Lodging association loses exemption for member-specific services

Plain-English summary

The IRS revoked a lodging association's tax-exempt status under IRC § 501(c)(6). The association's principal activities included advertising member properties, inspecting those properties, processing payments, and selling gift certificates for members. The IRS concluded that these were particular services and commercial benefits for individual members rather than activities improving business conditions for the lodging industry as a whole. The revocation applied from the stated effective date, and the organization was required to file corporate income tax returns.

Ruling snapshot

• Question: Did the association continue to qualify as a tax-exempt business league under IRC § 501(c)(6)?
• Outcome: Revocation
• Key authorities: IRC § 501(c)(6); Treas. Reg. § 1.501(c)(6)-1; Rev. Rul. 55-444; Rev. Rul. 56-84; Rev. Rul. 67-77; Automotive Electric Association v. Commissioner, 168 F.2d 366 (6th Cir. 1948)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury

Appeals Office
4330 Watt Avenue SA 7890 Employer Identification Number:
Sacramento, CA 95821-7012
Date: Release Number: 201633035 Person to Contact:

Release Date: 8/12/2016

Date: May 19, 2016 Employee ID Number:

Tel:
UIL Code: 501.06-00 Fax:

Tax Periods Ended:

Certified Mail

Dear

This is a final determination that you do not qualify for exemption from Federal income tax under Internal
Revenue Code (the “Code”) section 501(a) as an organization described in Code section 501(c)(6) for the
tax periods above. Your determination letter dated is revoked. .

Our adverse determination as to your exempt status was made for the following reason(s):

Organizations exempt from tax under section 501(c)(6) of the Internal Revenue Code, including business
leagues formed to promote the common interests of members engaged in a particular line of business,
must not be organized for profit and no part of the net earnings may inure to the benefit of any private
shareholder or individual. A substantial portion of your activities includes the performance of regular
services for individual members, including the promotion of the individual member's business, rather than
promoting the industry as a whole or seeking to improve business conditions for the industry as a whole.
See Treas. Reg. 1.501(c)(6)-1. Therefore, you are not an organization described in Code section
501(c)(6). ;

You do not promote the advancement of any particular line of business or the improvement of business
conditions; rather you promote the individual businesses of your members. Therefore, you do not qualify
for exemption as an organization described in section 501(c)(6) of the Code.

You are required to file Federal income tax returns on Forms 1120. File your returns with the appropriate
Internal Revenue Service Center per the instructions of the return. For further instructions, forms, and
information please visit www.irs.gov.

We will make this letter and the proposed adverse determination letter available for public inspection
under Code section 6110 after deleting certain identifying information. We have provided to you, in a
separate mailing, Notice 437, Notice of Intention to Disclose. Please review the Notice 437 and the
documents attached that show our proposed deletions. If you disagree with our proposed deletions, follow
the instructions in Notice 437.

If you decide to contest this determination, you may file an action for declaratory judgment under the
provisions of section 7428 of the Code in one of the following three venues: 1) United States Tax Court,
2) the United States Court of Federal Claims, or 3) the United States District Court for the District of
Columbia. A petition or complaint in one of these three courts must be filed within 90 days from the date
this determination letter was mailed to you. Please contact the clerk of the appropriate court for rules and
the appropriate forms for filing petitions for declaratory judgment by referring to the enclosed Publication
892.

You may write to the courts at the following addresses:

United States Tax Court
400 Second Street, N.W.
’ Washington, D.C. 20217

U.S. Court of Federal Claims
717 Madison Place, N.W.
Washington, D.C. 20439

U.S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, D.C. 20001

Processing of income tax returns and assessments of any taxes due will not be delayed if you file a
petition for declaratory judgment under section 7428 of the Internal Revenue Code.

You may also be eligible for help from the Taxpayer Advocate Service (TAS). TAS is an independent
organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax
problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS.

If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit
www.taxpayeradvocate.irs.gov or call 1-877-777-4778.

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.

Sincerely Yours,

Appeals Team Manager

Enclosure: Publication 892

cc:

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities Division
Exempt Organizations: Examinations

ORG

Date: March 10, 2015
Taxpayer identification number:

Form:

990 Return
Tax year(s) ended:

December 31, 20XX, 20XX, 20XX
Person to contact/ID number:

Contact numbers:
Telephone:
Fax:

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

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

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
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:

Internal Revenue Service
Office of the Taxpayer Advocate

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.

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

Thank you for your cooperation.

Enclosures:

Report of Examination
Form 6018-A
Publication 892
Publication 3498

Sincerely,

Margaret Von Lienen
Director, EO Examinations

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

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
December 31, 20XX,
ORG 20XX, 20XX
Issue(s):

1. Whether ORG continues to qualify for exemption under IRC Section 501(c)(6)?

2. Whether the Organization's exemption under IRC Section 501(a), an organization
   described in IRC Section 501(c)(6), should be revoked effective January 1, 20XX.

Facts:

ORG (Organization) was granted exemption from Federal income tax, under Section 501(c)(6) of
the Internal Revenue Code, in Letter 948 dated July 30, 19XX. Letter 984 showed the former
name of the Organization as CO-1.

The Organization was incorporated under the laws of the State of State. By-Laws dated July 18,
20XX states the organization's Mission is “The recognition, support and promotion of those State
professional innkeepers exclusively committed to the highest standards of excellence in distinctive

lodging accommodations.”

The Organization filed Forms 990, Return of Organization Exempt from Income Tax, for year
20XX, 20XX and 20XX. The Organization did not file Forms 990-T, Exempt Organization
Business Income Tax Return.

Form 990 described the Organization's Mission as “to preserve the historical accommodations of
STATE and educate the public and promote conserving utilization of the structures.”

The Organization’s three largest program services listed on the Form 990 are:

• Advertising and promoting support for the historic accommodations of State.

• Inspections and re-inspections of historical accommodations of State to assure they are
  being maintained and cared for properly.

• ACH and credit card processing facility.

The organization also conducted an Annual Convention listed on the Form 990 as a Fundraising
Event. This Convention was open to the membership, associated membership and the public.

The Service conducted an examination of the books and records and the Organization’s Form 990
for the year ending December 20XX.

The Director, Indv-1, stated that the Organization had 0 member properties and provided a
Membership List. She was asked in regards of the name of the organization since it was not the
same as the one in the determination letter. The Director said that as the organization “evolved”,
it became ORG.

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

Schedule number or exhibit -

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
December 31, 20XX,
ORG 20XX, 20XX

The Forms 990 show the following:

Year ending December 31, 20XX
Revenue Current Year
Contributions and Grants 0
Investment Income 0
Other Revenue 0

Total Revenue 0
Expenses
Other expenses 0

Total Expenses 0
Revenues less Expenses 0

End of Year

Total Assets 0
Total Liabilities 0
Net Assets or Fund Balances 0

Year ending December 31, 20XX
Revenue Current Year
Contributions and Grants 0

Investment Income 0
Other Revenue 0
Total Revenue 0

Expenses

Other expenses 0
Total Expenses 0

Revenues less Expenses 0

End of Year

Total Assets 0

Total Liabilities 0

Net Assets or Fund Balances 0

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

Schedute number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
December 31, 20XX,
ORG 20XX, 20XX

Year ending December 31, 20XX
Revenue Current Year
Contributions and Grants 0

Investment Income 0
Other Revenue 0
Total Revenue 0

Expenses

Other expenses 0
Total Expenses 0

Revenues less Expenses 0

End of Year

Total Assets 0

Total Liabilities 0

Net Assets or Fund Balances 0

Organization Activities

The review of the Transaction Reports, Minutes and interview revealed that the organization's
main activities were to advertise and promote their membership properties through their website
and publications.

The review of their activities showed that the organizations main activities are advertisement of the
membership properties on their website, Inspections and re-inspections of the properties, and
served as an ACH and Credit Card processing facility.

The organization provided, to its membership properties, advertisement and promotion through
their website www.statebb.org, Location Guide Brochure and Innkeepers Resource Manual.

The website contained a wedding page listing with direct links to the membership websites.

The Organization also provided Gift Certificate sales through its website and its 1800 number, as
stated on its brochures.

The examination showed that the organization held an Annual Convention for the membership,
associated members and was open to the public. The convention had a Basic Workshop, a
Conference for members, sponsors, and Vendor Registration.

The examination of the books and records showed that the organization's main activities were to
provide particular services to its membership.

On December 1, 20XX, a review of the Form 990 statute date was done. We mailed Form 872,
Consent to Extend the Time to Assess Tax, for the year 20XX, to | As per phone

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

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
December 31, 20XX,
ORG 20XX, 20XX

discussion with the Director about the form, we mailed Form 872 to the President of the
organization, Indv-1, in City, State on December 15, 20XX.

We received a letter from Organization’s President on December 19, 20XX declining to sign Form

872. As of the day of this report, we have not received an executed Form 872.

LAW:

Section 6001 of the Code provides that every person liable for any tax imposed by the Code, or for
the collection thereof, shall keep adequate record as the Secretary of the treasury or his delegate
may from time to time prescribe.

Section 6033(a)(1) of the Code provides, except as provided in section 6033(a)(2), every
organization exempt from tax under section 501(a) shall file an annual return, stating specifically
the items of gross income, receipts and disbursements, and such other information for the
purposes of carrying out the internal revenue laws as the Secretary may by forms or regulations
prescribe, and keep such records, render under oath such statements, make such other returns,
and comply with such rules and regulations as the Secretary may from time to time prescribe.

Section 1.6033-1(h)(2) of the regulations provides that every organization which has established
its right to exemption from tax, whether or not it is required to file an annual return of information,
shall submit such additional information as may be required by the district director for the purpose
of enabling him to inquire further into its exempt status and to administer the provision of
Subchapter F (section 501 and the following), chapter 1 of the code and section 6033.

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.

IRC section 501(c)(6) provides for the exemption of business leagues and similar organization
whose:

a. Purpose is the promotion of the common business interest of its members,

b. Net earnings do not inure to the benefit of any member,

c. Purpose is not to engage in a regular business of a kind ordinarily carried on for profit,

d. Principal activity is not the performance of particular services for individual persons.

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

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

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
December 31, 20XX,
ORG 20XX, 20XX

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.

Rev. Rul. 55-444 states that an organization formed to promote the business of a particular
industry that carries out its purposes primarily by conducting a general advertising campaign to
encourage the use of products and services of the industry as a whole is exempt from tax
notwithstanding that such advertising to a minor extent constitutes the performance of particular
services for its members.

Revenue Ruling 56-84 states that an organization, operated primarily for the purpose of
promoting, selling and handling the national advertising in its members' publications, is engaged in
the performance of particular services for individual members as distinguished from activities for
the improvement of the business conditions of its members as a whole and, therefore, is not
entitled to exemption from Federal income tax as a business league.

Revenue Ruling 67-77 states that an organization composed of dealers of a certain make of
automobile, in a designated area, whose primary purpose is the financing of advertising
campaigns for the sale of that make of automobile is performing particular services for its
members and is not entitled to exemption from Federal income tax as a business league under
section 501(c)(6) of the Internal Revenue Code of 1954.

The publishing of trade journals has been found to constitute the performance of particular
services where the journals are mainly catalogues of the product of members.

Rev. Rul. 68-267 states that an exempt retail food merchants’ association that regularly carries on
as a minor portion of its activities a coupon redemption service for its members is engaged in
unrelated trade or business.

Advertising that carries the names of members generally constitutes the performance of particular
services for members. Thus, an association of the merchants in a particular shopping center
whose advertising material contained the names of the individual merchants is denied exemption
(see Rev. Rul. 64-315, 1964-2 C.B. 147) as is an association created to attract tourists to a local
area, but whose principal activity is the publication of a yearbook consisting largely of paid
advertisements by its members (see Rev. Rul. 65-14, 1965-1 C.B. 236). In another case
exemption was denied an association that published catalogues that listed only products
manufactured by the members. See Automotive Electric Association v. Commissioner, 168 F.2d
366 (6th Cir. 1948).

On the other hand, an organization formed to promote the business of a particular industry and
that conducts a general advertising campaign to encourage the use of products and services of

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

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
December 31, 20XX,
ORG 20XX, 20XX

the industry as a whole is exempt notwithstanding that such advertising to a minor extent
constitutes the performance of particular services for its members. See Rev. Rul. 55-444, 1955-
2, C.B. 258.

Activities that Constitute the Performance of Particular Services. The performance of particular
services by an organization for its members or others is not an exempt activity under IRC
501(c)(6) . While such activities do not preclude exemption in and of themselves, an organization
whose primary activity is performing particular services is not exempt under IRC 501(c)(6).

Government’s Position:

We are proposing revocation of the Organization’s exemption under IRC Section 501(c)(6)
beginning January 1, 20XX because it is not operated for exempt purposes in accordance with the
requirements set forth in Section 501(c)(6) of the Internal Revenue Code.

The Service position is that the Organization has failed the basic tests in order to be exempt under
IRC 501(c)(6). The Basic Tests the Organization must meet in order to be exempt under IRC
501(c)(6) are as follows:

a. It must be an association of person having some common business interest, and its
purpose must be to promote this common business interest.

b. It must not be organized for profit.

c. It must be a membership organization and have a meaningful extent of membership

support.

No part of its net earnings may inure to the benefit of any private shareholder or individual.

e. Its activities must 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.

f. Its purpose must not be to engage in a regular business of a kind ordinarily carried on for
profit, even if the business is operated on a cooperative basis or produces only sufficient
income to be self-sustaining.

g. It must be primarily engaged in activities or functions constituting the basis for its
exemption.

h. Its primary activity cannot be performing particular services for members.

The Organization does not qualify for exemption from Federal income tax under section 501(c)(6)
of the Code because its principal activities constitute the performance of particular services for its
members. Its principal activities were advertisement for its members through the organization’s
website; Inspections and re-inspections for the membership properties; ACH and credit card
processing service; and sale of Gift Certificates thru the website and Organization’s 1800 number.
Those activities are considered a personal benefit to your members, of a commercial nature, and
would preclude your exemption.

Form 886-A (1-1994) Catalog Number 20810W Page 6 publish.no.irs.gov | Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
December 31, 20XX,
ORG 20XX, 20XX

Since the advertisement and promotion, inspections and re-inspections, ACH and credit card
processing are the organization’s principal activities, the organization does not qualify for
exemption from Federal income tax under section 501(c)(6) of the Internal Revenue Code.

Taxpayer’s Position:

The Organization's position is unknown at this time.
Conclusion:

The Organization does not qualify for exemption from Federal income tax under section 501(c)(6)
of the Code because its principal activities constitute the performance of particular services for its
members.

The Organization's tax exempt status should be revoked effective January 1, 20XX, because it is
not operated for exempt purposes pursuant to the requirements set forth in Section 501(c)(6) of
the Internal Revenue Code.

Should this revocation be upheld, you are required to file Form 1120 for the years ending
December 31, 20XX, 20XX, 20XX and all future periods, whether or not you have taxable income.

Form 886-A (1-1994) Catalog Number 20810W Page 7 publish.no.irs.gov | Department of the Treasury-Internal Revenue Service