Exclusive referral network is denied business league exemption

Plain-English summary

A networking organization limited membership to one representative from each business or profession and required members to remain exclusive to the group. Members met weekly, tracked business referrals, and could be fined for failing to provide a lead. Although the group described its mission as education and professional development, the IRS found that its structure gave individual members leads and competitive advantages instead of improving conditions across a line of business. Its membership was also too restricted to qualify as a chamber of commerce serving the general economic welfare of a community. The IRS denied exemption under section 501(c)(6), and the determination became final when the organization did not protest.

Ruling snapshot

• Question: Does the exclusive business-referral network qualify as a business league or chamber of commerce under section 501(c)(6)?
• Outcome: Denied. Its primary purpose was promoting the private business prospects of individual members.
• Key authorities: IRC § 501(c)(6); Treas. Reg. § 1.501(c)(6)-1; Rev. Rul. 59-391; Rev. Rul. 73-411

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201

Number: 201721020
Release Date: 5/26/2017 Employer ID number:

Date: March 3, 2017

Contact person/ID number:
Contact telephone number:
Form you must file:

Tax years:

UIL: 501.06-00

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.

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


Sincerely,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

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

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


Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201
Date: January 13, 2017

Employer ID number:
Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:

B =State 501.06-00
C = Date

D = Number

E = Number

F= Number

x dollars= Amount
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.

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

Facts

Several years ago, you began with just a few members who decided to meet weekly to network and share
business tips and trends within their particular line of business. You grew over the years and consequently
decided to incorporate under B’s nonprofit statute. As the group expanded and evolved, the mission changed to
more of an educational focus with emphasis on enhancing the professionalism of each member’s business. On C
in B you reincorporated to reflect these changes. Per your Articles of Incorporation, your purpose is to operate
exclusively as a not-for-profit organization of business persons within the community to gather together to
further the education of your members as to professional development, communication and networking. Every
member has been unanimously voted into your network based upon their expertise and excellence.
Furthermore, any member may sponsor a prospective member and present him to your membership as a guest.
Your entire membership must then decide unanimously whether this prospective member will fill a vacant
profession or business category that is advantageous to you.

Your activities consist of members meeting weekly for breakfast at the same location and the same time. Your
members have the responsibility when scheduled, to provide the program which involves a thirty minute
presentation for the scheduled meeting and, therefore must:


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• Attend the meeting and either speak or arrange for a guest speaker who provides the presentation on
recent developments in their profession or business.
• Invite members to visit the member’s place of business.

Your bylaws indicate your mission is to provide education and professional development to your exclusive
network of professionals who excel in their field of practice. They also state you are a community of diverse,
business professionals dedicated to cultivating long-term relationships through the sharing of ideas, experiences,
resources, and business referrals.

Your membership provisions listed in your bylaws are as follows:

1. Membership shall be limited to D persons; however, this limitation may be modified by the affirmative vote
of 75 percent of the membership in good standing, excluding affiliate members.

2. One representative shall be allowed, as a recognized member, for each business or profession (category). If
one member representing a business or profession is desirous of allowing an “affiliate” member to also
attend your scheduled meetings and other affairs, said member is entitled to do so, upon approval by the
Board of Directors. The member shall ensure that you receive adequate compensation for the additional
expenses incurred by virtue of the “affiliate” member’s attendance at your meetings and/or events. The
affiliate member shall not be entitled to vote unless the recognized member is not present at the time of the
vote. Should the affiliate member eventually replace the existing member, they must apply to be voted on as
a new member.

3. If one member representing a business or profession changes their profession to one which is represented by
another member, such existing member in that category shall be the only representative of the common
profession. No member shall represent more than one category.

4. In the event certain members represent overlapping professions, a majority of the general membership may
vote to suspend the application of provision 2 above. The provisions of this section shall apply only upon the
approval of all the members of the overlapping professions.

5. All businesses and respective members must be based within the State of B and provide a location and serve
the community.

6. The members shall be committed exclusively to you and shall not become a member or affiliate, directly or
indirectly, with any other networking organization; said prohibition excludes charitable and/or civic
organizations or chambers of commerce.

Your Board of Directors per your bylaws is composed of your Officers and E additional Board members,
elected by a majority of a quorum of your general membership. Your officers consist of the President, Vice-
President, Secretary, Treasurer, Sergeant at Arms, and your Past President. The main duties of the officers are

as follows:

• The President will preside at all your meetings and guide your affairs. The President also has the specific
authority to appoint individuals to serve and/or lead committees.

• The Vice President will record attendance and the number of weekly business referrals (leads) and keep

an active role of all your members. The Vice President presents, at any regularly or specially scheduled
Board meeting, the report of the membership. Additionally, the Vice President shall act in the
President’s absence at all duly scheduled meetings and/or events.

• The Secretary will record and report the minutes of each meeting and maintain records.

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


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• The Treasurer shall collect and maintain a record of all dues paid and/or owing by your membership,
maintain and prepare a proper accounting of all income and expenditures relative to the business affairs
and activities, present a monthly financial report to the President, for review and affirmation by the
Board of Directors, and perform such other and further duties as requested by the President.

• The Sergeant at Arms shall have the responsibility to ensure that the location for your meetings or other
scheduled events is available and suitable for its intended purpose and act as a liaison with any vendor to
ensure that your needs are met. Additionally, the Sergeant at Arms shall assist the President at all
meetings in performing the normal duties of the Sergeant at Arms, including, but not limited to,
maintaining a record of the number and extent of weekly business referrals/tips (leads) and the
appropriateness of same.

You are supported by dues from members which are currently x dollars per quarter per member. In addition,
you impose fines for those members who do not give a business lead to another member at your weekly
meetings. Further, the Sergeant at Arms is responsible for enforcing the collection of these fines. The
Sergeant at Arms also has the discretion to challenge any member whose tip/lead is deemed inappropriate and
not consistent with the spirit and intent of providing business leads to your members. Your bylaws indicate
“Before the conclusion of any business meeting, the Sergeant at Arms shall collect all fines and deposit them
with the Treasurer with the spirit and intent of providing business leads to members.”

Finally, you indicated that it is not your aim to exchange business between members. If your members wish to
conduct business among themselves that is their decision, however, membership within you imposes no such
responsibility upon the individual members.

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 inure to the benefit of any
private shareholder or individual.

Treasury Regulation Section 1.501(c)(6)-1 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 59-391, 1959-2 C.B. 151, held that an organization composed of individuals, firms,
associations and corporations, each representing a different trade, business, occupation or profession whose
purpose is to exchange information on business prospects has no common business interest other than a mutual
desire to increase their individual sales. The activities are not directed to the improvement of one or more lines
of business, but rather to the promotion of the private interests of its members and is not exempt under section
501(c)(6) of the Code.

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


4

Revenue Ruling 73-411, 1973-2 C.B. 180, describes an organization that was not structured along industry or
business lines but was composed of various types of businesses and commercial endeavors comprising a
shopping center. Therefore its right to right to exemption, if any, had to rest on its characterization as a chamber
of commerce or board of trade or similar organization. The revenue ruling further indicates that chambers of
commerce and boards of trade direct their efforts at promoting the common economic interests of all the
commercial enterprises in a given trade community. In the case of a chamber of commerce or similar
organizations, the common business interest is usually the general economic welfare of a community.
Membership is voluntary and open generally to all business and professionals in the community.

Application of law

You are not described in IRC 501(c)(6) and Treas. Reg. Section 1.501(c)(6)-1 because the facts show you are
not formed to promote the common business interests of a particular industry or trade, but rather you are formed
to benefit your members’ business interests. Your membership is restricted to D noncompeting members and
just one representative from each type of business or profession. The exception in your bylaws allowing
members with overlapping professions only with the approval of all the members of the overlapping provisions
also indicates you are operating for member’s interests. In addition, the restriction in your bylaws that reads
“The member shall be committed exclusively to you and shall not become a member or affiliate, directly or
indirectly, with any other networking organization; said prohibition excludes charitable and/or civic
organizations or chambers of commerce” indicates you are operating for non 501(c)(6) purposes.

You are like the organization described in Rev. Rul. 59-391. Your membership consists of vetted professionals
from different types of businesses which are not in competition with one another. In addition, the provision in
your bylaws that requires your Sergeant at Arms as one of his duties to maintain a record of the number and
extent of weekly business referrals (leads) and the appropriateness of same and the fact members are fined if
they do not provide a lead at your meetings illustrates you have no common business interest other than a desire
to increase business prospects of your members.

Like the organization in the Revenue Ruling Revenue Ruling 73-411, you are not structured along any
particular industry or business lines. You are composed of various types of businesses. Therefore, to meet
exemption under IRC 501(c)(6), you must depend on being characterized as a chamber of commerce. Because
your membership is not open to all businesses in your community but only to one business per category, you do
not meet the definition of a chamber of commerce within the meaning of IRC 501(c)(6) as explained in this
revenue ruling.

Your position

You wrote that that your membership is limited to one representative of F separate business/industry lines
selected by design to represent a cross section of businesses/ industries in the geographic area. Your programs
are structured to educate members on community trends, best practices, ethical professionalism and most of the
members in turn take this information back to their specific industry group. For example, the attorney takes this
back to his local bar, the CPA back to the sub groups with various specialties in the accounting area, the
financial investment adviser takes information back to the financial planning community and so on. In this
manner, you have the potential to impact thousands in the community thanks to the different business/industry
representatives. By restricting the group to F members, the members give voice to F different business/industry
representatives and are not constrained by one group dominating another due to their large underlying
membership numbers. They have found that this business model allows for much better goal attainment and
dissemination of information throughout the community. And of course your members make referrals to each

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


5

other. However the purpose for setting up this group is to enhance the competence, ethics, professionalism of
members and the business lines they represent.

Our response to your position

You failed to provide any additional information from which it can be concluded that you are primarily
organized and operated in accordance with IRC 501(c)(6). Even though you claim your programs are structured
to educate members on community trends, best practices, ethical professionalism and most of the members in
turn take this information back to their specific industry group, the facts show you are restricting membership to
one member per individual category, which benefits individual members by giving them leads and a
competitive advantage. This is primary and excludes you from exemption under IRC 501(c)(6).

Conclusion

Your membership constraints show that your primary purpose is to further the private interests of your
individual members and not the improvement of business conditions of one or more lines of business. You have
no common business interest other than a mutual desire to increase member’s business prospects. Your
activities are not primarily directed to the improvement of business conditions of one or more lines of business
nor for the common economic interests of all the businesses in a given trade community as in the case of a
chamber of commerce, but rather to the promotion of the private interests of your members as illustrated by the
restrictive nature of your membership. Therefore, you not meet the requirements for exemption under IRC
501(c)(6).

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:

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


6

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

If you don’t file a protest within 30 days, you can’t seek a declaratory judgment in court at a later date because
the law requires that you use the IRS administrative process first (Section 7428(b)(2) of the Code).

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.

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


7

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.

Sincerely,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

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