Real estate association denied section 501(c)(6) exemption because its MLS served members

Plain-English summary

A real estate association applied for exemption as a business league under section 501(c)(6). Its activities included advocacy, education, member meetings, community events, public information, and access to a fee-based Multiple Listing Service. The association estimated that MLS operations used about 20% of its time and effort, but MLS fees provided more than 67% of its revenue in each of three reported years. The IRS concluded that operating the MLS was the association's primary activity and provided particular services to individual members rather than improving conditions for an entire line of business. The IRS therefore denied exemption, and the determination became final when the association did not protest within 30 days.

Ruling snapshot

• Question: Did the real estate association qualify as a section 501(c)(6) business league despite operating a fee-based Multiple Listing Service for members?
• Outcome: denied
• Key authorities: IRC §§ 501(a), 501(c)(6), 6110, 7428(b)(2); Treas. Reg. § 1.501(c)(6)-1; Rev. Rul. 59-234; Rev. Rul. 72-211; Evanston-North Shore Bd. of Realtors v. U.S., 320 F.2d 375 (Ct. Cl. 1963)

Full text (IRS public release)

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

Date: JUNE 14, 2017

Release Number: 201736028
Release Date: 9/8/2017
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.

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
P.O. Box 2508
Cincinnati, OH 45201

Date: APRIL 21, 2017

Employer ID number:

Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend:

B = State Association
C = National Association
D = City
E = Licensed Trademark
F = Licensed Trademark
G = State Commission
X = State
Y = Date

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 stated below.

Facts

You were incorporated in state X on date Y. According to your Articles of Incorporation, you were formed for
the following purposes:

• To unite those engaged in the real estate profession for the purpose of promoting and
  maintaining high standards of conduct in the profession.

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2

• To promote and maintain high standards of conduct in the real estate profession as expressed in
  the Code of Ethics of C.

• To provide a unified medium for real estate owners and those engaged in the real estate
  profession whereby their interests may be safeguarded and advanced.

• To further the interests of home and other real property ownership and provide property rights.

• To unite those engaged in the real estate profession in D area with B and C, 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, individuals authorized to use the registered trademarks
  E and F as licensed, prescribed and controlled by C.

Your activities, as provided on the Form 1024 application, are:

• Continuing to unite those engaged in the real estate profession for the purpose of exerting a
  beneficial influence upon the profession and related interests. You encourage members and the
  public to participate in elections and community politics to protect private property rights and the
  dream of homeownership. Your executive and volunteer leaders conduct voter registration drives
  annually. You also promote advocacy by participating in state and national calls for action.

• Promoting and maintaining high standards in the real estate profession by offering continuing
  education (CPE) and designation courses. The courses are offered throughout the year and are
  provided by B, C, and G.

• Hosting frequent meetings of the membership to educate and discuss local issues and updates which
  affect the real estate industry.

• Providing access to the Multiple Listing Service (MLS) to assist realtor members in offering
  cooperation and compensation and to assist in the orderly correlation and dissemination of listing
  information so members can better serve their clients.

• Coordinating and participating in community events to give back to the community such as beach
  cleanup, collecting donations for charities and nonprofit organizations.

• Providing statistical information and reports as well as providing tips and advice to the public about
  real estate transactions in your jurisdiction.

You further explain that the MLS is a listing of properties which your member real estate agents are hired to
sell. The MLS is a means by which authorized participants make blanket unilateral offers of compensation to
other participants (acting as subagents, buyer agents, or in other agency or non-agency capacities defined by
law); by which cooperation among participants is enhanced; by which information is accumulated and
disseminated to enable authorized participants to prepare appraisals, analyses, and other valuations of real

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property for bona fide clients and customers; by which participants engaging in real estate appraisal contribute
to common databases; and is a facility for the orderly correlation and dissemination of listing information so
participants may better serve their clients and the public. Entitlement to compensation is determined by the
cooperating broker’s performance as a procuring cause of the sale (or lease).

Your classes of membership are realtor members, institute affiliates, affiliate members, public service members,
honorary members, and student members. E members are the only class of membership which has full voting
rights and privileges to serve on committees and the board of directors.

You state you estimate the total time and effort for the operation of the MLS to be approximately 20%. The
remaining 80% is spent on the overall operation of the association which includes organizing meetings,
education courses, financial reporting, volunteer operations, member training and orientations.

Your support comes from monthly dues from the MLS, annual membership dues, fees from CPE courses, and a
small amount from unrelated business income. The profit and loss statements included with the application
shows income derived from MLS fees were each over 67% of revenues in 20XX, 20XX, and 20XX.

Law

Section 501(c)(6) of the Code provides for the exemption from federal income tax of business leagues,
chambers of commerce, real-estate boards, or boards of trade, 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.

Treasury Regulation § 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.

In Revenue Ruling 59-234, 1959-2 C.B. 149, a real-estate board whose primary purpose or activity was the
operation of a multiple listing system was considered to be rendering particular services for its members and
was not exempt from federal income tax as an organization described in section 501(c)(6) of the Code.

In Rev. Rul. 72-211, 1972-1 C.B. 150, an organization whose principal activity was the operation and
maintenance of a plan room that was open for use by all individuals and businesses in the industry, nonmembers
as well as members, was not rendering particular services to its members and therefore qualified for exempt
status under section 501(c)(6) of the Code. Providing a plan room available to the entire building and
construction industry without charge was found to improve the business conditions of that line of business
because it made information on construction projects freely available to the construction industry as a whole.

In Evanston-North Shore Bd. of Realtors v. U.S., 320 F.2d 375, (Ct. Cl. 1963), an Illinois not-for profit
corporation which operated a multiple listing system not directed to improvement of business conditions in the

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4

real estate market and not merely as an incidental activity of the board of licensed realty brokers and salesmen,
was not entitled to exemption from income tax as a real estate board not organized for profit.

Application of law

You are not operated as an organization described in section 501(c)(6) of the Code because your primary
activity is providing your members access to the MLS for a fee. This constitutes the performance of particular
services for individual members and precludes you from qualifying for exemption under section 501(c)(6) of
the Code. See also Treas. Reg. Section 1.501(c)(6)-1.

You are similar to the organization in Evanston-North Shore Bd. of Realtors because your primary activity is to
provide the medium or channel for your members by rendering Multiple Listing Service to your members. See
also Rev. Rul. 59-234.

You are unlike the organization in Rev. Rul. 72-211. You provide a particular service, a Multiple Listing
Service, to your members with a fee. Your activities do not improve a line of business conditions as a whole.

Although you state only 1% of your time and efforts are from your MLS activities, your profit and loss
statements indicate more than % of your revenues are from MLS fees. This is indicative that the operation of
the MLS is your primary activity and prohibits exemption under section 501(c)(6).

Conclusion

You are not a business league as described in section 501(c)(6) of the Code and Treas. Reg. Section
1.501(c)(6)-1 because your activities are not directed to improving business conditions of one or more lines of
business as defined under this subsection. Rather, you are formed to provide particular services to your
members through the operation of your Multiple Listing Service. Accordingly, you are not exempt under
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

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• 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:

U.S. mail:

Internal Revenue Service
EO Determinations Quality Assurance
Room 7-008
P.O. Box 2508
Cincinnati, OH 45201

Street address for delivery service:

Internal Revenue Service
EO Determinations Quality Assurance
550 Main Street, Room 7-008
Cincinnati, OH 45202

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.

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

6

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,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

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