Franchise-owner association denied business-league exemption

Plain-English summary

An association of franchise owners for a single brand sought exemption as a business league under section 501(c)(6). It held meetings and annual forums about brand policies, vendors, operating problems, profitability, and networking, and it also organized a charity golf tournament. The IRS concluded that the association promoted the interests of one franchise and provided particular services to its members, rather than improving conditions for an entire line of business. The IRS therefore denied exemption under section 501(c)(6). The denial became final when the organization did not protest the proposed adverse determination within 30 days.

Ruling snapshot

• Question: Does an association serving franchise owners of one brand qualify as a tax-exempt business league under section 501(c)(6)?
• Outcome: denied
• Key authorities: IRC § 501(c)(6); Treas. Reg. § 1.501(c)(6)-1; Rev. Rul. 58-294; Rev. Rul. 66-338; Rev. Rul. 67-295; Rev. Rul. 68-182; National Muffler Dealers Association, Inc. v. United States, 440 U.S. 472 (1979)

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201

Date: January 30, 2020

Number: 202017028
Release Date: 4/24/2020

Employer ID number:

Contact person/ID number:

UIL Number: 501.06-00, 501.06-01

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 Internal Revenue Code
(IRC) Section 501(c)(6). 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 IRC Section 6110) 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:

December 4, 2019
Employer ID number:

Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend:                                     UIL:

M = State                                   501.06-00
B = Date                                    501.06-01
N = Name

P = Geographic area
Q = Geographic area

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 IRC Section 501(c)(6)? No, for the reasons stated below.

Facts
You incorporated in M on B. Your Articles of Incorporation provide that you promote the interests of franchise
owners of N in the P and Q areas. Your bylaws state that you foster the common business interests of N
franchise owners by working to:

• foster knowledge and understanding through the sharing of timely, accurate, and relevant information;

• unite franchise owners of N and provide a form for open, honest, and productive communication; and

• promote profitability and improve business conditions for franchise owners of N.

Voting members of your organization are limited to franchise owners of N in the P and Q areas. Any entity that
supplies goods or services to franchise owners of N may join as a non-voting member.

You hold monthly meetings to introduce new policies from N, discuss issues with vendor representatives, and
introduce new N franchise owners to existing N franchise owners. You also conduct annual forums for N
franchise owners aimed at reviewing problems and issues encountered during the year and promoting
profitability.

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

In addition, you organize an annual golf tournament that benefits charities in the P area. You noted that the
event also fosters goodwill between franchise owners and vendor partners.

You are supported by membership dues, fundraising proceeds, sponsorships, and donations. You donate
revenues in excess of expenses to several charities in your area.

Law
IRC Section 501(c)(6) provides for the exemption from federal income tax 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.

Treasury Regulation Section 1.501(c)(6)-1 provides 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 58-294, 1958-1 C.B. 244, holds that an association of licensed dealers in a certain type of
patented product did not qualify as a business league under IRC Section 501(c)(6). The association in this ruling
owned the controlling interest in the corporation that held the basic patent of the product, it engaged mainly in
furthering the business interests of its member dealers, and it did not benefit businesses that manufactured
competing product of the same type covered by the patent.

Revenue Ruling 66-338, 1966-2 C.B. 226, describes an organization that was formed to promote the interests of
a particular retail trade and is not exempt from federal income tax under IRC Section 501(c)(6) because it
advises its members in the operation of their individual businesses.

Revenue Ruling 67-295, 1967-2 C.B. 197, states that an organization, composed of businessmen, may qualify
for exemption where its activities are limited to holding luncheon meetings devoted to a discussion, review, and
consideration of the various problems in a particular industry directed to the improvement of business
conditions for the industry as a whole.

Revenue Ruling 68-182, 1968-1 C.B. 263, states that the Internal Revenue Service (Service) will not in similar
cases follow the decision entered by the United States Court of Appeals, Seventh District, in Pepsi-Cola
Bottlers' Association, Inc. v United States, 369 F.2d 250 (1966). In that case the court held that the Association,
whose members are engaged in the bottling and sale of a single franchised soft-drink product, and whose
purposes and activities were directed to the more efficient production and sale of that product, qualified for
exemption under IRC Section 501(c)(6). It is the position of the Service that organizations promoting a single
brand or product within a line of business do not qualify for exemption under IRC Section 501(c)(6).

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

3

In National Muffler Dealers Association. Inc. v. United States, 440 U.S. 472 (1979), the court held that an
organization of muffler dealers franchised by Midas International Corporation did not qualify for exemption
under IRC Section 501(c)(6).

Application of law
You are not a business league as described in IRC Section 501(c)(6) and Treas. Reg. Section 1.501(c)(6)-1
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 like the organization described in Rev. Rul. 58-294 in that your activities only benefit and promote the
interests of franchise owners of N rather than an industry as a whole.

You are similar to the organization in Rev. Rul. 66-338 in that you advise your members in the operation of
their individual businesses and help them network with vendors. This is a service for the convenience of
members and does not promote or improve a line of businesses in general.

Unlike the organization described in Rev. Rul. 67-295, your activities do not address the various problems in a
particular industry and are not directed to the improvement of business conditions for that industry as a whole.
Rather, your activities address issues and business conditions of one particular store.

The Service's position outlined in Rev. Rul. 68-182 applies to you. The promotion of a single business franchise
within a line of business does not qualify for exemption under IRC Section 501(c)(6). Like the organization
described in National Muffler Dealers Association, your activities are directed toward a single franchise.

Conclusion
Based on the information provided, you fail to qualify for exemption under IRC Section 501(c)(6) because you
provide services to your members that further their private interests and are not directed toward the
improvement of business conditions of one or more lines of business. Accordingly, you do not qualify for
exemption under IRC Section 501(c)(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.

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

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

4

• 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.

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

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

5

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