IRS revokes a forensic-examiner association's Section 501(c)(6) status

Plain-English summary

The IRS revoked an association's exemption under Section 501(c)(6), effective January 1, 20XX. The association represented forensic examiners, but a related for-profit company controlled its operations, published its magazine, collected membership fees, managed its membership records, and ran its certification programs. The IRS found that the association had no meaningful member control, made an unsecured loan to its founder, and paid substantial management fees without showing that the arrangement was arm's length. The related for-profit entities also received certification fees and dues from people who were presented as association members. The IRS concluded that the organization did not operate as an exempt business league and that its activities benefited private and commercial interests.

Ruling snapshot

• Question: Did the association continue to qualify for exemption under IRC § 501(c)(6)?
• Outcome: Revocation. Exemption was revoked effective January 1, 20XX.
• Key authorities: IRC § 501(c)(6); Treas. Reg. § 1.501(c)(6)-1

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE

1100 Commerce Street, MS 4920 DAL 501.06-00

Dallas, TX 75242

TAX EXEMPT AND

GOVERNMENT ENTITIES

DIVISION Date:

July 2, 2013

Form:

Release Number: 201349021

Release Number: 12/6/2013

LEGEND

ORG - Organization name

XX - Date

Address - address

Tax Period(s) Ended:

Taxpayer Identification Number:

Person to Contact/ID Number:

Contact Numbers:

Phone:

Fax:

Dear:

In a determination letter dated August 20XX, you were held to be exempt from Federal income tax under section 501(c)(6) of the Internal Revenue Code (the Code).

Based on recent information received, we have determined you have not operated in accordance with the provisions of section 501(c)(6) of the Code. Accordingly, your exemption from Federal income tax is revoked effective January 1, 20XX. This is a final letter with regard to your exempt status.

We previously provided you a report of examination explaining why we believe revocation of your exempt status was necessary. At that time, we informed you of your right to contact the Taxpayer Advocate, as well as your appeal rights. On April 25, 20XX you signed Form 6018-A, Consent to Proposed Action, agreeing to the revocation of your exempt status under section 501(c)(6) of the Code.

You are required to file Federal income tax returns for the tax period(s) shown above. If you have not yet filed these returns, please file them with the Ogden Service Center within 60 days from the date of this letter, unless a request for an extension of time is granted. File returns for later tax years with the appropriate service center indicated in the instructions for those returns.

You have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate assistance is not a substitute for established IRS procedures, such as the formal appeals process. The Taxpayer Advocate cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a petition in a United States court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling. You may call toll-free, 1-877-777-4778, and ask for Taxpayer Advocate Assistance. If you prefer, you may contact your local Taxpayer Advocate at:

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

Thank you for your cooperation.

Sincerely,

Nanette M. Downing

Director, EO Examinations

Department of the Treasury

Internal Revenue Service

Tax Exempt and Government Entities Division
Exempt Organizations: Examinations

3730 S. Elizabeth Street

Independence, MO 64057

Date: March 15, 2013

Taxpayer identification number:

Form:

Tax year(s) ended:

Person to contact/ID number:

Contact numbers:

Telephone:

ORG Fax:

ADDRESS Manager's name/ID number:

Manager's contact number:

Response due date:

Certified Mail - Return Receipt Requested

Dear

Why you are receiving this letter

Enclosed is a copy of our report of examination explaining why revocation of your organization's tax-exempt status is necessary.

What you need to do if you agree

If you agree with our findings, please sign the enclosed Form 6018-A, Consent to Proposed Action, and return it to the contact at the address listed above. We'll send you a final letter revoking your exempt status.

If we don't hear from you

If we don't hear from you within 30 calendar days from the date of this letter, we'll process your case based on the recommendations shown in the report of examination and this letter will become final.

Effects of revocation

In the event of revocation, you'll be required to file federal income tax returns for the tax year(s) shown above. File these returns with the contact at the address listed above within 30 calendar days from the date of this letter, unless a request for an extension of time is granted. File returns for later tax years with the appropriate service center indicated in the instructions for those returns.

What you need to do if you disagree with our findings

If you disagree with our position, you may request a meeting or telephone conference with the supervisor of the contact identified in the heading of this letter. You also may file a protest with

Letter 3610-R (10-2012)
Catalog Number 59432G

the IRS Appeals office by submitting a written request to the contact person at the address listed above within 30 calendar days from the date of this letter. The Appeals office is independent of the Exempt Organizations division and resolves most disputes informally.

For your protest to be valid, it must contain certain specific information, including a statement of the facts, the applicable law and arguments in support of your position. For specific information needed for a valid protest, please refer to page one of the enclosed Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status, and page six of the enclosed Publication 3498, The Examination Process. Publication 3498 also includes information on your rights as a taxpayer and the IRS collection process. Please note that Fast Track Mediation referred to in Publication 3498 generally doesn't apply after we issue this letter.

If you and Appeals don't agree on some or all of the issues after your Appeals conference, or if you don't request an Appeals conference, you may file suit in United States Tax Court, the United States Court of Federal Claims, or United States District Court after satisfying procedural and jurisdictional requirements.

You may also request that we refer this matter for technical advice as explained in Publication 892. Please contact the person identified in the heading of this letter if you're considering requesting technical advice. If we send a determination letter to you based on a technical advice memorandum issued by the Exempt Organizations Rulings and Agreements office, then no further IRS administrative appeal will be available to you.

Contacting the Taxpayer Advocate Office is a taxpayer right

You have the right to contact the office of the Taxpayer Advocate Service (TAS). TAS is your voice at the IRS. This service helps taxpayers whose problems with the IRS are causing financial difficulties; who have tried but haven't been able to resolve their problems with the IRS; and those who believe an IRS system or procedure is not working as it should. If you believe you are eligible for TAS assistance, you can call the toll-free number 1-877-777-4778 or TTY/TDD 1-800-829-4059. For more information, go to www.irs.gov/advocate. If you prefer, you may contact your local Taxpayer Advocate at:

For additional information

If you have any questions, please call the contact at the telephone number shown in the heading of this letter. If you write, please provide a telephone number and the most convenient time to call if we need to contact you.

Thank you for your cooperation.

Sincerely,

Nanette M. Downing

Director, EO Examinations

Enclosures:

Report of Examination
Form 6018-A
Publication 892
Publication 3498

2 Letter 3610-R (10-2012)
Catalog Number 59432G

Form 886-A Schedule number or exhibit
(Rev. January 1994) REPORT OF EXAMINATION 0001

Name of taxpayer Tax Identification Number Year/Period ended

ORG EIN December 31, 20XX

Per Return: 990

Per Exam: December 31, 20XX

LEGEND

ORG - Organization name

EIN - EIN

XX - date

City - city

State - state

FDN-1 - 1st Founder

CERT-1 through CERT-8 - 1st through 8th CERT

CO-1 through CO-7 - 1st through 7th COMPANIES

Issue(s):

Whether ORG (ORG) continues to qualify for exemption under Section 501(c)(6) of the Internal Revenue Code.

Facts:

Exempt under the laws of the State of 20XX, ORG was originally called CO-1. The organization was founded by FDN-1. The organization's mission is an independent, scientific, and professional association representing forensic examiners worldwide, actively promoting the dissemination of forensic information and the continued advancement of forensic examination and consultation across the many professional fields of membership. The date the Internal Revenue Service recognized exemption, under IRC § 501(c)(6), is August 1993.

ORG is a membership organization. ORG has no employees. The organization's board consists of founder, FDN-1, his daughter, and a third person. When contacting the organization the caller would reach a company called CO-2. CO-2 was started by FDN-1 to manage ORG. FDN-1 also created several other for-profit related entities, CO-3, CO-4, CO-5, CO-6, and CO-7. ORG does not directly involve itself with its operations and activities, but instead CO-2 manages all of ORG operations and activities directed by FDN-1. CO-2 publishes ORG quarterly magazine, coordinates the CPE offering, collects membership fees, manages the membership listing, updates ORG websites, manages the finances of ORG, and is a point of contact for ORG. ORG ceded control of its operations to CO-2.

According to the ORG website, ORG offers several forensic certification programs, CERT-1, CERT-2, CERT-3, CERT-4, CERT-5, CERT-6, CERT-7, and CERT-8. These programs are run by the for-profit related organization founded by FDN-1. The for-profit corporation developed the test, administered it, and fees are collected and recognized by the for-profit corporation.

ORG memberships rely heavily on the certification programs run by the for-profit corporation. According to the website anyone that wishes to be certified must be a member of ORG. They are not allowed to take the exam without becoming a member and paying the membership dues. The reality is not all persons become members of ORG. If the person passes the certification examination their payment toward membership dues is recognized by the related for-profit corporation. They are considered as a member of the related for-profit corporation. Any future payments of membership dues would be recognized by the related for-profit corporation. ORG would get members who have

Form 886-A (1-1994) Catalog Number 20810W Page 1 of 5 publish.no.irs.gov | Department of the Treasury - Internal Revenue Service

Form 886-A Schedule number or exhibit
(Rev. January 1994) REPORT OF EXAMINATION 0001

Name of taxpayer Tax Identification Number Year/Period ended

ORG EIN December 31, 20XX

failed the examination and recognized their dues as income. By doing so the for-profit corporation robs ORG of the best and brightest members.

Per the contract agreement between ORG and CO-2, CO-2 would provide the following services to ORG:

• Maintenance of membership database including updates on address, phone, fax, e-mail, interest section and dues payment history

• Monthly invoices for ORG members commencing 30 days in advance of member anniversary date

• Mailing of new member packets within 1-2 weeks of receipt of dues

• Maintain staffing levels necessary to answer incoming calls

• Supply a chief association officer and other appropriate staff to ensure all membership processing runs efficiently

• Maintain appropriate bank accounts in the City area

• Provide financial reports suitable for audit

• Provide updates to the ORG website

• Membership recruitment campaigns ("outbound marketing")

• Work with the ORG Executive Director and appropriate educational committee to develop the educational program for the annual meetings

• Coordinate all educational program logistics, including budget for the annual meetings

• Work with the ORG Executive Director and the appropriate education committee to determine additional educational programs for the membership

• Work with the ORG Executive Director and the appropriate education committee to develop curriculums for courses as well as certification and advance courses.

• Develop an education catalogue for ORG members

• Coordinate the application process for accreditation in various discipline

• Market ORG educational offerings

• Develop budget for all educational offerings

ORG shall pay to CO-2 $ per paid members (new or renewing). The contract was signed by FDN-1 for both organizations. In the year ending 20XX ORG had a total of $ in revenues and paid the management fees of $ (%). In 20XX ORG had $ and paid $ in professional fees (%) and in 20XX ORG had $ in revenues and paid $ in management fees (%).

The funds of ORG are controlled by the president with no oversight. There was a loan made to FDN-1 from the organization with a balance of $ at the end of year 20XX. The board of ORG consists of the president, his daughter, and another person. No minutes were available. All decisions are made by the president. ORG members are not involved in the operation of the organization.

Law:

Form 886-A (1-1994) Catalog Number 20810W Page 2 of 5 publish.no.irs.gov | Department of the Treasury - Internal Revenue Service

Form 886-A Schedule number or exhibit
(Rev. January 1994) REPORT OF EXAMINATION 0001

Name of taxpayer Tax Identification Number Year/Period ended

ORG EIN December 31, 20XX

IRC § 501(c)(6) provides the following definition: Business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues (whether or not administering a pension fund for football players), 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 § 1.501(c)(6)-1 provides in part 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.

Lowry Hospital Association v. Commissioner of Internal Revenue, 66 T.C. 850 (1976), the court held that large, unsecured loans made to a nursing home owned by the organization's founder and a trust for his children constituted inurement.

Church By Mail, Inc. v. United States of America, CIV. A. No 87-0754-LFO, the court found that even if actual payment of manifestly excessive compensation were not inurement because the complex accounting makes precise tracing difficult without the services of an IRS Special Agent, there would be inurement because the control exercised by the controlling parties over the related entities creates a “potential for abuse.”

Bubbling Well Church of Universal Love, Inc. v. Commissioner, the court held that domination of an organization by a few members alone may not necessarily disqualify it for exemption, it provides an obvious opportunity for abuse of the claimed tax-exempt status. It calls for open and candid disclosure of all facts bearing upon petitioner's organization, operation, and finances so that the Court, should it uphold the claimed exemption, can be assured that it is not sanctioning an abuse of the revenue laws.

EST of Hawaii v. Commissioner, 71 T.C. 1067 (1979), held that a nonprofit organization could not qualify for tax exempt status because it was part of a franchise system, controlled by for-profit corporations, and thus was operated for private and commercial purposes. The for-profit corporation exerted “considerable control” over the nonprofit organization's activities. The organization's “only function” was portrayed as “presenting to the public for fee ideas that are owned by” for-profit corporations with materials and trainers that are supplied and controlled by the for-profit corporations.

National Muffler Dealers Association, Inc. v. United States, 440 U.S. 472 (1979), the U.S. Supreme Court upheld the validity of the tax regulations pertaining to business leagues which mandate that exempt business leagues direct their activities to improvement of the business conditions of one or more lines of business. The association of a particular brand name of muffler dealers does not qualify for

Form 886-A (1-1994) Catalog Number 20810W Page 3 of 5 publish.no.irs.gov | Department of the Treasury - Internal Revenue Service

Form 886-A Schedule number or exhibit
(Rev. January 1994) REPORT OF EXAMINATION 0001

Name of taxpayer Tax Identification Number Year/Period ended

ORG EIN December 31, 20XX

exemption because the association is not engaged in the improvement of business conditions of a whole line of business.

Government's Position:

In accordance with the above-cited provisions of the Code and regulations under section 501(c)(6), Treasury Regulation § 1.501(c)(6), and the court cases listed above, ORG is not considered to be the type of an organization for which an exemption from tax was intended. The following is a list of issues; anyone of them would disqualify ORG from exemption:

1) Membership Support - Treasury Regulation § 1.501(c)(6)-1 provides in part that an association of persons having some common business interest, the purpose of which is to promote such common interest. ORG does not have voting membership. ORG board is a self-perpetuating board and the general membership does not have the power to elect board members. The members of ORG are not involved in the operations and activities of the organization at a meaningful level. Without voting members and members' involvement, ORG does not have membership within the meaning of section 501(c)(6).

2) Unsecured Loan made to founder of the organization - IRC § 501(c)(6) states no part of the net earnings of which inures to the benefit of any private shareholder or individual. The organization made an unsecured loan to the founder of the organization. Lowry Hospital Association v. Commissioner of Internal Revenue held that such loan is inurement, thus a private benefit to the founder.

3) Arm's-Length Transaction - The Service is unable to determine if the contract between ORG and [redacted] were in the best interest of ORG. In the audit year over % of ORG gross revenues ($ per member) were paid to [redacted]. In 20XX the ratio was over %. There were no analysis or competitive bids to see if this were a fair amount. There is no explanation of how they derived the $ per member. Bubbling Well Church of Universal Love, Inc. v. Commissioner calls for open and candid disclosure of all facts bearing upon petitioner's organization, operation, and finances so that the Court, should it uphold the claimed exemption, can be assured that it is not sanctioning an abuse of the revenue laws. ORG fails to provide enough details of the transactions to disprove any private benefit jeopardizing their claim for exemption.

4) Relationship With Founder's For Profit Entities - [redacted] receives substantial compensation. Members who pass certification automatically become members of the founder's for-profit corporation and their dues are recognized by the for-profit corporation even though the website stated that they are members of ORG. Test fees are recognized by the for-profit corporation. FDN-1 signed contracts for both ORG and [redacted]. There is no oversight of an independent board. Church By Mail, Inc. v. United States of America, the court found there would be inurement because the control exercised by the controlling parties over the related entities creates a “potential for abuse.”

Form 886-A (1-1994) Catalog Number 20810W Page 4 of 5 publish.no.irs.gov | Department of the Treasury - Internal Revenue Service

Form 886-A Schedule number or exhibit
(Rev. January 1994) REPORT OF EXAMINATION 0001

Name of taxpayer Tax Identification Number Year/Period ended

ORG EIN December 31, 20XX

5) Operational Relationship With For Profit Entities - [redacted] manages every aspect of ORG. [redacted] handles all of the organization's CPE, publishing, accounting, and members. ORG's ability to remove itself from [redacted] is severely impaired. ORG is dependent on [redacted] for its operation. EST of Hawaii v. Commissioner held that a nonprofit organization could not qualify for tax exempt status controlled by for-profit corporations.

6) Improvement of Business Conditions of a Whole Line of Business - ORG members are persons that failed to pass the certification test. If the person passes the exam later, they would become members of founders' for-profit related entity. Such a setup would cause a drain of ORG of the brightest and best members. Improvements of business conditions would be unlikely and any improvements would benefit the for-profit entity at the expense of the rest of the forensic industry. National Muffler Dealers Association, Inc. v. United States - The court held that association does not qualify for exemption because the association is not engaged in the improvement of business conditions of a whole line of business.

Conclusion:

The Government concludes that the Exceptional Organizations does not meet the requirements to be recognized as exempt from federal income tax under 501(c)(6) of the Internal Revenue Code. Accordingly, the organization's exempt status is revoked effective January 1, 20XX.

Form 886-A (1-1994) Catalog Number 20810W Page 5 of 5 publish.no.irs.gov Department of the Treasury-Internal Revenue Service