IRS denies business-league status to a cooperative retail gallery

Plain-English summary

A member organization operated a seasonal retail gallery that sold members' handcrafted goods, retained part of the proceeds, and paid the remainder to each seller. It also provided bookkeeping, advertising, display space, and other services, while requiring members to work shifts and help operate the gallery. The IRS found that these activities resembled a regular for-profit retail business and provided particular services to individual members rather than improving conditions for a line of business as a whole. Community events did not change the organization's primary operation. After no protest was filed, the IRS finalized its denial of exemption as a business league under IRC § 501(c)(6).

Ruling snapshot

• Question: Does the cooperative retail gallery qualify as a tax-exempt business league under § 501(c)(6)?
• Outcome: Denied
• Key authorities: IRC § 501(c)(6); Treas. Reg. § 1.501(c)(6)-1; Rev. Rul. 65-14; Rev. Rul. 66-338

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
PO Box 2508
Cincinnati, OH 45201

Number: 202103016
Release Date: 1/22/2021
Date: October 27, 2020

UIL: 501.06-01, 501.06-02

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

Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201
Date: August 25, 2020

Employer ID number:

Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:

B = State 501.06-01
C = Date 501.06-02
D=Name

E = Name

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 in the state of B on C by a group of local and in order to:

1. Promote the work of local and people.
2. Help develop a tourist market as well as develop a local market for your members.
3. Promote E county.
4. Help promote the local community by organizing and/or supporting community activities.

You are operating as a cooperative to market your members handcrafted items. Specifically, you provide a
facility for your members to sell their products under the name D that operates as a retail gallery, is opened
daily for several months during the year, and is typically closed during the winter months. Concerning items
sold, you retain % of the proceeds, while the member retains the remainder. Further, you provide book
keeping services for your members and advertising as well as promote your activities through local events
which you stated ultimately benefits your members.

Your members consist of and who wish to sell their products at D. To become a member,
your Executive Board will jury the work of new members and make recommendations to the general
membership who will vote on whether to accept them. Membership dues are x dollars. The initial joining fee
will also be x dollars and will count for the first year’s dues.

All accepted members are required to participate in the operation of D. Specifically, members:

• Must sign up for a designated number of shifts at the beginning of the new season and are
responsible for working their shifts or finding a replacement;

• Are expected to serve on committees, to help with cleaning, to set up store displays and to help
with other projects as designated by your membership;

• Are responsible for labeling their own merchandise, for keeping track of their inventory and for
maintaining quality merchandise.

If members do not comply with working their shifts, your Executive Board will notify them in writing that they
have one week to complete their projected schedule or schedule a meeting to discuss a hardship arrangement.
Those who do not comply with these requirements, will be notified in writing that they are terminated from
participating for that season and they will be notified to immediately remove their merchandise.

You are governed by an Executive Committee, consisting of your President, the Vice President, Two Co-
Treasurers, and the Secretary. The Co-Treasurers are responsible for keeping cooperative books including
gallery financial records; paying bills; teaching members how to handle store operations, recording and making
deposits; determining money splits for members; and, writing checks to members the first week of the month

for the previous month’s sales.

Additionally, you are supported by commissions from members products sold through D, donations, and
membership fees. Expenses are for facility maintenance, advertising, insurance, equipment, and supplies.

Besides operating the gallery, you help with the community celebration which helps bring tourists to
your community and into D where your members products are available for sale. You also hold an annual
Christmas party for children open to all in the community.

Finally, your bylaws indicate that you have the option to decline work submitted by members, or to refuse work
from potential members for the following reasons:

• The items are of poor quality and construction;
• The items are identical to the work of other members;
• The items are clearly produced from mass marketing kits

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 Regulations 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 65-14, 1965-1 C.B. 236 describes an organization formed to promote the tourist industry in its
area and whose principal activity is publishing a yearbook consisting largely of paid advertisements for its
members. The organization was not entitled to exemption under Section 501(c)(6) of the Code because its
principal activity was considered the performance of particular services to individual members of the
organization, rather than an activity aimed at the improvement of general business conditions.

Revenue Ruling 66-338, 1966-2 C.B. 226 describes an organization formed to promote the interests of a
particular retail trade which advises its members in the operation of their individual businesses and sells
supplies and equipment to them. The organization is not exempt under IRC Section 501(c)(6) because its
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.

Application of law

To be exempt under IRC Section 501(c)(6), your activities must be directed to the improvement of business
conditions of one or more lines of business, and not inure to the benefit of any private shareholder or individual.
You primarily operate a cooperative art gallery, D, where members receive 80% of the proceeds of the items
they sell. As a condition of membership , members must also work a specific number of shifts in the gallery or
lose the right to display and sell merchandise. They are also required to serve on committees. By operating in
this manner, you are engaged in a regular business of a kind ordinarily operated on a for profit basis which is in
contravention to Treas. Reg. Section 1.501(c)(6). You are also rendering particular services including
advertising and book keeping services for individual persons rather than promoting the general business
conditions of a particular line of business.

Similar to the organization described in Revenue Ruling 65-14, you are primarily engaged in the performance
of particular services to your individual members. For example, you provide retail gallery space for your
members to sell their products, keep books and records and write them commission checks, as well provide
advertising of their products. This precludes exemption under IRC Section 501(c)(6).

You are similar to the organization described in Revenue Ruling 66-338. You are providing members suitable
gallery space, book keeping services and advertising. These services provide your members with an economy and
convenience in the conduct of their individual businesses. Furthermore, these facts show you are providing
particular services for your individual members as distinguished from activities aimed at the improvement of
business conditions in their trade as a whole.

Conclusion
Based on the information provided, we conclude that you are not operated as a business league described in IRC

Section 501(c)(6). Your operations are substantially similar to those of a for profit business and you provide
particular services to members as well provide a convenience to members. Therefore, 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
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