Business referral group denied social welfare exemption

Plain-English summary

A professional networking chapter sought exemption as a social welfare organization under IRC § 501(c)(4). Its members promoted one another through referrals, met weekly, and paid dues that funded meeting space and social activities intended to strengthen relationships, referrals, and group growth. The chapter limited membership to one representative from each profession and aimed to help members increase their individual businesses. The IRS concluded that these activities primarily served members' private economic interests rather than the common good and general welfare of the community. It therefore issued a final denial of exemption.

Ruling snapshot

• Question: Did the member business-referral group qualify as a social welfare organization under IRC § 501(c)(4)?
• Outcome: Denied
• Key authorities: IRC § 501(c)(4); Treas. Reg. § 1.501(c)(4)-1(a)(2); Rev. Rul. 73-306; Rev. Rul. 73-349; Rev. Rul. 75-199; Rev. Rul. 78-132

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
PO Box 2508
Cincinnati, OH 45201

Date: November 10, 2020

Employer ID number:

Form you must file:

Tax years:

Person to contact:
Name:
ID number:
Telephone:

Number: 202105008
Release Date: 2/5/2021

UIL: 501.00-00, 501.04-00

Dear

This letter is our final determination that you don’t qualify for exemption from federal income tax
under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section
501(c)(4). 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 the federal income tax forms for the tax years shown above within 30 days from
the date of this letter unless you request an extension of time to file. For further instructions,
forms, and information, visit www.irs.gov.

We'll make this final adverse determination letter and the proposed adverse determination letter
available for public inspection after deleting certain identifying information, as required by IRC
Section 6110. 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 call the contact person shown above. If you have
questions about your federal income tax status and responsibilities, call our customer service


number at 800-829-1040 (TTY 800-829-4933 for deaf or hard of hearing) or customer service for
businesses at 800-829-4933.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Notice 437
Redacted Letter 4034
Redacted Letter 4038


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

Date: September 8, 2020

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

Contact fax number:

Legend: UIL:
X = State 501.00-00
Y = Date 501.04-00

Z = Organization
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)(4).
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)(4)? No, for the reasons stated below.

Facts
You were incorporated in X on Y for the purpose of promoting networking and growing businesses.

You describe yourself as a professional, non-profit organization made up of members who promote other
members through referrals. Your mission is to help members increase their business through a structured,
positive, and professional referral marketing program that enables them to develop long-term, meaningful
relationships with quality business professionals.

You are a chapter of Z. Your chapter is only allowed to have one person representing each profession. Your
chapter meets once per week and attendance at the meetings is mandatory.

You are supported exclusively by member dues. The dues are used to pay for the venue of the weekly meetings
as well as social activities that promote relationships and referrals among members and growth of the group

itself.

Law
IRC Section 501(c)(4) provides that civic leagues or organizations not organized for profit but operated

exclusively for the promotion of social welfare, or local associations of employees, the membership of which is



limited to the employees of a designated person or persons in a particular municipality, and the net earnings of
which are devoted exclusively to charitable, educational, or recreational purposes and no part of the net earnings
of such entity inures to the benefit of any private shareholder or individual may be exempt from federal income

tax.

Treasury Regulation Section 1.501(c)(4)-1(a)(2) states that an organization is operated exclusively for the
promotion of social welfare if it is primarily engaged in promoting in some way the common good and general
welfare of the people of the community. An organization embraced within this section is one which is operated
primarily for the purpose of bringing about civic betterments and social improvements.

Revenue Ruling 73-306, 1973-2 C.B. 179, provides that an organization formed for the purpose of promoting
the common interest of tenants who reside in a particular apartment complex does not qualify for exemption
under IRC Section 501(c)(4). The organization represented its member-tenants in negotiations with the
management of the complex to secure better maintenance and services, as well as reasonable rents. The ruling
holds that the organization was not described in Section 501(c)(4) because it operated essentially to benefit its
members and, thus, was not primarily engaged in activities that promote the common good and general welfare

of the community.

Rev. Rul. 73-349, 1973-2 C.B. 179, an organization was formed to purchase groceries for its membership at the
lowest possible prices. It received orders from its members, consolidated them, and purchased the food in
quantity. Each member paid for the cost of his food, and each member was assessed an equal monthly service
charge for the monthly operating costs. Membership was open to all individuals in a particular community. This
revenue ruling stated that the organization was a private cooperative enterprise for the economic benefit or
convenience of its members. Citing Commissioner v. Lake Forest, Inc., infra, this ruling stated that the
organization operated primarily for the private benefit of members. Any benefits to the community were not
sufficient to meet the requirement of the regulations that the organization operate primarily for the common
good and general welfare of the people of the community. Accordingly, it did not qualify for exemption under
IRC Section 501(c)(4).

Rev. Rul. 75-199, 1975-1 C.B. 160, held that where the benefit from an organization is limited to that
organization's members (except for some minor and incidental benefit to the community as a whole), the
organization is not operated exclusively for the promotion of social welfare within the meaning of IRC Section

501(c)(4).

Rev. Rul. 78-132, 1978-1 C.B. 157, found a community cooperative organization formed to facilitate the
exchange of personal services among members was operating primarily for the private benefit of its members
and was not exempt from tax as a social welfare organization under IRC Section 501(c)(4). The fact that
payments for services were made in kind and did not involve a monetary exchange did not derogate from the
economic benefits accruing to members. Any benefits to the community were not sufficient to meet the
requirement of the regulations that the organization be operated primarily for the common good and general
welfare of the people of the community. Accordingly, this organization is not exempt from federal income tax
as a social welfare organization under Section 501(c)(4).

In New York State Association of Real Estate Boards Group Insurance Fund v. Commissioner, 54 T.C. 1325
(1970), an association organized by a small group interested in obtaining group insurance did not qualify for
exemption because it offered its benefits to only a limited class of its members and their employees. The court



noted, “there is not in such an organization the requisite civic concern to constitute social welfare” required for
qualification under IRC Section 501(c)(4). Where the primary benefit from an organization is limited to that
organization's members, and not provided to the community as a whole, the organization is not operated
primarily for social welfare.

Application of law

You provide a way for your members to network through your referral marketing program. You are not
described in IRC Section 501(c)(4) and Treas. Reg. Section 1.501(c)(4)-1(a)(2) because your activities do not
primarily promote civic betterment or social welfare. Rather, you are operating as a networking and referral
service for your members to help increase their individual businesses. This provides a benefit to your members

and any benefits to community are incidental.

The concept of social welfare implies a service or program directed at benefiting the community as a whole,
rather than a private group of individuals, as explained in Rev. Rul. 73-306. You are like the organization
described in Rev. Rul. 73-349 because you provide benefits to your membership through your networking and
referral activities. Any benefits to the community are not sufficient to meet the requirement of the regulations
that the organization be operated primarily for the common good and general welfare of the people of the
community.

You are like the organization discussed in Rev. Rul. 75-199 because, other than some incidental benefit to the
community, the benefits you offer are limited to your members. Therefore, you are not operated for the
promotion of social welfare within the meaning of IRC Section 501(c)(4).

You are like the organizations described in Rev. Rul. 78-132 and New York State Association of Real Estate
Boards Group Insurance Fund because, while you do provide some benefits to the public, you primarily serve
the private economic interests of your members. Therefore, you are not operated primarily for social welfare
purposes within the meaning of IRC Section 501(c)(4).

Conclusion
Based on the information provided, we conclude that you are not described in IRC Section 501(c)(4). You were

formed to provide a networking and referral group for your members' economic benefit rather than for an
overall community benefit or for social welfare purposes. Accordingly, you do not qualify for exemption under
Section 501(c)(4).

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.

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