Auto-repair purchasing group provided particular services to members

Plain-English summary

An organization of independent auto-repair businesses negotiated supplier pricing and rebates for its members. It planned to use vendor rebates for administration, advertising, recruiting, negotiations, and possible reductions in membership fees and marketing costs. The IRS concluded that these activities gave members purchasing economies and negotiating power rather than improving conditions for the auto-repair industry as a whole. Because providing particular services to individual members was the organization's primary activity, the IRS denied exemption under § 501(c)(6).

Ruling snapshot

• Question: Did the purchasing group qualify as a tax-exempt business league under § 501(c)(6)?
• Outcome: Denied. Its primary activity provided particular purchasing services to members.
• Key authorities: IRC § 501(c)(6); Treas. Reg. § 1.501(c)(6)-1; Rev. Ruls. 56-65 and 66-338

Full text (IRS public release)

Scanned document; transcription proofread from IRS OCR. Obvious scan misreads were corrected. Wording is otherwise verbatim.

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

Date: November 19, 2018

Employer ID number:

Number: 201907007
Release Date: 2/15/2019

Contact person/ID number:
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: September 10, 2018
Employer ID number:
Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend: UIL:

B = Date 501.06-00
C = State 501.06-01
D = 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.

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

Facts

You were formed on B in C as a Domestic Nonprofit Limited Liability Company. Your Articles of
Organization and your Operating Agreement state in part that you are organized exclusively as a business
league for the purpose of aiding the independent auto service owner in obtaining competitive supply pricing
without commitment quotas and to provide educational instruction to assist in obtaining financial stability.

Your primary activity consists of negotiating with vendors to obtain better supplier pricing for your members so
they can compete with large national retail chain companies. You further indicated that your individual
members will negotiate favorable pricing with suppliers. In addition, you have one type of membership and
potential members must be an auto service repair facility who demonstrate high operating standards and
integrity. You currently have D members.

You have already contracted with a specific oil company supplier on behalf of your members. Under the terms
of the contract, members who purchase oil from this supplier receive a rebate of x dollars for each gallon of oil
purchased. Furthermore, for members that buy oil from this supplier you also receive a rebate for x dollars for
each gallon of oil purchased by your members. These funds are then used to pay general administrative
expenses, advertising expenses, expenses related to member recruitment and travel to negotiate with suppliers.
Any excess revenue received from the vendor rebates will be used to reduce your yearly membership fees and
your future marketing expenses.


2

Your financial information shows that rebates are about % of your projected revenue while membership fees
comprise the remainder source of revenue.

In addition, your operating agreement provides for a Management Committee who has the responsibility for
managing your operations and consists of four managers who are from each one of your current member
businesses. Moreover, all members must be approved unanimously by members of your Management
Committee.

You will also have quarterly meetings so that your members can discuss future projects on price negotiations as
well as network among themselves to discuss various business needs and concerns. Finally, you characterize
yourself as a group purchasing organization for auto repair businesses to negotiate supplier pricing to obtain
competitive acquisition costs for members.

Law
Section 501(c)(6) of the Code 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.

Treasury Regulation Section 1.501(c)(6)-1 defines a business league as an association having a common
business interest, whose purpose is to promote the common business interest and not to engage in a regular
business of a kind ordinarily carried on for profit. Its activities are directed to the improvement of business
conditions of one or more lines of business rather than the performance of particular services for individual
persons.

Revenue Ruling 56-65, 1956-1 C.B. 199 describes an organization whose principal activity consists 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 is performing particular services for individual persons. Such organization, therefore, is not entitled
to exemption from Federal income tax under section 501(c)(6) of the Internal Revenue Code of 1954 as a
business league even though it performs functions which are of benefit to the particular industry and the public
generally.

Revenue Ruling 66-338, 1966-2 C.B. 226 describes an organization that provided business consulting services,
electronic management services and low cost office supplies and store fixtures to members of a particular retail
trade. It allowed its members to secure supplies, equipment and services more cheaply than if they had to secure
them on an individual basis. Its primary purpose was providing services to its members and not improving
business conditions in their trade as a whole. In addition, its activities constituted a business of a kind ordinarily
carried on for profit.

In Indiana Retail Hardware Assn., Inc. v. United States (1966), 177 Ct. Cl. 288, the Court held that when
conducting particular services for members is a substantial activity of an organization, the organization will be
precluded from exemption under section 501(c)(6) of the Code.

In Bluetooth SIG Inc. v. U.S., 611 F.3d 617 (9th Cir. 2010), the Court examined an organization that was
formed to advance the common business interests of its members in the development and regulation of technical
standards for the compatibility and interoperability of wireless products and devices within a wireless personal
area network. The organization develops specifications and use applications and promotes consumer awareness

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

3

and marketing through its Bluetooth technology and trademark. The Court held that the organization was not a
tax-exempt business league under Section 501(c)(6) of the Code because the organization's activities
exclusively benefit its members, rather than an entire line of business. The Court noted that it “strains credulity”
for the organization to argue that its services indirectly benefit the industry as a whole simply by generating
consumer awareness of the availability and reliability of its technology.

Application of Law

You are not described in Section 501(c)(6) of the Code because you are primarily organized and operated to
perform particular services for your members. That fact that your Articles of Organization state in part that your
purpose is to “aid the independent auto service owner in obtaining competitive supply pricing without
commitment quotas” illustrates your members formed you to achieve the common advantage of having pooled
resources to obtain favorable terms in contracts regarding supplier pricing. In addition, the fact that you have
already negotiated a contract for the benefit of your members and your meetings focus on discussing future
projects on price negotiations substantiates this.

You are also not described in Treas. Reg. Section 1.501(c)(6) because you are primarily operated so members
can pool their resources to negotiate favorable terms in contracts on their behalf as private, individual
companies. In addition, your activities are intended to improve your members negotiating power with potential
suppliers so they can compete with large national retail chain companies.

You are similar to the organizations described in Revenue Rulings 56-65 and 66-368. You are operated
primarily to negotiate the most favorable terms in contracts for the individual interests of your members rather
than negotiate for the improvement of business conditions within the industry. Like these organizations in the
revenue rulings, you are performing a particular service to your members rather than directing your activities to
the improvement of business conditions of your industry as a whole.

You are similar to the organization in Indiana Retail Hardware Assn. because your primary activity is the
performance of services to members. You are providing a convenience and economy to your members in their
individual businesses resulting in savings in operating expenses as well as simplifying their operations.

You are similar to the organization described in Bluetooth SIG., Inc. because you were formed to advance the
common business interests of your members to negotiate favorable supplier contract pricing. Your activities
exclusively benefit your members, rather than an entire line of business. Similar to the organization in Bluetooth
SIG, Inc., it would be difficult to argue that your services benefit the industry as a whole because you are
negotiating the best terms for supplier pricing for your members so they can compete with the large national
chain companies.

Conclusion

Negotiating contracts for better supplier pricing for your members is providing particular services for individual
persons and thus does not meet one of the requirements to be exempt under Section 501(c)(6) of the Code.
Furthermore, your activities are not directed to the improvement of the business conditions of the line of
business of its members as a whole because your activities are aimed only at improving the interest of your
individual members. Therefore, you do not meet the requirements for exemption and do not qualify for
exemption under Section 501(c)(6) of the Code.

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


4

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
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,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

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