board of Directors who must approve your prospective members. There have
been G new members approved by your board since your inception. Moreover, your Board of Directors may
remove a member for cause which includes but is not limited to:

• Breach of any applicable confidentiality obligations to you or members; and/or
• Violation of any license agreement with you or a member.

Your income is derived from the onetime membership fee and annual dues. Your expenses are for development
and website maintenance.

You wrote that non-members indirectly benefit by using the universal format. For example, the creation of this
universal format allows non-members like H to readily access the video/metadata produced by your members'
products. Your latest correspondence stated if a business in the ; industry
would like to use the standards created/adopted/or set by you, they would need to become a member. Non-
members cannot use your standards.

Furthermore, your website states that you are a collaborative group who build and license technology, enabling
cooperation between processors and consumers. You are guided by your membership to develop
and constantly improve uniform standards.

You also have direct links on your website to your founders' specific products developed from the technology
you have developed.

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 defines a business league as an association having a common
business interest, whose purpose is to promote the common business interest and not to engage in a regular
business of a kind ordinarily carried on for profit. Its activities are directed to the improvement of business
conditions of one or more lines of business rather than the performance of particular services for individual
members. An organization, whose purpose is to engage in a regular business of a kind ordinarily carried on
for a 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.

Rev. Rul. 56-65, 1956-1 C.B. 199 held that a local organization whose principal activity consisted 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, was performing particular services for individual persons. Such organization was
not entitled to exemption under IRC Section 501(c)(6), even though it performed functions that are of
benefit to the particular industry and the public generally.

In Bluetooth SIG, Inc., v. United States, 611 F.3d 617 (9th Cir. 2010), the Ninth Circuit Court of Appeals held
that an association that owned and marketed a wireless networking protocol and trademark was not exempt
under IRC Section 501(c)(6) because it engaged in a business ordinarily conducted for a profit since it
licensed intellectual property to its members as evidenced on how its membership fees were set. The court
also recognized, that the organization did not improve the conditions of one or more lines of business, and
it provided particular services for members.

Additionally, the court cited the District Court's discussion of the differences between Bluetooth and
American Plywood Association v. United States, 267 F. Supp. 830 (W.D. Wash. 1967), finding that:

[T]he product in American Plywood was something the members were already selling to begin
with; the product here is something the members banded together to create. Thus, the collective
enterprise of the Association derives from the fact that it has created a thing of value, which its
members can then use to enhance the value of the products they sell.

Application of law

You are not described in IRC Section 501(c)(6) and in Treas. Reg. Section 1.501(c)(6)-1 because you are
engaged in a business ordinarily conducted for a profit. For example, you are developing and
implementing an open standard to enable the exchange of format among your members. You
will license the standard exclusively to your members for fees depending on their membership level.

Further, your board of directors must approve new member applications and has only approved a small
number (G) of new member applications since your inception. You also have direct links on your website to
your founders' specific products using the standards that you have developed and have licensed to them. This
shows that your activities are not directed toward the improvement of business conditions of one or more
lines of businesses but rather this is the performance of particular services for a select group of individual
members. Your services also provide your limited membership a competitive edge over non-members.

You are like the organization described in Rev. Rul. 56-65, 1956-1 C.B. 199. Your primary activity is to
provide services to your individual members through the development of a specific standard. Your
members also may participate in the direction of further development of the standard. Such
participation allows the members to maximize the economy of the standard to their individual business
needs which precludes exemption under IRC Section 501(c)(6).

You are similar to the organization described in Bluetooth SIG, Inc., v. United States, 611 F.3d 617 (9th Cir.
2010). For example, you engage in a regular business of the kind ordinarily carried on for a profit
because your purpose is to develop and promote a specific standard which you license exclusively to
your Tier 1 and Tier 2 members. In addition, you are providing services to your individual members as
evidenced by the fact that you have direct links on your website to your founders' specific products using the
standard that you have developed and have licensed to them. Furthermore, you are operating like a
collective enterprise because you have created a thing of value, which your members can then use to their
competitive advantage when creating and marketing their products.

Conclusion

Based on the information provided, you are not operated as a business league described in IRC Section
501(c)(6). You are engaged in a business ordinarily conducted for a profit. You are not operated to improve
the conditions of one or more lines of business, but you are providing particular services to members.

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:

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