IRS denies § 501(c)(6) business-league status to an angel-investor network

Plain-English summary

An invitation-only angel-investor network applied to be recognized as a tax-exempt
business league under Section 501(c)(6), and the IRS said no. The group recruits
accredited investors as members, screens early-stage companies raising capital, and
holds monthly meetings where members hear pitches, discuss valuations, and then
individually decide whether to invest, with the group also helping members execute and
monitor their investments. The IRS explained that a 501(c)(6) business league must
promote the common business interests of a trade or industry as a whole, not perform
particular services for individual members. Relying on the regulation's specific example
that furnishing information to prospective investors is not a business league, plus a line
of revenue rulings and cases (Produce Exchange, Northwestern Municipal, General
Contractors' Association), the IRS concluded the group's members share no common
business interest beyond increasing their own investment returns, and the services it
provides are a convenience to members that inure to their private benefit. It issued a
final adverse determination denying exemption; the group continues to file Form 1120.

Ruling snapshot

• Question: Does the angel-investor network qualify for exemption under IRC § 501(c)(6) as a business league?
• Outcome: Denied (final adverse determination)
• Key authorities: IRC § 501(c)(6); Treas. Reg. § 1.501(c)(6)-1; Rev. Ruls. 56-84, 58-224, 59-391, 67-182, 70-80, 76-366; Produce Exchange Stock Clearing Ass'n v. Helvering; Northwestern Municipal Ass'n v. U.S.; General Contractors' Ass'n of Milwaukee v. U.S.

Full text (IRS public release)

Transcription note: This determination is a scanned document (final adverse
determination Letter 4038, with the proposed adverse determination Letter 4034
attached). Per the runbook's OCR proofreading duty, obvious scanning misreads
have been corrected to the letter's standard wording; genuinely unreadable spots
are marked [illegible]; blanks where the IRS redacted identifying details are left
as gaps. Wording is otherwise reproduced verbatim.

Department of the Treasury                           Date:
Internal Revenue Service                             January 11, 2022

Tax Exempt and Government Entities                   Employer ID number:
IRS   PO Box 2508
      Cincinnati, OH 45201
                                                     Form you must file:

                                                     Tax years:
Number: 202214015                                    Person to contact:
Release Date: 4/8/2022                                 Name:
                                                       ID number:
                                                       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 Letter 437, Notice of Intention to Disclose - Rulings, and review the two attached letters that show our
proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Letter 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 Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Letter 437
Redacted Letter 4034
Redacted Letter 4038

Letter 4038 (Rev. 11-2021)
Catalog Number 476328

Department of the Treasury
Internal Revenue Service
IRS   PO Box 2508
      Cincinnati, OH 45201

                                                     Date: November 2, 2021
                                                     Employer ID number:
                                                     Person to contact:
                                                       Name:
                                                       ID number:
                                                       Telephone:
                                                       Fax:

                                                     Legend:              UIL:
                                                     B = Date             501.06-00
                                                     C = State            501.06-01
                                                     D = Organization

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 B in C as a membership organization. You have been filing Form 1120, U.S.
Corporation Income Tax Return, since incorporation.

Your mission is to recruit accredited investors to your membership and provide them with angel investing
education and opportunities to individually invest in early stage businesses. You make yourself known to early
stage businesses in your geographic region that are raising capital. These businesses then provide you with their
business plans and financing needs. Your screening committee will review their applications and coach them on
their presentations. Monthly meetings are held for your members to hear the presentations and meet the
business owners. Members can then discuss the business and get multiple points of view about the investment
profile and valuation. If members express an interest, they will join your due diligence committee and
individually decide whether to invest. You will also help your members execute the investment transaction as
well as arrange for periodic updates. Membership is invitation-only.

You are supported by annual membership dues which cover meeting costs, website development and
maintenance, financial analysis of the start-up businesses, and corporate dues to D, an angel investing
association.

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

2

During review of your application, we requested additional information regarding your activities and
membership.

Your mission is promoting investments in startup businesses. You strive to help members make informed
investment decisions for themselves. You state that the vast majority of your activities are geared towards
education, educating members to make better-informed investment decisions through active participation in
learning about startup businesses, their business plans, potential, valuation, and leadership teams. Members
must be accredited investors and willing to invest in startup businesses. They engage in active discussions to
learn more about the startup businesses' management teams, products/services, financing needs, and investment
profile. They have broad backgrounds in science, technology, marketing, and finance.

Your website states you are an angel network:

* A group of accredited investors
* Invest their own individual capital
* Seek seed and early stage investments
* Primarily in the C region

Law

IRC Section 501(c)(6) exempts from federal income tax business leagues, chambers of commerce, real estate
boards, boards of trade, and professional football leagues (whether or not administering a pension fund for
football players), which are 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 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. 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. An association engaged in furnishing
information to prospective investors, to enable them to make sound investments, is not a business league, since
its activities do not further any common business interest, even though all of its income is devoted to the
purpose stated. A stock or commodity exchange which serves its members as a convenience and economy in
buying and selling is not a business league, a chamber of commerce, or a board of trade within the meaning of
IRC Section 501(c)(6) and is not exempt from tax.

Revenue Ruling 56-84, 1956-1 C.B. 201, held that an organization that is operated primarily for the purpose of
promoting, selling and handling the national advertising in its members' publications is not entitled to
exemption from federal income tax as a business league under IRC Section 501(c)(6). Such activities constitute
the performance of particular services for the individual members as distinguished from activities for the
improvement of the business conditions of its membership as a whole.

Rev. Rul. 58-224, 1958-1 C.B. 242, held that an organization whose sole activity is to conduct an annual trade
show, not held in conjunction with a convention or annual meeting, but held only for the purpose of bringing
buyers and sellers together, is not exempt under IRC Section 501(c)(6). The ruling concluded that the activities
of the organization substantially serve its members as a convenience and economy in the conduct of their

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

3

businesses. Therefore, the organization is rendering particular services for individual persons as distinguished
from the improvement of business conditions generally.

Rev. Rul. 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).

Rev. Rul. 67-182, 1967-1 C.B. 141, considers the exempt status of a nonprofit organization whose only activity
is providing a reference library of "electric logs," maps, and oil publications, and oil information services, as
well as other matters which are a source of geological data, for its members' use as an aid in their oil exploration
businesses. The organization made specialized information available to its members on a cooperative basis,
which serves as a convenience and economy in the conduct of their businesses. Furthermore, since membership
is limited and the facilities of the organization are made available only to participating members, the
organization's activities are not aimed at the improvement of business conditions in the industry as a whole. The
ruling found that operation of the library as described is an activity which constitutes the performance of
particular services for individual persons. Accordingly, the organization does not qualify for exemption from
federal income tax under IRC Section 501(c)(6).

Rev. Rul. 70-80, 1970-1 C.B. 130, considers a nonprofit trade association of manufacturers in a particular line
of business whose members consist of a small number of manufacturers in the industry. Although membership
in the association is open to all manufacturers in the industry, a significant number of manufacturers have
chosen not to join the association. The ruling held that because the association directs its activities solely to the
benefit of its limited membership, it is not directing its activities to the improvement of conditions in a business
line and is, thus, not exempt under IRC Section 501(c)(6).

Rev. Rul. 76-366, 1976-2 C.B. 144 held that an association of investment clubs formed to enable members and
prospective investors to make sound investments by the mutual exchange of investment information, does not
qualify for exemption from federal income tax. The association carried on not only educational activities, but
other activities directed to the support and promotion of the economic interests of its members. Moreover, by
furnishing information to prospective investors to enable them to make sound investments, the association is
serving private interests.

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 IRC Section
501(c)(6)), the court explained that merely serving as a convenience to members is not a characteristic shared
by the entities listed in the statute.

In Northwestern Municipal Association, Inc. v. United States, 99 F.2d 460 (8th Cir. 1938), the Eighth Circuit
held that an organization of investment brokers, whose purpose was to represent the interests of municipal

Letter 4034 (Rev. 01-2021)
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bondholders, and which was formed to perform services members would have been required to perform
themselves in making bond investments, was not exempt under IRC Section 501(c)(6) because the
organization's primary activities were found to constitute the performance of particular services for individual
persons. The enterprise was undertaken as a cooperative endeavor to render services which the separate
members might have been required to furnish and its main purpose was to benefit bondholders. The court
concluded "if its [the organization's] main purpose is to benefit its shareholders or individuals it is not exempt".

In General Contractors' Association of Milwaukee v. United States, 202 F.2d 633, 636 (7th Cir. 1953), the
Seventh Circuit found that where membership dues supported a quality estimating service, as the primary
activity of an association of general contractors, the benefits that the service afforded the members was an
inurement of net earnings fatal to exemption under IRC Section 501(c)(6). The court held that where valuable
services are rendered to individual members, as in this case, it may be said that part of the net earnings of a
taxpayer do inure to the benefit of its members.

Application of law

You are not described in IRC Section 501(c)(6) and Treas. Reg. Section 1.501(c)(6)-1 because the facts show
you are not formed to promote the common business interests of a particular industry or trade, but rather you are
formed to perform particular services for your members and promote their individual interests. The
aforementioned Treas. Reg. specifically states, "An association engaged in furnishing information to
prospective investors, to enable them to make sound investments, is not a business league, since its activities do
not further any common business interest, even though all of its income is devoted to the purpose stated". In
your case, there is no common business interest other than a mutual desire to increase member investment
returns. Your activities are a convenience and economy to your members in the conduct of their individual
investing.

You are like the organizations in Rev. Rul. 56-84, 58-224, and 67-182 because you are providing particular
services to members as distinguished from improvement of business conditions generally. You bring buyers and
sellers together and help your members to make individual investments. You are easily compared to Produce
Exchange Stock Clearing Association, where an organization provided a facility and exchange for the
promotion of investment decisions. The court determined that because the organization was providing a
convenience or economy to members in their security and commodity dealings rather than promoting the
common business interests of a particular trade, there was no apparent reason for granting exemption as a
business league. You can also be compared to Northwestern Municipal because, like that organization of
investors, you were formed to perform services that your members would otherwise be required to perform
themselves in making their individual investment decisions.

Similar to the organization in Rev. Rul. 76-366, you were formed to enable members to make sound
investments by providing an exchange of investment information. The organization in the ruling also carried on
not only educational activities but other activities directed to the support and promotion of economic interests of
its members (like your monthly meetings and screening/due diligence committees). You are also serving private
interests and do not qualify for exemption under IRC Section 501(c)(6). As the court concluded in Northwestern
Municipal, if the organization's main purpose is to benefit individuals, it is not exempt. See also Rev. Rul. 59-
391 and 70-80 where private interests precluded exemption under Section 501(c)(6).

You provide services to your members, such as financial analysis of their potential investment opportunities. An
individual can only become a member if they're invited, are "accredited" investors, and willing to invest in
startup businesses. Like the organization described in General Contractors' Association of Milwaukee, the

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

5

services you provide inure to the benefit of your members and are more than insubstantial. Accordingly, you are
precluded from exemption under IRC Section 501(c)(6).

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 members have no common business interest other than to increase their individual
investment returns and your activities are not directed at improving conditions of one or more lines of business.
Rather, you provide particular services to members and are promoting the private interests of your members.
Therefore, you do not meet the requirements for exemption under 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:

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

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
PO 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. 01-2021)
Catalog Number 47628K