Written determination 1231013: IRS denies exemption to a single-brand franchisee association

Plain-English summary

The IRS issued a final adverse determination after a franchisee association did not protest a proposed adverse determination within 30 days. The association served franchisees of one restaurant chain, and the IRS concluded that its activities promoted the business interests of those individual franchisees rather than improving business conditions for a line of business as a whole. The association therefore did not qualify for exemption under IRC § 501(c)(6). The letter instructs the organization to file federal income tax returns within 30 days unless it requests an extension.

Ruling snapshot

• Question: Does a single-brand franchisee association qualify for exemption under IRC § 501(c)(6)?
• Outcome: Revocation
• Key authorities: IRC §§ 501(a), 501(c)(6), and 6110; Treas. Reg. § 1.501(c)(6)-1; Rev. Ruls. 67-295 and 68-182; Pepsi-Cola Bottlers’ Association Inc. v. United States, 369 F.2d 250 (1966); National Muffler Dealers Association v. United States, 440 U.S. 472 (1979).

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION
Release Number: 201231013 Contact Person:
Release Date: 8/3/2012
Date: May 8, 2012 Identification Number:
UIL: 501.06-00
501.06-01 Contact Number:
Employer Identification Number:
Form Required To Be Filed:
Tax Years:
All Years
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

2

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,

Lois Lerner
Director, Exempt Organizations

Enclosure
Notice 437
Redacted Proposed Adverse Determination Letter
Redacted Final Adverse Determination Letter

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
Contact Person:
Date: March 21, 2012 Identification Number:
Contact Number:
FAX Number:
Employer Identification Number:
LEGEND: VIL:
B = Restaurant Chain 501.06-00
C = State 501.06-01
D = Date
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
stated below.

Facts
You were incorporated under the Non-Profit laws of the State of C on D.

Your purpose is to provide for the common interests and mutual benefit of B
franchisees. You provide a forum for the members to communicate with each other and
with the franchisor. You also conduct meetings and provide a website for members to
share information.

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You provided a breakdown of your activities as follows:

50% of activities are organizing and presenting a yearly convention put on by
members for members focusing on educational presentations.

30% of activities are publishing periodic newsletters and emails to members
focusing on business updates and educational information.

15% of activities are maintaining a website complete with a forum as a vehicle for
members to communicate and share information.

You indicated that the remainder of the time is focused on responding to issues
as they arise.

Your annual convention is a three day event with general sessions and workshops,
vendor exhibits and guest speakers. The conventions are open to B franchisees and
product suppliers of B stores as vendors. The product suppliers pay a vendor fee for a
booth and depending on the amount of the fee paid, some get to speak at the
convention and get monthly exposure on your webpage and in your newsletters.

Topics covered at the convention include marketing techniques, marketing, juggling TV
and print discounts, what other markets are doing, what's new and what’s working, and
current franchisee issues (i.e. remodel initiative). All topics covered pertain to operating
a B pizza store. You submitted representative copies of your newsletters which address
similar topics.

In a prior year, you contracted with an attorney to negotiate changes to the franchise
agreement terms with the franchisor.

You have one class of membership. Membership is limited to majority owners of one or
more B stores with each member having one vote. Member dues are paid yearly,
based on the number of stores owned and subject to change each year based on needs
which may facilitate a special assessment. You currently have approximately 250
members.

Your financial data shows that your revenue comes from member dues, convention
income, and vendor exhibit fees. In the last two years, you have received more revenue
from convention income and vendor exhibit fees than you have from member dues.

The convention activity comprises the majority of your annual expenditures.

Letter 4034(CG) (11-2005)
Catalog Number 47628K

Law

IRC 501(c)(6) provides for exemption of 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.

Section 1.501(c)(6)-1 of the Income Tax Regulations 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. 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.

Revenue Ruling 67-295 states that an organization composed of businessmen may
qualify for exemption where its activities are limited to holding luncheon meetings
devoted to a discussion, review, and consideration of the various problems in a
particular industry directed to the improvement of business conditions for the industry as
a whole.

Revenue Ruling 68-182 indicates the Internal Revenue Service will not in similar cases
follow the decision entered by the United States Court of Appeals, Seventh Circuit, in
Pepsi-Cola Bottlers’ Association Inc v. United States, 369 F.2d 250 (1966). In that
case, the Court held that the Association, whose members are engaged in the bottling
and sale of a single franchised soft drink product and whose purposes and activities
were directed to the more efficient production and sale of that product, qualified under
section 501(c)(6) of the Code. It is the position of the Service that organizations
promoting a single brand or product within a line of business do not qualify for
exemption under section 501(c)(6) of the Code.

In National Muffler Dealers Association v. United States, 440 U.S. 472 (1979), the
Supreme Court held that an association of a particular brand name of muffler dealers
did not qualify for IRC 501(c)(6) status because it was not engaged in the improvement
of business conditions of a line of business.

Letter 4034(CG) (11-2005)
Catalog Number 47628K

Application of Law

You are not described in section 501(c)(6) of the Code because you are not organized
to improve business conditions of one or more lines of business as defined under this
subsection.

You are not described in Section 1.501(c)(6)-1 of the Income Tax Regulations because
your activities are not directed to the improvement of business conditions of one or
more lines of business. Instead, you are formed to promote the business interests of
your individual members who are all franchise owners of B pizza stores.

You are not like the organization described in Revenue Ruling 67-295. Unlike the
organization described in this ruling, your primary purpose is not the improvement of
business conditions for an industry as a whole. Instead, your activities are directed at
the promotion of your members’ businesses, B pizza stores which are a specific brand,
not the industry as a whole. This is evident by the fact that your membership is open
only to individuals that own one or more B franchises and all of your activities are
directed to improving the operation of B stores.

You are identical to the organization discussed in Revenue Ruling 68-182 and the court
case Pepsi-Cola Bottlers’ Association Inc v. United States. Although Pepsi-Cola
Bottlers’ Association was granted exemption in 1966, two years later Revenue Ruling
68-182 made it clear that organizations promoting a single brand or product within a line
of business do not qualify for exemption under section 501(c)(6) of the Code. Like this
organization, your activities promote a single brand within a line of business; namely, B
pizza stores. Your primary purpose is to promote the products and services of your
members and increase their business performance.

Likewise, you are similar to the organization in National Muffler Dealers Association v.
United States, 440 U.S. 472 (1979), since your primary purpose is to promote a
particular brand.

Applicant’s Position

You believe you meet the definition of a business league under Code section 501(c)(6)
as a trade association of franchisees having a 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.

You have named several franchisee organizations whom you claim operate similarly to
you and have been granted exemption under section 501(c)(6) of the Code. You
maintain their exemption should justify a similar ruling in your favor.

Letter 4034(CG) (11-2005)
Catalog Number 47628K

5
Service Response to Applicant’s Position

As explained above, your organization is not promoting an industry as a whole. The
information you have provided shows that your organization is formed to promote the
business interests of your members who are all franchise owners of B pizza stores.
Therefore, you do not meet the definition of operating for the improvement of business
conditions of one or more lines of business.

Regarding your argument that other similar organizations are exempt under section
501(c)(6) of the Code, the Service does not accept the exempt status of another
organization as legal precedent. The exempt status of an organization can not be
applied broadly to other organizations as each applicant's facts and circumstances are
unique.

Conclusion

Your primary purpose is the promotion and improvement of a particular chain of pizza
stores. Instead of improving the business conditions of one or more lines of business
as a whole, your activities are directed to improving the business conditions of your
members who are all franchise owners of B pizza stores.

Accordingly, we conclude that you are not exempt under IRC 501(c)(6).

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

Letter 4034(CG) (11-2005)
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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
P.O. Box 2508 Room 7-008 550 Main Street, Room 7-008
Cincinnati, OH 45201 Cincinnati, OH 45202

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.

Letter 4034(CG) (11-2005)
Catalog Number 47628K

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

Sincerely,

Lois G Lerner
Director, Exempt Organizations

Enclosure, Publication 892

Letter 4034 (CG) (11-2005)
Catalog Number 47628K