Single-vendor software group was denied business-league exemption

Plain-English summary

A software user group sought exemption as a business league under section 501(c)(6). Membership was limited to organizations licensed to use a particular commercial software system, and most forum activity concerned that system. The group planned peer discussions, webinars, videos, newsletters, an annual meeting, and paid access to an implementation specialist from the software developer. The IRS concluded that the group served users of one developer's products and provided particular services to members rather than improving conditions across an entire line of business. It denied exemption, and the determination became final after the group did not file a protest.

Ruling snapshot

• Question: Did a user group focused on one software developer's products qualify as a business league under section 501(c)(6)?
• Outcome: denied because its activities benefited a limited product segment and provided member services
• Key authorities: IRC § 501(c)(6); Treas. Reg. § 1.501(c)(6)-1; Rev. Rul. 74-147; Rev. Rul. 83-164

Full text (IRS public release)

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

May 12, 2017
Employer ID number:

Number: 201731015 Contact person/ID number:
Release Date: 8/4/2017
Contact telephone number:

Form you must file:

Tax years:

UIL: 501.06-00, 501.06-01

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,

Stephen A. Martin
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 4, 2017

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

Contact fax number:

Legend: UIL:
B = State 501.06-00
C = Date of Formation 501.06-01

D = Industrial software system
E = Industry name

F = Annual Conference

J = Commercial software 1

K = Commercial software 2

L = Commercial software 3

M = Commercial software 4
O = Software developer

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 explained below.

Facts
You were incorporated under the laws of the State of B on C.

You are a software user group. You currently offer only active membership. Active membership is available to
any organization licensed to use any version of the commercially available D. Each member organization is
entitled to one vote in elections, polls, and other user group business, as well as multiple login accounts with
full access to the site and all resources.

You will provide a forum for peer to peer interaction for managers, estimators, and sales, production and
accounting personnel in the E industry. You intend to produce webinars and short videos highlighting areas of
interest to the group. A newsletter highlights upcoming webinars and encourages members to interact on the
forum. You will also meet as a group yearly at the F.


2

Discussions are primarily about issues related to D, may also involve other related software such as J, K, L, M,
mailing software, shipping software, etc.

75% of the forum interaction is about D
15% would be spread between the other related programs or systems
10% would be time spent on basic business practices or standard operating process outside of the system

You will be purchasing the time of an implementation specialist from the software developer, O.

Law

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.

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 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. 74-147, 1974-1 C.B. 136. A nonprofit organization, whose members represent diversified business
that own, rent, or lease digital computers produced by various manufacturers, organized to improve the
efficiency of its members’ use of computers, qualifies for exemption under section 501(c)(6) of the Code. The
common business interest of the members of the organization is their common business problem concerning the
use of digital computers. The primary objective of the organization is to provide a forum for the exchange of
information which will lead to the more efficient utilization of computers by its members and other interested
users, and thus improve the overall efficiency of the business operations of each.

Revenue Ruling 83-164, 1983-2 C.B. 95. An organization whose members represent diversified businesses that
own, rent, or lease computers produced by a single computer manufacturer does not qualify for exemption
under IRC 501(c)(6). This organization does not improve conditions in the lines of business from which its
members are drawn, but only in the segments of those lines of business which utilize the computers of a single
manufacturer. By limiting its activities to these users, the organization helps to provide a competitive advantage
to the manufacturer and to its customers at the expense of their competitors that may use other brands of
computers. Thus, the organization's activities are not directed towards the improvement of business conditions
in one or more lines of business within the meaning of section 1.501(c)(6)-1 of the regulations.

In Guide International Corporation v. United States, 948 F.2d 360 (7th Cir. 1991), the court concluded that an
association of computer users did not qualify for exemption under IRC 501(c)(6) because it essentially
benefited users of I.B.M. equipment. While Guide's members reflect a wide variety of businesses, Guide only
benefited IBM and those individuals within various lines of business who used IBM mainframes. Moreover, the

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


3

district court found that Guide primarily advances IBM's interests and that any benefit to its members and other
data processing companies who use information prepared by Guide is incidental.

In National Prime Users Group, Inc. v. U.S., 667 F. Supp. 250 (D.C. MD 1987), the court denied a tax
exemption to an association whose members consisted of users of computers of a single manufacturer because
the association only improved conditions for members in those lines of businesses that used the particular
computers. The court found an inherent competitive advantage for the computer manufacturer.

Application of law

You are not a business league as described in IRC 501(c)(6) because you are not organized to improve business
conditions of one or more lines of business as defined under this subsection.

You are not as described in Section 1.501(c)(6)-1 of the Income Tax Regulations because your activities are not
directed to the improvement of business conditions of one or more lines of business and you are formed to
provide particular services to your members.

You are similar to the organization described in Revenue Ruling 83-164. Your membership is restricted to
licensed users of a specific software program. Because you limit your activities to users of D, you help to
provide a competitive advantage to O and its customers at the expense of O’s competitors and their customers
that may use other brands of software. You do not improve conditions in the lines of business from which your
members are drawn, but only in the segments of those lines of business which utilize D. Thus, your activities
are not directed towards the improvement of business conditions in one or more lines of business within the
meaning of Section 1.501(c)(6)-1 of the Income Tax Regulations.

You are likewise similar to Guide International Corporation and National Prime Users Group, Inc., since your
activities are not directed to improvement of conditions in the E industry as a whole, but benefit only businesses
that use D software.

You are distinguishable from the organization in Rev. Rul. 74-147 because your membership does not consist of
users of software for use in the E industry other than D, J, K, L, and M, all proprietary programs of O. In
consequence, your activities do not improve conditions in that line of business as a whole, but only that segment
which uses O’s products.

Conclusion

Your activities are not 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. Accordingly, we conclude that
you are not exempt 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:

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


4

• 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
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:

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


5

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.

Sincerely,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

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