IRS rejects business-league status for member-specific realty services

Plain-English summary

A real-estate association filed Form 990 as a § 501(c)(6) organization even though it had never obtained a determination letter. Its major activities were operating a multiple-listing service, publishing a homes magazine, and providing related services to members. The examination report found that the association executive spent 81.81% of working time on nonexempt activities, volunteers spent 45.75% of their time on particular services, and 67% of income and 62% of expenses related to the listing service and magazine. The IRS concluded that these activities served individual members instead of improving business conditions for the real-estate industry as a whole. It therefore treated the association as nonexempt for the examined period and required Form 1120 returns. The final letter states that the conclusion applied only to the listed tax periods and did not determine later periods.

Ruling snapshot

• Question: Did the association qualify as a § 501(c)(6) business league when most of its resources supported a multiple-listing service and members' homes magazine?
• Outcome: Revocation
• Key authorities: IRC §§ 501(c)(6) and 513; Treas. Reg. § 1.501(c)(6)-1; Rev. Rul. 59-234; Rev. Rul. 78-52

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
TE/GE EO Examinations

GOVERNMENT ENTITIES
DIVISION

October 27, 2009

Release Number: 201451038
Release Date: 12/19/2014
UIL Code: 501.06-00

Taxpayer Identification Number:
Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

Dear

During our examination of the return(s) indicated above, we determined that your organization was not described in Internal Revenue Code section 501(c) for the tax period(s) listed above and therefore, it does not qualify for exemption from federal income tax. This letter is not a determination of your exempt status under section 501 for any period other than the tax period(s) listed above.

The attached Report of Examination, Form 886-A, Explanation of Items, summarizes the facts, the applicable law, and the Service’s position regarding the examination of the tax period(s) listed above, You have agreed with our determination by signing Form 6018-A, Consent to Proposed Action, accepting our determination of non-exempt status for the period(s) stated above. You have filed the

required income tax returns.

In the future, if you believe your organization qualifies for tax-exempt status and would like to establish its status, you may request a determination from the Internal Revenue Service by filing Form 1024, Application for Recognition of Exemption Under Section 501(a), and paying the required user fee.

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 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:

Local Taxpayer Advocate

Letter 4097 (3-2006)
Catalog Number 483688

If you have any questions, please call the contact person 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,

Vicki L, Hansen
Acting Director, EO Examinations

Enclosures:
Form 886-A

Letter 4097 (3-2006)
Catalog Number 48368B

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or m Explanation of Items Exhibit Name of Taxpayer 20XX ISSUES Can the . qualify for exempt status under section 501(c)(6) of the

Internal Revenue Code for the period ending December 31, 20XX when their primary activities consist of the operation of a Multiple Listing Service (hereinafter referred to as MLS) and the publication of a Homes Magazine that are considered particular services for members?

FACTS

The (hereinafter referred to ) has shown on their filed Form 990, Return of Organization Exempt From Income, for the period ending December 31, 20XX, “J Organization Type” that they are described within section 501(c)(6) of the Internal Revenue Code. The has never filed a Form 1024, Application for Recognition of Exemption under Section 501(a), with the Service. The Service records show that the current status of the is, Organizations other than 501(c)(3), (9), or (17) without determination letters but who file Forms 990 and a subsection code of 06, 501(c)(6).

is Incorporated in the State of , under the General Not for Profit Corporation Law on March 23, 19xx. Their Articles of Incorporation, Article V, Sections a) through f) hold that the Purposes for which was formed are:

» to unite those engaged in the real estate business in the counties of ; and for the purpose of exerting a beneficial influence upon the real estate business and related interest
» to promote and maintain high standards of conduct in the real estate business
» to provide a unified medium for real estate owners and those engaged in the real estate business whereby their interests may be safeguarded and advanced to further the interest in home and other real property ownership to unite those engaged in the real estate business in the counties of 4 and with the Association of Realtors and the National Association of Realtors, thereby furthering their own objectives throughout the state and nation, and obtaining the benefits and privileges of membership therein
» to designate, for the benefit of the public, those individuals within its jurisdiction authorized to use the term "Realtor" and "Realtor Associate" as prescribed and controlled by the National Association of Realtors.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -1-

Form 886A Department of the Treasury - Internal Revenue Service Explanation of Items
Name of Taxpayer
20XX

The
has a full-time employee, Association Executive, and a part-time employee to assist the
Association Executive with his/her duties. Following is a breakdown of the Associate Executive's time spent by activity:

EDUCATION
ACTIVITIES
HOURS
Association of Realtors (hereinafter referred to as ) 10
Offsite, non-
40
New member orientation
76
education and business meetings
128
MLS training
24
Board co-sponsored education
10
NOTE: Examples of courses offered:

1. Onsite Site Sewage Systems
2. Local Impact on State Government
3. Time Management
4. Quarterly AE Seminars
5. Technology
   TOTAL HOURS 288

MEMBER MANAGEMENT
ACTIVITIES
HOURS
Committee Support
204
Accounting Functions
780
Correspondence
50
General phone calls
100
Board and General Member meetings
36
Files management
50
Roster management
25
TOTAL HOURS
1245

LISTING ACTIVITIES
ACTIVITIES RELATED TO MLS
HOURS
Meetings
50
New member registration
100
Training
40
Caravan tours
75
Software management
90
Phone calls
50
TOTAL HOURS
405

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -2-

Form 886A Department of the Treasury - Internal Revenue Service Explanation of Items
Name of Taxpayer
20XX

LOCKBOX AND KEY MANAGEMENT
ACTIVITIES
HOURS
Hardware management
65
Contract management
40
Key programming and reprogramming
40
TOTAL HOURS
145

NOTES: This comes to a total of 2083 hours for the year.

The schedule below shows the Associate Executive's time spent on activities related to exempt purpose and activities that constitute particular services (nonexempt).

ASSOCIATE EXECUTIVE'S TIME SPENT

DESCRIPTION
EXEMPT MLS HOMES MAGAZINE OTHER TOTAL
Education 264 24 0 0 288
Member Management
Committee Support 30 104 30 40 204
Accounting Functions 70 580 36 94 780
Correspondence 5 35 5 5 50
General phone calls 5 75 15 5 100
Board & General Membership 0 0 0 36 36
Files Management 5 35 5 5 50
Roster Management 0 20 0 5 25
Listing Activities 0 405 0 0 405
Lockbox and Key Management 0 0 0 145 145
TOTAL 379 1278 91 335 2083

NON EXEMPT ACTIVITIES PERCENTAGE TOTALS

DESCRIPTION HOURS SPENT TOTAL HOURS AVAILABLE PERCENTAGE MLS 1278 2083 61.35% Homes Magazine 91 2083 4.37% Other Activities 335 2083 9.12% TOTALS 1704 2083 81.81%

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -3-

Form 886A Department of the Treasury - Internal Revenue Service Explanation of Items
Name of Taxpayer
20XX

The time spent by volunteers on
Committees is as follows:

TOTAL VOLUNTEER HOURS BY COMMITTEE
COMMITTEE
HOURS
MLS
164
Homes Magazine
83
Awards
22
Bylaws
49
Banquet
26
Membership/EEO
73
Legislative/RPAC
44
Nominations
8
Education/Programs
50
Strategic Plan/Plan of Action 69
TOTAL VOLUNTEER HOURS
588

VOLUNTEER COMMITTEE HOURS

DESCRIPTION EXEMPT HOURS NONEXEMPT HOURS TOTAL HOURS EXEMPT % NONEXEMPT % MLS 0 164 588 0.00% 27.89% Homes Magazine 0 83 588 0.00% 14.12% Awards 0 22 588 0.00% 3.74% Bylaws 49 0 588 8.33% 0.00% Banquet 26 0 588 4.42% 0.00% Education 50 0 588 8.50% 0.00% Membership/EEO 73 0 588 12.41% 0.00%
Legislative/RPAC 44 0 588 7.48% 0.00%
Nominations 8 0 588 1.36% 0.00% Strategic Plan/Plan of Action 69 0 588 11.73% 0.00% TOTALS 319 269 588 54.25% 45.75%

The breakdown of the MLS Income is as follows:

Income

Service charge is $ per month or $ per year plus an annual board membership fee of
$
for the Certified Appraiser.

The number of members is approximately 297. The number of members, 297, times $
per
year equals $
income.

According to Part VII, #93a. of the Form 990, the income for the MLS service was $ . The total income for the organization is $ . Based on the above information, the income for the MLS service is 23% of total income.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -4-

Form 886A Department of the Treasury - Internal Revenue Service Explanation of Items
Name of Taxpayer
20XX

The breakdown of the Homes Magazine Income is as follows:

Income

The Monthly Homes Magazine fees are based on how many partial page ads and full-page ads each realtor wants to use.

The income reported on Form 990, Part VII, #93b is $ . The total income for the organization is $ . Based on the above information, the Homes Magazine service is 44% of income.

The breakdown of the Expenses for the exempt and non-exempt purposes is as follows:

DESCRIPTION
MLS % HOMES MAGAZINE %
Salaries 61.35% 4.37%
Payroll Taxes 61.35% 4.37%
Accounting Fees
Supplies 57.96% 11.21%
Telephone
Postage & shipping
Equipment rental & maintenance
(Copier lease) 33.33% 33.33%
Printing & Publications 0.00% 100.00%
Travel
Conferences, conventions, &
meetings (Board functions)
Interest
Rent
Continuing Education 51.19% 0.00%
Miscellaneous
Warranty & Support 100.00% 0.00%
Repairs 58.62% 0.00%
Dues & Subscriptions 43.82% 0.00%
Other Expenses (Insurance &
Furniture)
TOTALS 25.21% 42.24%

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -5-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or Explanation of Items Exhibit Name of Taxpayer 20XX LAW:

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.

Revenue Ruling 59-234, 1959-2 C.B. 149 — held that an organization whose primary purpose is to stimulate and facilitate the transaction of business between members through cooperation and exchange of exclusive listings, which is inherently designed for the rendering of particular services for individual members as a Convenience and economy in the conduct of their respective businesses, is not entitled to exemption from Federal income tax as an organization described in 501(c)(6) of the Code.

Revenue Ruling 78-52, 1978-1 C.B. 166 — held that the distribution of a magazine by a business league exempt from Federal income tax under section 501(c)(6) of the Internal Revenue Code of 1954 is unrelated trade or business within the meaning of section 513.

Government's Position:

The total amount of time spent during the year by the Associate Executive on providing particular services for members, the MLS, Homes Magazine and Other Activities, is 1704 hours out of 2083 total hours or 81.81%

The total amount of time spent during the year by . volunteers on providing particular services for members, the MLS, Homes Magazine service and Awards Service, is 269 hours out of 588 hours or 45.75%.

The total amount of income devoted to particular services for members, the MLS and the Homes Magazine, is $ of the $ total income or 67%. The total amount of expenses devoted

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service Page: -6-

. .
oo
.4

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or Explanation of Items Exhibit Name of Taxpayer 20XX to particular services for members, the MLS and the Homes Magazine services, is $ of the
$ total expenses or 62%.
The : Articles of Incorporation provide that the purpose of the “to unite those engaged in

the real estate business, to promote and maintain high standards of conduct, to provide a unified medium for real estate owners and those engaged in real estate, to further the interest in home or other property ownership, and to allow individuals to use the term "realtor" and “realtor associate” as prescribed by the National Association of Realtors”. This purpose promotes the member and not the industry as a whole.

As shown above operation is substantially devoted both time spent and financially to activities that are considered particular services to members as described in Revenue Ruling 59-234, 1959-2 CB 149 and Revenue Ruling 78-52, 1978-1 CB 166. These rulings held the organizations not to be a business league within the intendment of section 501(c)(6) of the Code. Revocation of the organization's exempt status under 501(c)(6) of the Code was proposed and upheld. A minimal amount of the time spent and finances are devoted to activities that benefit the industry as a whole as described in regulations 1.501(c)(6)-1. It has been shown that assets of the are inuring to the member which is prohibited under section 501(c)(6) of the Code.

Therefore it is the government's position that, the activities of operating the Homes Magazine and multiple listing services are a substantial part of operations and these services provide particular services to their members rather than to the business industry as a whole. The activities of the are no different than that of a for-profit organization or other realty companies.

Taxpayer's Position:

To be submitted by taxpayer.

Conclusion:

Based on the information above, it is concluded that the does not meet the requirements to be recognized as exempt from federal income tax under section 501(c)(6) of the Internal Revenue Code. Accordingly, the is not eligible to file

the Form 990, Return of Exempt Organizations, for the period ending December 31, 20XX or any period thereafter unless they can show to the Service that their activities have changed and can qualify for exempt status under section 501(c)(6) of the Code.

Form 1120 returns should be filed for the tax periods after January 1, 20XX.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service Page: -7-