Business-referral network denied exemption

Plain-English summary

A membership association sought section 501(c)(6) status for a business-referral network. It admitted only one noncompeting member from each trade or profession and required members to exchange leads, recommend each other, attend weekly meetings, and promote fellow members through events, a website, and social media. The IRS found that these activities provided particular services to individual member businesses rather than improving conditions for one or more lines of business. It denied business-league exemption.

Ruling snapshot

• Question: Did the referral network promote a common line of business, or did it provide particular services to individual members?
• Outcome: Denied
• Key authorities: IRC § 501(c)(6); Treas. Reg. § 1.501(c)(6)-1; Rev. Rul. 56-65; Rev. Rul. 59-391; Rev. Rul. 76-409

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201

Date: April 23, 2015

Release Number: 201529010
Release Date: 7/17/2015
UIL Code: 501.06-00
501.06-01

Employer ID number:

Contact person/ID number:

Contact telephone number:

Form you must file:

Tax years:

Dear

This letter is our final determination that you don’t qualify for tax-exempt status under Section 501(c)(6) of the
Internal Revenue Code (the Code). Recently, we sent you a proposed adverse determination in response to your
application. The proposed adverse determination explained the facts, law, and basis for our conclusion, and it
gave you 30 days to file a protest. Because we didn’t receive a protest within the required 30 days, the proposed
determination is now final.

You must file federal income tax returns for the tax years listed at the top of this letter using the required form
(also listed at the top of this letter) within 30 days of this letter unless you request an extension of time to file.

We'll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection (as required under Section 6110 of the Code) 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 the Notice
437 on how to notify us. If you agree with our deletions, you don’t need to take any further action.

If you have questions about this letter, you can contact the person listed at the top of this letter. If you have
questions about your federal income tax status and responsibilities, call our customer service number at
1-800-829-1040 (TTY 1-800-829-4933 for deaf or hard of hearing) or customer service for businesses at
1-800-829-4933.

We sent a copy of this letter to your representative as indicated in your power of attorney.

Letter 4040 (Rev. 7-2014)
Catalog Number 47635Z

Sincerely,

Director, Exempt Organizations

Enclosures:

Notice 437
Redacted Letter 4034, Proposed Adverse Determination under IRC Section 501(a) Other Than 501(c)(3)

Redacted Letter 4040, Final Adverse Determination under IRC Section 501(a) Other Than 501(c)(3) - No
Protest

cc:

Letter 4040 (Rev. 7-2014)
Catalog Number 47635Z

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201

Date: March 5, 2015

Employer ID number:

Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend:

B = Date
C = State

UIL:
501.06-00
501.06-01

Dear

We considered your application for recognition of exemption from federal income tax under Section 501(a) of
the Internal Revenue Code (the Code). Based on the information provided, we determined that you don’t qualify
for exemption under Section 501(c)(6) of the Code. This letter explains the basis for our conclusion. Please
keep it for your records.

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 B, in the state of C. The following purposes are outlined in both your Articles of
Incorporation and your bylaws:

• To institute and maintain a method of exchanging and interchanging business information among
members.
• To create and encourage cooperation, business efficiency, and service to members.
• To bring members in touch with business opportunities.
• To encourage local, national, and foreign trade expansion of members.
• To promote a better acquaintance and closer association among members.

Article II of your bylaws defines membership as “...persons, firms, and corporations, each representing a
different trade or business, occupation or profession...” Article II also states, “Any person, firm, or

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K

corporation whose main activity or profession is not in competition with the main activity or profession of a
member is eligible for membership in the Association. An application for membership shall not be denied by
reason of any conflict between the main activity of such applicant and an incidental activity of a member.”

Your bylaws state that all members are classified by their business or profession. Further, your bylaws state
that you allow only one membership for each classification. No member is allowed to hold more than one
classification unless otherwise approved by your Board of Directors.

Article IV of your bylaws titled “Obligations of Members” outlines the following member requirements:

• Section 1. Attendance: Members, by their designated representatives, shall attend each and every
meeting of the association.

Members shall have the privilege of making up enforced absences from regular meetings by attending
an after-hours event or a meeting of the Board of Directors within sixty (60) days of missing a regular
meeting.

• Section 2. Leads: A lead is specific information not otherwise readily known in the community in which
a current member can rely upon to generate business. Information which cannot benefit any member is
not a valid lead. Each member is required to bring in a minimum of one complete lead at each weekly
meeting, or pay $1.00. If the member is unable to submit this information at a meeting, the information
may be called, emailed, or faxed to the prospective business that will be receiving the lead.

A member who does business with another member for the first time shall be entitled to lead credit for
that transaction. Repeat business with that same member does not entitle the member to additional lead
credit unless the transaction is new business.

• Section 3. Classification Talks and After Hours Events: Members shall give a Classification Talk within
the first three months and host an after-hours event within the first six months of membership and at
least once every two years thereafter. What constitutes an after-hours event shall be determined by the
Board of Directors.

A member may be excused from hosting an after-hours event by appearing in person before the Board of
Directors and presenting reasons for not having an after-hours event. If excused by the Board of
Directors, the member shall sponsor an event in an amount equal to the average cost of an after-hours
event, as determined by the Board of Directors.

• Section 4. After Hours Registration: Members shall register at each after-hours event in order for their
attendance credit. If unable to register at the after-hours event, they have the week following the after-
hours event to do so.

• Section 5. Business Familiarity: Members shall familiarize themselves with the business interests of
fellow members to the extent that they recognize opportunities for helping them in a business way.

• Section 6. Employee/Associate Assistance: Members shall solicit through systematic effort the
cooperative help of his/her associates and employees in the performance of these duties.

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K

• Section 7. Diligence: Members shall act promptly on all information received, following it up diligently
and making every reasonable attempt to turn it into business.

• Section 8. Recommendations: Whenever possible, members shall recommend the services and products
of his/her fellow members to friends and business associates.

Members shall handle all recommendations reported to them in such a thorough manner that it will
reflect credit on the member recommending their products and service, as well as the membership of the
Association as a whole.

• Section 9. Satisfactory Service: Every member of the Association is considered a “Dependable Source
of Supply,” and has thereby incurred an obligation to give satisfactory service as to price, quality,
quantity, delivery, maintenance, etc., equal to, or superior to that of his competitor.

• Section 10. Preferences: In keeping with the Association’s objectives, members are encouraged to
always give fellow members every possible preference in business transactions, other things being
equal, and subject to legitimate demands of policy with reference to established business connections.

Article VIII of your bylaws discusses committees and board liaisons. You shall have a membership committee
composed of five members whose duties will be to determine, “a. Whether a conflict exists between a
prospective member and a current member, b. The nature of the prospective member’s business, its reputation
in the community, and other information necessary to educate the Board of Directors that shall vote on
prospective members application, and c. The position of the intended designated representative and alternate
and their authority within the organization.” You will also have a leads committee appointed by the President.
“The purpose shall be to promote leads, determine whether a lead is valid, and report to the Board of Directors
any member who fails to comply with the leads requirement of the bylaws.”

You were formed to institute and maintain a method of exchanging and interchanging business information
among your members. You will aid members in growing their businesses and exchange information among
members at weekly meetings. You have bi-weekly presentations in order to create and encourage cooperation,
business efficiency and service to your members as well as to aid businesses to provide better customer service
and for growth of the business. You bring members in touch with business opportunities through weekly emails
that include business networking activities. The potential networking activities are also discussed at weekly
meetings. These activities should increase both the members’ own clientele as well as the members’ network
for referral opportunities. Through your networking and referral activities as well as your participation in as an
organization in community social and networking events, you encourage the local, national, and foreign trade
expansion of your members. Finally, you have group after-hours events to promote a better acquaintance and
closer association among your members. This provides members with a better knowledge of the type of
business that fellow members engage in.

You sponsor events designed to promote all of your members’ businesses in the community, with an emphasis
on the importance of shopping locally. In addition, you maintain both a website and a social media site on
Facebook which is used to promote each of your members’ businesses.

You are funded solely through membership dues. Your expenses are incurred to fund activities related to your
exempt purpose.

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K

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 an 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. By furnishing information to and advertising the products of its members, the
organization was performing particular services for its members.

Revenue Ruling 59-391, 1959-2 C.B. 151, held that an organization created for the purpose of exchanging
information on business prospects in an attempt to increase sales for members was not entitled to tax exemption
as a business league under section 501(c)(6) of the Code. The organization described in this ruling restricted its
membership to individuals, firms, associations and corporations, each of which represented a different trade,
business, occupation or profession and no one of which was in competition with another. The applicant held
weekly meetings, operated a central information service for the exchange of business information among
members, encouraged member cooperation and business efficiency, and required members to provide referrals
to fellow members. Each member agreed to keep the organization’s members informed of business changes
which would indicate potential markets for the sale of members' products.

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

Application of law

You are not described in section 501(c)(6) of the Internal Revenue Code because you were formed to provide
particular services to your members.

You are not described in section 1.501(c)(6)-1 of the Income Tax Regulations because you are not formed to
improve the business conditions of one or more lines of business. Rather, your sole purpose is to promote the

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K

expansion and improvement of your member businesses. You achieve this purpose by: a) limiting your
membership to specific membership classes with each class representing a specific type of business, b)
disallowing membership applications from businesses that would compete with the business of an existing
member, and c) requiring members to provide active business leads and referrals to other members.

You are similar to the organization described in Revenue Ruling 56-65 because you are providing particular
services to your members. By providing your members with regular business leads and restricting membership
to noncompeting classes representing a single line of business, you are promoting the private interests of your
member businesses rather than the broad common interests of a particular trade or industry.

Your activities are almost indistinguishable from those of the organization described in Revenue Ruling 59-391
because you restrict your membership to individuals, firms, associations and corporations, each of which
represent a different trade, business, occupation or profession and no one of which is in competition with
another. Further, your members are required to provide leads and referrals to fellow members. Like the
organization described in this ruling, you do not meet the requirements for tax exemption under section
501(c)(6) of the Code because your activities are not directed to the improvement of business conditions of one
or more lines of business. Rather, you are operated to serve the private interests of your members.

You are performing particular services for your members in a manner similar to the organization described in
Revenue Ruling 76-409. Though you do not publish a directory, you do maintain a website and social media
site on Facebook which is used to promote each of your members. Like the organization described in Revenue
Ruling 76-409, the services you provide to members constitute particular services and preclude tax exemption
under section 501(c)(6) of the Code.

Your Position

You state that you qualify for tax exemption under section 501(c)(6) of the Code because you are an association
of persons having the common business interest of improving the business conditions as a whole for your
members. To accomplish this goal, topics of an educational nature are discussed at your weekly meetings. The
topics discussed are designed to educate members in the operation of their businesses and thereby improve the
conditions of each member’s line of business. The meetings provide an interdisciplinary forum for the
exchange of ideas and all members are invited to participate to help solve problems common to all members. In
addition, you state that you sponsor events designed to promote all of your members’ businesses in the
community, with an emphasis on the importance of shopping locally. Finally, you state that you maintain both
a website and a social media site on Facebook, which is used to promote each of your members.

Our Response to Your Position

Although you are promoting the business interests of your members, your activities are not directed to the
improvement of business conditions of one or more lines of business as required by section 1.501(c)(6)-1 of the
Income Tax Regulations. Rather, you restrict your membership to noncompeting representatives from different
trades, businesses, occupations or professions, and you are primarily operated to promote the private interests of
your members. Your membership limitations also preclude you from qualifying as a board of trade or chamber
of commerce as these types of organization do not limit their membership in this way. While you do conduct
various educational activities at your weekly meetings, this does not deter from the fact that your membership
structure and business referral activities constitute particular services to your members and preclude tax
exemption under section 501(c)(6) of the Code.

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K

Conclusion

The facts clearly show that 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 business, or any other purpose defined in section
501(c)(6) of the Code. Rather, your activities and purposes are directed at the improvement of your members’
individual businesses.

Accordingly, you do not qualify for exemption as an organization described in section 501(c)(6) of the Code.

If you don’t agree
You have a right to file a protest if you don’t agree with our proposed adverse determination. To do so, you
must send a statement to us within 30 days of the date of this letter. The statement must include:

• Your name, address, employer identification number (EIN), and a daytime phone
number

• A copy of this letter highlighting the findings you disagree with
• An explanation of why you disagree, including any supporting documents
• The law or authority, if any, you are relying on

• The signature of an officer, director, trustee, or other official who is authorized to sign for the
organization, or your authorized representative

• One of the following declarations:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I 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.

For authorized representatives:

Under penalties of perjury, I declare that I prepared 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 representative (attorney, certified public accountant, or other individual enrolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if he or she hasn’t
already done so. You can find more information about representation in Publication 947, Practice Before the
IRS and Power of Attorney.

We'll review your protest statement and decide if you provided a basis for us to reconsider our determination. If
so, we’ll continue to process your case considering the information you provided. If you haven’t provided a
basis for reconsideration, we’ll forward your case to the Office of Appeals and notify you. You can find more

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K

information about the role of the Appeals Office in Publication 892, How to Appeal an IRS Decision on Tax-
Exempt Status.

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

U.S. mail: Street address for delivery service:
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 can also fax your statement and supporting documents to the fax number listed at the top of this letter. If
you fax your statement, please contact the person listed at the top of this letter to confirm that he or she received
it.

If you agree

If you agree with our proposed adverse determination, you don’t need to do anything. If we don’t hear from you
within 30 days, we’ll issue a final adverse determination letter. That letter will provide information on your
income tax filing requirements.

You can find all forms and publications mentioned in this letter on our website at www.irs.gov/formspubs. If
you have questions, you can contact the person listed at the top of this letter.

We sent a copy of this letter to your representative as indicated in your power of attorney.

Sincerely,

Director, Exempt Organizations
Cc: Thomasina F. Moore
Enclosure:
Publication 892

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K