Accounting consultants denied business league exemption

Plain-English summary

A membership organization for accounting businesses offered each member an initial free consultation followed by customized management consulting for quarterly fees. More than a redacted percentage of its revenue came from consulting and membership fees, and its listed expenses were salaries and payroll taxes associated with the consulting services. The IRS found that the organization primarily performed particular services for individual members and operated a regular business of a kind ordinarily carried on for profit. It therefore denied exemption as a business league under section 501(c)(6).

Ruling snapshot

• Question: Does the accounting membership organization qualify as a tax-exempt business league under section 501(c)(6)?
• Outcome: denied, because its principal activity was providing fee-based consulting tailored to individual members rather than improving conditions for an entire line of business
• Key authorities: IRC § 501(c)(6); Treas. Reg. § 1.501(c)(6)-1; Apartment Operations Ass’n v. Commissioner

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service

P.O. Box 2508
Cincinnati, OH 45201

Date: July 10, 2019
Release Number: 201940009

Release Date: 10/4/2019 Employer ID number:
UIL Code: 501.06-00 Contact person/ID number:
501.06-01

Contact telephone number:
Form you must file:

Tax years:

All

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 29, 2019

Employer ID number:

Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend: UIL:

T = State 501.06-00
U = Date 501.06-01
V = Name

w dollars = Amounts
x percent = Number

Dear

We considered your application for recognition of exemption from federal income tax under Internal Revenue
Code (IRC) Section 501(a). We determined that you don’t qualify for exemption under IRC Section 501(c)(6).
This letter explains the reasons 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

You were incorporated in the state of T on U. Per your Articles of Incorporation, you were formed to serve
members engaged in the accounting profession and its related disciplines. You are a membership organization
consisting of any organization engaged in providing accounting services.

One of your activities is the provision of management consulting services to your member accounting
businesses. The consulting services will focus on owners of small accounting business and will consist of a one-
time free consultation which includes access to your web-based tools. After the initial consultation, you will
charge fees beginning in the range of w dollars per quarter per full time equivalent employee. The services will
be tailored to the specific needs of each accounting business.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

2

Your revenue is derived from fees from management consulting services, and membership fees. Furthermore,
over x percent of your revenue is from these fees. The only expenses you listed are for salaries and payroll
taxes incurred from your provision of these management consulting services.

Your Form 1024 application lists V as your only governing body member. Your Articles of Incorporation state
the number of your directors shall be one, which may be increased pursuant to your Bylaws. They further state
that V is the director who shall act until the first meeting or until the successor is duly chosen and qualified.
Finally, you indicated that you will engage in non-exempt activities such as providing accounting consulting
services as a means to train and foster development.

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.

In Apartment Operations Ass’n v. Commissioner of Internal Revenue, 136 F. 2d 435 (1943), the court denied
exemption as a business league. The organization was an apartment owners’ association which regularly
carried on a business of a kind ordinarily conducted for profit and performed particular services for individual
persons. These services consisted of acting as a clearing house for information about tenants, including the
operation of apartment houses, and about the legislation affecting the business; gave council and advice to its
members and did what it could to promote their welfare; secured information about prices for necessary goods
for the apartments; and represented its members in labor disputes and negotiations. The Court held the
organizations primary activity was one of a business regularly carried on for profit and the organization
performs particular services for individual persons. There is no showing that business done, or the activities
described were merely incidental to the organization’s total activities.

Application of law

You are not described in Section 501(c)(6) of the Code. For example, you are primarily providing management
consulting services to your small business members tailored toward their particular business for a fee. Your
revenue is primarily derived from these fees and your expenses are primarily incurred through the provision of
these consulting services. This shows you are providing particular services for members and consequently
precludes you from exemption under Section 501(c)(6) of the Code.

You are also not described in Treas. Reg. Section 1.501(c)(6). You state that that you will engage in non-
exempt activities which consists of offering tailored accounting consulting services for a fee as a means to train
and foster development. However, the facts that over x percent of your revenue is derived from these fees and

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

3

the only expenses described are for the provision of these services indicate you are engaging in a regular
business. This disqualifies you from qualifying under Section 501(c)(6) of the Code.

You are like the organization in Apartment Operations Ass’n v. Commissioner of Internal Revenue, 136 F. 2d

435. Like this organization, you provide management consulting services tailored to members for a fee. These
services are also characteristic of a business ordinarily carried on for profit . Therefore, you are not promoting
the general business conditions of the industry as a whole and fail to qualify under Section 501(c)(6) of the
Code.

Conclusion

Your activities are not directed to the improvement of business conditions of one or more lines of businesses, or
any other purpose defined in Section 501(c)(6) of the Code Rather, your activities consist of rendering
particular services to members and have characteristics of a business ordinarily carried on for profit. Therefore,
you fail to qualify under Section 501(c)(6) of the Code.

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.

If you don't agree
You have a right to protest if you don’t agree with our proposed adverse determination. To do so, send us a
protest within 30 days of the date of this letter. You must include:

• Your name, address, employer identification number (EIN), and a daytime phone number

• A statement of the facts, law, and arguments supporting your position

• A statement indicating whether you are requesting an Appeals Office conference

• The signature of an officer, director, trustee, or other official who is authorized to sign for the
organization or your authorized representative

• The following declaration:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I have examined this request, or this modification to the
request, including accompanying documents, and to the best of my knowledge and belief, the request
or the modification contains all relevant facts relating to the request, 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 they haven’t
already done so. You can find more information about representation in Publication 947, Practice Before the
IRS and Power of Attorney.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

4

We’ll review your protest statement and decide if you gave us a basis to reconsider our determination. If so,
we’ll continue to process your case considering the information you provided. If you haven’t given us a basis
for reconsideration, we’ll send your case to the Appeals Office and notify you. You can find more information
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 later because the
law requires that you use the IRC administrative process first (IRC Section 7428(b)(2).

Where to send your protest
Send your protest, Form 2848, if applicable, 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
Mail Stop 6403 550 Main Street, Mail Stop 6403

P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

You can also fax your protest 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 they received it.

You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-
pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at
the top of this letter.

Contacting the Taxpayer Advocate Service

The Taxpayer Advocate Service (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 if 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 877-777-4778.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K