Automobile foremen association denied tax-exempt status

Plain-English summary

A membership association organized educational meetings for automobile dealership foremen working with one manufacturer's vehicles. The IRS concluded that the association primarily benefited its members, the manufacturer, and its dealerships, rather than serving a public interest or broader community welfare. It also did not perform the historically recognized functions of a labor organization and served only a segment of a line of business. The IRS therefore denied exemption under §§ 501(c)(3), (4), (5), and (6), and the denial became final when the organization did not protest within 30 days.

Ruling snapshot

• Question: Did the association qualify for exemption as a charitable or educational organization, social welfare organization, labor organization, or business league?
• Outcome: Denied under IRC §§ 501(c)(3), (4), (5), and (6).
• Key authorities: IRC §§ 501 and 7428; Treas. Reg. §§ 1.501(c)(3)-1, 1.501(c)(5)-1, and 1.501(c)(6)-1; National Muffler Dealers Association, Inc. 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: 201431032 Contact Person:
Release Date: 8/1/2014
Date: May 6, 2014 Identification Number:
UIL Code: 501.33-00
501.35-00
501.36-00 Contact Number:
533.00-00
Employer Identification Number:
Required To Be Filed:
Tax 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)(3). 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.

Because you do not qualify for exemption as an organization described in Code section
501(c)(3), donors may not deduct contributions to you under Code section 170. 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. File the returns in accordance with their
instructions, and do not send them to this office. Failure to file the returns timely may result in a
penalty.

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, follow the
instructions in Notice 437. If you agree with our deletions, you do not need to take any further
action.

In accordance with Code section 6104(c), we will notify the appropriate State officials of our
determination by sending them a copy of this final letter and the proposed adverse letter. You
should contact your State officials if you have any questions about how this determination may
affect your State responsibilities and requirements.

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
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,

Tamera Ripperda
Director, Exempt Organizations

Enclosure

Notice 437

Redacted Proposed Adverse Determination Letter
Redacted Final Adverse Determination Letter

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

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION
Date: March 14, 2014 Contact Person:
Identification Number:
Contact Number:
FAX Number:
Employer Identification Number:
LEGEND:

N = Name
P = State
Q = Date
R = Date
S = Date
u dollars = amount

UIL:
501.33-00
501.35-00
501.36-00
533.00-00

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 sections 501(c)(3),
501(c)(4), 501(c)(5) or 501(c)(6). The basis for our conclusion is set forth below.

Issue(s)

1. Do you qualify for exemption under section 501(c)(3)? No, for the reasons described
   below.

2. Do you qualify under section 501(c)(4)? No, for the reasons described below.

3. Do you qualify under section 501(c)(5)? No, for the reasons described below.

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

Facts

You were incorporated in the state of P on Q as a nonprofit mutual benefit corporation
for the specific purpose of the discussion of technology, diagnostic advances, and
current vehicles. You filed an amendment on R and became organized as a nonprofit
public benefit corporation. The amendment also stated your purpose to be labor/
agricultural/horticultural.

On S, you submitted a Form 1023 requesting exemption under Section 501(c)(3). You
later submitted a Form 1024 requesting exemption under Section 501(c)(5) and
subsequently requested exemption under 501(c)(4) and 501(c)(6).

You are a membership organization whose membership is composed of foremen from
several different states. Your members work for N car dealerships, which service
automobiles built by N. Your primary activity is to arrange educational meetings for your
members as well as guests from N’s headquarters. The purpose of these meetings is
for your members to obtain knowledge and then share this knowledge including
advances in N automobile technology and new features found on N automobiles
with their particular dealership. This ultimately improves the customer's experience.
You only have a few educational events per year which are held at convenient
hotels usually near an airport. There are usually presenters who come
from N’s headquarters, who present on such topics as diagnostic advances of current
vehicles, new technologic advances for N cars as well as new and emerging issues that
individual foremen may be encountering to see if others are facing the same problems
and how they are addressing such problems. The result is that the shop foremen will
have a better understanding of the N auto which is needed to solve routine repair
problems that may be encountered at the dealership level.

Members pay annual membership dues of u dollars and these dues are your only
source of revenue. Your expenses are for the costs of the meetings.

Finally you have a three person volunteer board and have not adopted bylaws.
Law
Issue 1

Section 501(a) of the Code provides for the exemption from federal income tax for
organizations described in Section 501(c)(3). Such organizations are recognized as
exempt if they are organized and operated exclusively for religious, charitable, and
educational purposes.

Section 1.501(c)(3)-1(a)(1) of the Regulations states that in order to qualify under
section 501(c)(3) of the Code, an organization must be both organized and operated
exclusively for one or more exempt purposes. If an organization fails to meet either the
organizational or the operational test, it is not exempt.

Section 1.501(c)(3)-1(c)(1) of the Regulations states that an organization will be
regarded as "operated exclusively" for one or more exempt purposes only if it engages
primarily in activities which accomplish one or more of such exempt purposes specified
in section 501(c)(3) of the Code. An organization will not be so regarded if more than
an insubstantial part of its activities is not in furtherance of an exempt purpose.

Section 1.501(c)(3)-1(d)(1)(ii) of the Regulations states that an organization is not
operated exclusively for one or more exempt purpose unless it serves a public rather
than a private interest.

Revenue Ruling 68-504, 1968-2 C.B. 211 describes a nonprofit organization formed and
operated to conduct an educational program for bank employees in a particular urban area
that qualified for exemption. No person could take the courses unless he was a
member of the organization but membership was open to employees of all banks in the
area.

Revenue Ruling 74-116, 1974-1 CB 127 describes a membership organization devoted
to developing and exchanging research data among users of a specific type of
computer. In furtherance of its objectives, the organization conducted meetings and
seminars at which operational and technical problems relating to the use of

this computer were discussed. Representatives of the manufacturer were invited

to attend these functions to answer questions concerning the computer's

operation. By making specialized information available to its members focusing on a
specific type of computer , it was found the organization served the private

interest of its members rather than a public interest and was not exempt from federal
income tax under section 501(c)(3) of the Code.

Issue 2

Section 501(c)(4) of the Internal Revenue Code provides exemption to civic leagues or
organizations not organized for profit but operated exclusively for the promotion of
social welfare or local associations of employees, the membership of which is limited to
the employees of a designated person or persons in a particular municipality and the
net earnings of which are devoted exclusively to charitable, education or recreational
purposes. The net earnings of such entity may not inure to the benefit of any private
shareholder or individual.

Issue 3

Section 501(c)(5) of the Code provides for the exemption from federal income
tax of labor organizations.

Section 1.501(c)(5)-1(a) of the Income Tax Regulations provides that the
labor organizations contemplated by section 501(c)(5) of the Code are those
which have no net earnings inuring to the benefit of any member and have as
their objects the betterment of the conditions of those engaged in labor, the
improvement of the grade of their products, and the development of a higher
degree of efficiency in their respective occupations.

Rev. Rul. 77-46, 1977-1 CB 147 describes a non-qualifying organization under Section
501(c)(5). It did not qualify under Section 501(c)(5) because it did not conduct activities
that are commonly or historically recognized as characteristic of labor organizations, or
be closely related and necessary to accomplishing the principal purposes of exempt
labor organizations. Historically, labor organizations were primarily organized to
negotiate wages, hours, and working conditions.

Issue 4

Section 501(c)(6) of the Code exempts from federal income tax business
leagues, chambers of commerce, real estate boards, or boards of trade, 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 describes a business

league as 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.

Revenue Ruling 68-182, 1968-1 CB 263 states an organization which promoted a single
brand within a line of business will not qualify for exemption from federal income tax
under section 501(c)(6) of the Code.

Revenue Ruling 83-164, 1983-2 CB 95 describes an organization whose members
represent diversified businesses that own, rent, or lease computers produced by a
single computer manufacturer. This organization did not qualify under Section 501(c)(6)
of the Code because it failed to meet the line of business test but instead was found to
have served only a "segment of a line" include groups composed of businesses that
have licenses to a single patented product

In National Muffler Dealers Association, Inc. v. United States, 440 U.S. 472, Ct. D.
1997, 1979-1 C.B. 198 (1979), the Court held that an organization of muffler dealers
franchised by Midas International Corporation did not qualify for exemption from federal
income tax as a business league under section 501(c)(6) of the Code. The
organization's purpose was too narrow to satisfy the line of business test of section
1.501(c)(6)-1 of the regulations.

Application of Law

Issue 1

You are not described in section 501(c)(3) of the Code because you fail the operational
test as per Section 1.501(c)(3)-1(a)(1) of the Regulations.

You are not described in Section 1.501(c)(3)-1(d)(1)(ii) of the Income Tax Regulations
because you are operating for the private interests of your members, N and N
dealerships. This is illustrated by the fact that your training is only directed to foremen of
N dealerships which results in substantial private benefit to N and your members.

You are not like the qualifying organization described in Revenue Ruling 68-504,
because your membership is limited to foremen who work for N dealerships from several
states. Your training is not focused on a particular industry as a whole in a geographical
area but on issues pertaining to a particular manufacturer.

You are similar to the organization described in Revenue Ruling 74-116 because you
are a membership organization whose educational activities pertain to a specific type of
automobile. Because your training is limited to a specific type of automobile, you are
serving private interests, which precludes exemption under Section 501(c)(3).

Issue 2

You do not meet Section 501(c)(4) of the Code because you are operating primarily for
the convenience of members, N dealerships and N. This is illustrated by the fact that
your training is solely focused on the N automobile and members must be a foreman at
N dealerships and generally only personnel from N headquarters provides the training.
Furthermore, your goal is for foremen to share the knowledge with their particular
dealership to provide better service. Consequently your activities do not promote the
common good and general welfare of the people of the community as a whole because
you are serving primarily the private interests of N and N dealerships. In addition, you
are further precluded from qualifying as a Local Association of Employees within the
meaning of 501(c)(4) because your membership is not local in nature; your membership
is comprised of individuals from several states.

Issue 3

You are not as described in Section 501(c)(5) of the Code and Section 1.501(c)(5)-1(a)
of the Income Tax Regulations because you do not have as your primary objectives the
betterment of conditions of those engaged in labor, the improvement of the grade of
your products and the development of a higher degree of efficiency. You were formed
for the benefit of your members, employees of N, N dealerships and N headquarters to
provide training on the N brand of automobiles.

Like the organization described in Rev. Rul. 77-46, you do not conduct activities
historically characteristic of a labor organization. You were not formed to negotiate
wages, hours and working conditions but you are operating for the convenience of
members, N dealerships and N headquarters by providing educational events directed
toward private interests precluding you from qualifying for exemption under Section
501(c)(5).

Issue 4

You are not described in Section 501(c)(6) of the Code because you are not organized
and operated as a business league.

You are not described in Section 1.501(c)(6)-1 of the Income Tax Regulations because
your activities are directed to perform services for the benefit of a particular
manufacturer rather than to the improvement of business conditions of one or more
lines of business.

You are like the organizations described in Revenue Rulings 68-182 and 83-164,
because your activities are exclusively directed for foremen at N dealerships. You were
established for foremen at N dealerships to receive training on N cars from personnel at
N headquarters as well as collaborate on issues that individual foremen may face.
Because are only improving business conditions in a segment of line of a business, you
are precluded from exemption under Section 501(c)(6).

You are similar to the organization described in National Muffler Dealers Association,
because your activities serve members who only work for N dealerships. You provide
particular services toward one automobile manufacturer which does not represent one
or more line of businesses. Therefore, you are precluded from exemption under
Section 501(c)(6).

Applicant’s Position

You applied initially under IRC section 501(c)(3) you then applied under section
501(c)(5) and 501(c)(6). You also submitted amended Articles of Incorporation to
change from a mutual benefit to a public benefit corporation.

You state that your focus is on automotive technology, the N brand of auto is just part of
your larger agenda and that N dealerships involved sell different makes and models of
automobiles, which means the meetings for shop foremen do not fit a narrow purpose or
create any special advantage for them. More so you only admit shop foremen to
educational meetings and only discuss automotive technology, diagnostic advances and
current vehicles. Finally no part of the net earnings inure to the benefit of any private
shareholder or individual.

Service Response to Applicant’s Position

You failed to provide any additional information from which it can be concluded that you
are primarily organized and operated in accordance with sections IRC 501(c)(3),
501(c)(4), 501(c)(5) or 501(c)(6) as described in the preceding facts and analysis.

Conclusion

You do not qualify under Section 501(c)(3) and Section 501(c)(4) because you are
serving the private interests of N foremen, N dealerships and N headquarters. You do
not qualify under Section 501(c)(5) because you do not have as your objectives, the
betterment of conditions of those engaged in labor, the improvement of the grade of
your products and the development of a higher degree of efficiency. You do not meet
Section 501(c)(6) because your benefits are directed toward a segment of line of a
business.

You have the right to file a protest if you believe this determination is incorrect. To
protest, you must submit a protest statement explaining your views and reasoning. You
must submit the protest statement, signed by one of your officers, within 30 days from
the date of this letter. We will consider your statement and decide if the information
affects our determination. If your protest 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.

Types of information that should be included in your protest statement can be found in
Publication 892. The protest statement must be accompanied by the following
declaration:

“Under penalties of perjury, I declare that I have examined this protest statement,
including accompanying documents and to the best of my knowledge and belief, the
statement contains all relevant facts and such facts are true, correct, and complete.”

Your protest will be considered incomplete without this statement.

If an organization's representative submits the protest, a substitute declaration must be
included stating that the representative prepared the protest and accompanying
documents; and whether the representative knows personally that the statements of
facts contained in the protest 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. If you want
representation 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. You can find more information about representation in 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 file a protest within 30 days, you will not be able to file a suit for declaratory
judgment in court because the Internal Revenue Service (IRS) will consider the failure
to appeal as a failure to exhaust available administrative remedies. Code section
7428(b)(2) provides, in part, that a declaratory judgment or decree shall not be issued in
any proceeding unless the Tax Court, the United States Court of Federal Claims, or the
District Court of the United States for the District of Columbia determines that the
organization involved has exhausted all of the administrative remedies available to it
within the IRS.

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. 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 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,

Director, Exempt Organizations

Enclosure: Publication 892