Other 1105048: Beverage trade association denied exemption for providing particular services to members

Plain-English summary

The IRS issued a final adverse determination that a beverage-industry trade association did not qualify for exemption under IRC § 501(c)(6). The association negotiated supplier contracts, operated redistribution hubs, promoted members to suppliers, and provided consulting and other services that gave individual members operational savings and convenience. The IRS concluded that these activities served particular members rather than improving business conditions for the industry as a whole. Because the organization did not file a timely protest, the proposed adverse determination became final, and the organization was required to file federal income tax returns.

Ruling snapshot

• Question: Does a beverage-industry association that provides contract, distribution, marketing, and consulting services to its members qualify for exemption under IRC § 501(c)(6)?
• Outcome: Revocation.
• Key authorities: IRC § 501(c)(6); Treas. Reg. § 1.501(c)(6)-1; Rev. Ruls. 56-65, 61-270, 66-338, 68-264, and 76-409; Apartment Operations Ass’n v. Commissioner of Internal Revenue, 136 F. 2d 435 (1943).

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Release Number: 201105048 Contact Person:
Release Date: 2/4/11
Date: November 9, 2010 Identification Number:
Contact Number:
Employer Identification Number:
Form Required To Be Filed:
1120
Tax Years:
All

Dear

This is our final determination that you do not qualify for exemption from Federal income tax as
an organization described in Internal Revenue Code section 501(c)(6). Recently, we sent you a
letter in response to your application that proposed an adverse determination. The letter
explained the facts, law and rationale, and gave you 30 days to file a protest. Since we did not
receive a protest within the requisite 30 days, the proposed adverse determination is now final.

You must file Federal income tax returns on the form and for the years listed above within 30
days of this letter, unless you request an extension of time to file.

We will make this letter and our proposed adverse determination letter available for public
inspection under Code section 6110, 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, you should follow
the instructions in Notice 437. If you agree with our deletions, you do not need to take any
further action.

If you have any questions about this letter, please contact the person whose name and
telephone number are shown in the heading of this letter. If you have any questions about your
Federal income tax status and responsibilities, please contact IRS Customer Service at

Letter 4040(CG) (11-2005)
Catalog Number 476352

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1-800-829-1040 or the IRS Customer Service number for businesses, 1-800-829-4933. The
IRS Customer Service number for people with hearing impairments is 1-800-829-4059.

Sincerely,

Rob Choi

Director, Exempt Organizations
Rulings & Agreements

Letter 4040(CG) (11-2005)
Catalog Number 476352

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: September 23, 2010 Contact Person:
Identification Number:
Contact Number:
FAX Number:
Employer Identification Number:

N =
O =
P =
Q =
R =
y =
Z =

UIL:
501.06-01

Dear

We have considered your application for recognition of exemption from Federal income tax
under Internal Revenue Code section 501(a). Based on the information provided, we have
concluded that you do not qualify for exemption under Code section 501(c)(6). The basis for
our conclusion is set forth below.

Issue

Do you qualify for exemption under section 501(c)(6) of the Code? No, for the reasons
described below.

Facts

You were incorporated on y, in the state of z. The purposes outlined in your Articles of
Incorporation state, in part, “to solicit recognition and acceptance of beverage industry
commerce and to promote cooperation and communication between the members thereof.”

Your Bylaws and application for exemption describe your purposes and objectives, in
pertinent part, as follows:

Realizing that the success of the Member’s individual businesses depends largely
upon a strategically diversified product portfolio, and that the best brand sets can
be obtained only by a cooperative effort on the part of those engaged in an
association, this voluntary trade association is created and shall exist for the

following objectives:

A. to promote/encourage better communication between potential suppliers and
Members

B. to solicit recognition and acceptance of the Members as a desirable and
effective part of beverage industry commerce

C. to encourage logistical and contractual cooperation so as to be seen as a
desirable and cost effective conduit of products to market

D. to improve business relations between all members of the industry

E. to where and when appropriate provide consulting services to the Members (for
no fee) and current and future suppliers to provide a framework for commerce
consistent with the Bylaws as well as with consideration of both federal and
state statutes and regulations governing commerce on said products. The
consulting topics are primarily in the areas of sourcing, relationship building,
business modeling, and contractual execution as these topics relate to the
beverage industry.

F. to work in unison to improve our collective and separate service to the
constituents we serve

G. to carry out the above purposes under Articles and the Bylaws adopted for the
regulation of the Corporation

H. to facilitate the survival of new brands

I. to employ, contract for, or otherwise obtain the services of agents to perform all
services required in connection with the carrying out of its aforesaid purposes

Your Bylaws state the qualifications for membership as, “any person, firm or corporation legally
and actively engaged in the wholesale distribution of beverages in the State of z and which is
not a parent, subsidiary, affiliate, or under common control or ownership of another Member
may become a voluntary Member upon their written agreement to abide by the Articles and
these Bylaws, which includes the voluntary contributions contemplated herein to defray the
costs and expenses incurred in carrying out the purposes of the Corporation.”

Your attachment to the Form 1024 states members of your organization serve on various
disciple teams to accomplish the goals and services of the organization as listed above. These
teams include a business research and development team, logistic team, and a legal and
finance team. The teams were described as follows:

Business and Research Team — Members review various solicited and unsolicited

beverage firms for fit within the “Branding Partnering” criteria established for brand
consideration within the Organization’s footprint. This team meets monthly and
updates status of desirability - contact — next steps relative to presentation and
acceptance by the Organization’s members.

Logistic Team — Members meet for the purpose of creating a redistribution model
for products that will be less than truckload quantities to individual Organization
members. They attempt to optimize freight and supply chain dynamics relative to
product flow to the market. In addition, they are responsible for creating web
footprint and product order/entry mechanics.

Legal Finance Team — Members meet on an as needed basis for supplier contract
negotiations. Included in this contract work is outside counsel that has expertise in
the franchise field. The team is also responsible for creating annual budgets,
calling meetings of Organization members and filing all necessary paperwork to
keep the organization in proper legal standing.

You provided the following description of your consulting services to members:

We discuss companies who have contacted either individual members or the group
as a whole about using our distribution network to bring their products to
marketplace in z. We view industry data to assess if it makes economic sense to
consider. We discuss how such products fit into our screening process. We then
direct out various team committees to follow up activity with the potential or existing
supplier.

You provided a copy of your presentation materials which included the following:

What is the Group
• Organization dedicated to creating a partnership with all of its suppliers
o Sales Growth through the best possible distribution network in z
▪ Coordinated selling effort amongst wholesalers
▪ Efficient communication and sharing of selling materials amongst
partners
▪ Latest marketing equipment available: Selling Tools, Sign Making
Equipment, etc.
o Cost optimization through centralized distribution points; share of mind; and
professional organizations

Best of Both Worlds
• Simplified Logistics
o Has established 5 re-distribution “hubs” where suppliers will deliver all beer
needed to service State until sufficient quantities make financial sense for
individual wholesaler shipments.
▪ Reduces FOB on product
▪ Simplifies Brewer payment and touch points from an operational
perspective
o Wholesalers then pick up their orders from their designated “hub.”
o Centralize communications for forecasting and ordering products

Business Development Wholesaler Brand Chart
• Lost N to parts of the Q
o What do we need to do better to ensure this doesn’t happen again with O
▪ Didn’t get the feeling of commitment to the craft segment
▪ Image of the R is not what they are looking for
• Smart Access Program with P appears to be working well

Business Development Brand Funneling Findings
• We need to be stable on what we represent to suppliers
• Our main focus will be on sourcing Beer Brands

Law

Section 501(c)(6) of the Internal Revenue Code of 1986 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.

Section 1.501(c)(6)-1 of the Income Tax Regulation 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 are but not
limited to; promoting efficiency among members by producing a publication that provides a list
of specific projects from whom bids and quotations may be obtained by members. Also a labor
committee is maintained within the organization to settle labor disputes for members.

Revenue Ruling 61-270, 1961-2 C.B. 112 held that an organization formed and operated
primarily as an employment agency for the benefit of members is engaged in a regular business
of a kind ordinarily carried on for profit and is rendering particular services for individual
members; and thus, activities of this nature preclude exemption under 501(c)(6) of the Code.

Revenue Ruling 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
advice furnished includes assistance in planning modernization and layouts of the members’
stores. As part of their calls, the field representatives also inform the members about supplies,
equipment, and additional services which the organization can make available to the members
at low prices. This includes office and store operating supplies, store fixtures and display
accessories, store layout and merchandising services, and electronic management services.

The activities described above 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 section
501(c)(6) of the Code.

Revenue Ruling 68-264, 1968-1 C.B. 264 denied exemption to an organization whose services to
members and nonmembers alike included quotations of freight rates, rules, and practices and
investigations of loss damage and overcharge claims. The ruling defines a particular service for
the purposes of section 501(c)(6) of the Code as being an activity that serves as a convenience or
economy to the members of the organization in the operation of their businesses. The operation of
a traffic bureau for members and nonmembers is a clear convenience and economy to them in
their businesses, resulting in savings and simplified operations.

Revenue Ruling 76-409, 1976-2 C.B. 154 denied exemption to an organization whose principal
activity is the publication and distribution of an annual directory consisting almost entirely of
members’ names, addresses, and telephone numbers. The directory is distributed free to those
members of the business community who are likely to require the services of the profession. It
was held, the publication and distribution of a directory containing the names and addresses of
members constitutes advertising for individuals, and therefore, is the performance of particular
services to members rather than an activity aimed at the improvement of general business
conditions.

In Apartment Operations Ass’n v. Commissioner of Internal Revenue, 136 F. 2d 435 (1943), the
court denied exemption as a business league. The organization was an apartment owners’
association which regularly carried on a business of a kind ordinarily conducted for profit and
performed particular services for individual persons. These services consisted of acting as a
clearing house for information about tenants, including the operation of apartment houses, and
about the legislation affecting the business; gave council and advice to its members and did
what it could to promote their welfare; secured information about prices for necessary goods for
the apartments; and represented its members in labor disputes and negotiations. The Court
held the organizations primary activity was one of a business regularly carried on for profit and
the organization performs particular services for individual persons. There is no showing that
business done or the activities described were merely incidental to the organization’s total
activities.

Application of Law

You are not described in IRC 501(c)(6) because you were formed to provide particular services to
your members and therefore, operate similar to a for profit business.

You are not described in Section 1.501(c)(6)-1 of the Income Tax Regulation because the facts
show you are not formed to promote the common business interests of a particular industry or
trade, but rather you limit your promotion to your members specific wholesale businesses. You
engage in a regular business of the kind ordinarily carried on for profit in that you provide specific
service that would otherwise be necessary for each individual member to conduct on their own or
through another entity. For example, you negotiate contracts on behalf of your members, thereby

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relieving the member from the need to negotiate the contract. In addition, you established
distribution hubs which reduced members’ costs and simplified operations for them.

Like the organization in Revenue Ruling 56-65 you are providing a particular service to your
members and not benefiting the common business interests of all businesses involved with your
industry. As in the revenue ruling, you present information to your members about specific
suppliers with whom business deals and contracts can be obtained. You work collectively,
within your membership, to represent what the supplier looks for in their current or potential
wholesaler in order for members to more easily enter into business dealing and contracts with
suppliers. This activity constitutes performance of a particular service to your members with the
intent of providing efficiency of operations and economies of scale for members. You are
providing services to members that are similar to a business that is ordinarily carried on for
profit.

Similar to the organization in Revenue Ruling 66-338, your organization was formed to
provide an economy and convenience in the performance of their individual businesses.
You create efficient redistribution points for product movement to members thus allowing
manufacturers’ products to have lower cost and better market pricing. In addition, you
state that supply contracts are negotiated for the group as a whole versus each
negotiating their own contract. By promoting your members services and capabilities to
current and potential suppliers, you are providing the members with a service that they
would otherwise have to secure on their own. Although the activities of your
organization may not be similar to the specific activities of the revenue ruling, denial of
exemption based on the performance of a particular service for members makes the
ruling relevant to your activities.

Your formation of redistribution points and the negotiation of contracts is similar to that of
the organization in Revenue Ruling 68-264. You state that the operation of the
redistribution points for members provides for cost optimization and allows for
centralized communications in product forecasting and ordering, resulting in savings and
simplified operations. This is a clear indication that your organization is performing the
functions of a for-profit business by acting as a delegate to current and potential
suppliers for the benefit of your members. In addition, the redistribution points are a
convenience to members with the underlying purpose of generating higher margins
through cost optimization. Other non-member organizations involved in your particular
industry can not reap the benefits of your redistribution points or contract negotiations,
and consequently, are at an operational disadvantage to the members of your
organization. Therefore, your organization is not promoting the common business
interests of your industry as a whole.

Also similar to Revenue Ruling 68-264, you state that your intent is for suppliers to see your
group as an option for entry of their products into z. You provide detailed information on each
members’ capabilities and performance data from a single source. You provide suppliers with
insights and language which will be appealing to your members and encourage the suppliers to
work with your members. You also supply your members with consulting services on various
topics related to your industry to improve their individual businesses. You are providing
particular services to members that are not consistent with the promotion of the common
business interest of your industry as a whole.

You are like the organizations in Revenue Ruling 61-270 and Revenue Ruling 76-409. These
organizations were denied exemption under 501(c)(6) of the Code because the publication and
distribution of a directory containing the names and addresses of members constitutes
advertising for the individuals listed, and in turn, the performance of particular services for
members. In essence, the organizations acted as employment agencies for their members.
Although your organization does not publish a directory, it does advertise your members directly
to current and future suppliers in order to secure beneficial business deals for members. This
creates a convenience and economy to the individual members that they would otherwise have
to purchase independently.

You are like the organization in Apartment Operations Ass’n v. Commissioner of Internal
Revenue, 136 F. 2d 435. Like the organization in the case, you have stated you provide legal
services on contract issues and provide consulting services for members. These services are
those of a business ordinarily carried on for profit and render particular services for individual
members rather than promoting the general business conditions of the industry as a whole.

Applicant’s Position

You stated that your principal intent is for future suppliers to see your group of wholesalers as
an option for entry of their product into z. You stated you do not perform any service or
agreement with suppliers since it would create anti-trust issues. You are merely a conduit for
contract language which may be appealing to your members. Regarding the consulting
services and redistribution points for members, you noted that you do not provide services for
members such as acting as a consultant, freight cost optimizer, or redistribution center; but
instead create goodwill among members and suppliers to facilitate trade that is good for each
party and the industry.

Regarding your response to your similarities to the organization in Revenue Ruling 66-338, you
indicated you are not similar to the organization in the ruling because you have no field
representatives who visit or provide services of any kind to any distributor. Also you do not see
yourself falling under the ruling because you do not sell supplies, equipment, furnish formal
consulting services, etc.

Service’s Response to Applicant’s Position

We agree that you act as a conduit for contract language between your members and current or
potential suppliers. A conduit is defined as any channel, or means, whereby something is
passed on. You are passing on information to suppliers about the businesses and capabilities
of your members. You are providing services to your individual members that offers efficiency
of operations by allowing the members to effectively market their services and capabilities to
suppliers. This creates a clear convenience to your members and is an activity that is akin to a
service provided by a business that is normally carried on for profit.

Your statement that you do not provide particular services to members through consulting
activities, acting as a redistribution center, or optimizing freight costs differs significantly from
the provided information in your bylaws and application for exemption. The facts and totality of
the information provided clearly show you provide for efficient operations, amplified business
opportunities, and cost optimization for your members. The nature of the contact with suppliers
of your industry is not in any way promoting the common business interests of your industry as

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a whole, but rather focused on promoting specific members.

Revenue Ruling 66-338 does apply to your organization, as distinguished from your response
regarding the ruling. The ruling discusses an organization that provides members of the
organization with an economy and convenience in the conduct of their individual businesses.
Although the nature of the business may differ from your organization and the activities may not
be exactly what you do for members, you too provide your members with economy and
convenience in the conduct of their individual businesses. The facts show you serve as a
conduit linking members with suppliers. You established a distribution hub for members to use.
You negotiate contracts on behalf of your members as a whole so that separate negotiations by
individual members are not needed. You provide information to suppliers on member
capabilities and performance.

Conclusion

The facts clearly show you are not operated as a business league. Your activities are not
directed to the improvement of business conditions of one or more lines of businesses, or any
other purpose defined in section 501(c)(6). Rather, your activities and purposes are directed at
the improvement of your members businesses.

Accordingly, you do not qualify for exemption as an organization described in section 501(c)(6)
of the Code and you must file income tax returns.

You have the right to file a protest if you believe this determination is incorrect. To protest, you
must submit a statement of your views and fully explain your reasoning. You must submit the
statement, signed by one of your officers, within 30 days from the date of this letter.

We will consider your statement and decide if that information affects our determination. If your
statement does not provide a basis to reconsider our determination, we will forward your case to
our Appeals Office. You can find more information about the role of the Appeals Office in
Publication 892, Exempt Organization Appeal Procedures for Unagreed Issues.

Types of information that should be included in your appeal can be found on page 2 of
Publication 892, under the heading “Regional Office Appeal”. These items include:

1. The organization’s name, address, and employer identification number;
2. A statement that the organization wants to appeal the determination;
3. The date and symbols on the determination letter;
4. A statement of facts supporting the organization’s position in any contested factual
   issue;
5. A statement outlining the law or other authority the organization is relying on; and
6. A statement as to whether a hearing is desired.

The statement of facts (item 4) must be declared true under penalties of perjury. This may be
done by adding to the appeal the following signed declaration:

“Under penalties of perjury, I declare that I have examined the statement of facts presented in
this appeal and in any accompanying schedules and statements and, to the best of my
knowledge and belief, they are true, correct, and complete.”

Your appeal will be considered incomplete without this statement.

If an organization’s representative submits the appeal, a substitute declaration must be included
stating that the representative prepared the appeal and accompanying documents; and whether
the representative knows personally that the statements of facts contained in the appeal and
accompanying documents are true and correct.

An attorney, certified public accountant, or an individual enrolled to practice before the Internal
Revenue Service may represent you during the appeal process. To be represented during the
appeal process, you must file a proper power of attorney, Form 2848, Power of Attorney and
Declaration of Representative, if you have not already done so. For more information about
representation, see Publication 947, Practice Before the IRS and Power of Attorney. All forms
and publications mentioned in this letter can be found at www.irs.gov, Forms and Publications.
If you do not intend to protest this determination, you do not need to take any further action. If
we do not hear from you within 30 days, we will issue a final adverse determination letter to you.
That letter will provide information about filing tax returns and other matters.

Please send your protest statement, Form 2848 and any supporting documents to the
applicable address:

Mail to: Deliver to:

Internal Revenue Service Internal Revenue Service
EO Determinations Quality Assurance EO Determinations Quality Assurance
Room 7-008 550 Main Street, Room 7-008
P.O. Box 2508 Cincinnati, OH 45202
Cincinnati, OH 45201

You may also fax your statement using the fax number shown in the heading of this letter. If
you fax your statement, please call the person identified in the heading of this letter to confirm
that he or she received your fax.

If you have any questions, please contact the person whose name and telephone number are
shown in the heading of this letter.

Sincerely,

Robert S. Choi
Director, Exempt Organizations
Rulings & Agreements

Enclosure, Publication 892