IRS denies 501(c)(6) business-league status to a single-vendor customer user group

Plain-English summary

An organization applied to be recognized as a tax-exempt "business league" under 501(c)(6). It operates as the customer and user community for the products of one for-profit technology company (referred to as G), running an annual multi-day conference, webinars, technical support forums, and training focused on G's cloud communication products, funded largely by event registration fees and sponsorships from G and industry partners. The IRS issued a proposed adverse determination and, when the group filed no protest within 30 days, made the denial final. To qualify under 501(c)(6), a business league must promote the common business interest of an entire line of business, not perform particular services for individuals or advance a single company. The IRS concluded the group improves business conditions only for a segment (the users, customers, employees, and partners of G) and acts as an effective marketing tool for G, giving G a competitive advantage over its rivals. Citing Revenue Ruling 83-164 and Guide International Corp. v. United States (an IBM user-group case), the IRS found the group is not organized or operated to improve one or more lines of business, so it does not qualify. Because the group did not protest, it must now file federal income tax returns.

Ruling snapshot

• Question: Does a customer and user group centered on one for-profit company's products qualify as a tax-exempt business league under § 501(c)(6)?
• Outcome: Denied (it benefits a single vendor's ecosystem, not a whole line of business, and serves as a marketing tool for that vendor)
• Key authorities: IRC § 501(c)(6); Treas. Reg. § 1.501(c)(6)-1; Rev. Rul. 74-147; Rev. Rul. 83-164; Guide International Corp. v. United States, 948 F.2d 360 (7th Cir. 1991)

Full text (IRS public release)

Transcriber's note: this document is a degraded scan. Per the runbook's proofreading duty, obvious OCR misreads have been corrected, wording is kept verbatim, and the IRS's redaction blanks are preserved as gaps. Genuinely unreadable spots are marked [illegible]. The scan's own header misprints are corrected to the plainly intended text.

Department of the Treasury Date:
Internal Revenue Service January 4, 2022
I Tax Exempt and Government Entities Employer ID number:

Box 2508
Cincinnati, OH 45201

Form you must file:
Tax years:

Person to contact:

Release Number: 202213010 Name: .
Release Date: 4/1/2022 ID number:
UIL: 501.06-00, 501.06-01 Telephone:

[] Check if 501(c)(3) denial
[] Check if valid POA

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)(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 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 Letter 437, Notice of Intention to Disclose - Rulings, and review the two attached letters that show our
proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Letter 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,

Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Letter 437

Redacted Letter 4034
Redacted Letter 4038

[_] Hide blank fields.

Letter 4038 (Rev. 11-2021)
Catalog Number 47632S

Department of the Treasury
Internal Revenue Service

IRS PO Box 2508
Cincinnati, OH 45201

Legend:

B = Date

C = State

D = Date

E = Date

F = State
G =Name
H = Name
J= Name
K= Name
X = Number
Y =Number
Dear

Date: October 26, 2021

Employer ID number:

Person to contact:
Name:
ID number:
Telephone:
Fax:

UIL:
501.06-00
501.06-01

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 were incorporated on B, in the state of C, and subsequently dissolved on D. Later you incorporated as a

mutual benefit corporation on E, in the state of F.

Your purposes listed in your bylaws are to

e Educate and inform members in all areas of products and solutions with emphasis on the G solution

portfolio.

e Provide an outlet for users and others interested in G products to comingle with one another.
e Create a peer-to-peer network to share solutions and solve common problems.
e Advocate on behalf of members to drive G and its partners' product and service solutions.

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

Your primary goals are to:

Advocate on behalf of the needs and interests of G customers

Provide a direct channel of feedback from customers to G leadership

Serve as a conduit of product and company information from G to its customers

Provide training, industry news, networking opportunities, and other value-adds to G customers
Facilitate a positive, productive relationship between G and its customers

Create valuable networks among G customers

eo © © 8 @

Your activities consist of educational events and conferences focusing on products and services of G. G is a for
profit digital communication products and solutions company specializing in cloud communications and
workstream collaboration solutions. Your bylaws state that G is a sponsor and advertiser for your events and has
a non-voting board seat. You also indicated that as the forum for the global G customer community, you
provide a voice and resource for G customers everywhere.

One half of your time and resources is devoted to planning and hosting an annual conference. The conference
lasts for several days and consists of workshops focusing on G products and solutions, learning labs on G
solutions and products, breakout sessions as well as access to G experts. The conference connects attendees to
products, solutions, and ideas concerning G cloud communications as well as provides networking
opportunities.

Your other activities include:

e Providing program support to your chapters which are located all over the world. You assist in designing
training, best practices and localized education focusing on their specific needs regarding G products
and solutions.

e Conducting an annual virtual event that offers breakout sessions as well as a virtual trade fair which
displays G products and solutions.

e Developing webinars on G solutions and updates. These provide both soft and hard skills for your
members. Some of these webinars are sold as opportunities for your partners to highlight their products
and to be used for training for these products.

e Conducting H programs on a monthly basis in order to provide members an opportunity to engage by G
product area and share stories, learn best practices and raise challenges they are having with these tools.

e Conducting support/technical forums. Specifically. your staff and volunteers provide 365-day support to
the online community and technical discussions for G products. These exist to provide members relevant
support based on issues they may have with their products.

e Preparing and distributing a monthly newsletter to your members. The newsletter highlights
membership programs and industry news pertaining to G.

You explained that you offer varying categories of membership which are either paid or unpaid. You explained
that the various categories account for a members’ relationship to you, as well as the level of benefits they are
interested in accessing. To join as a paid member, individuals must complete an application on your website
and pay annual dues. Membership is confirmed upon receiving payment. Paying members can participate in
your H programs, get G training discounts, and on demand access to webinars. There are currently X paying
members. Paid membership categories consist of the following:

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

e The J membership which is intended for current G customers. Specifically, they are IT professionals
responsible for deploying and managing G products in their roles.

e The K membership which is intended for current G partners. Specifically, they are individuals that work
for organizations responsible for selling G products, services, or solutions; and/or products that are
created to support G products.

You further stated that to join as an unpaid member, individuals must complete an application on your website.
There is no approval process associated with this application Once the application is completed, membership is
active. You further explained that this membership is intended for anyone within the G ecosystem, including G
employees, interested in accessing your minimal benefits and programs. These benefits primarily only include
access to your website, live webinars and chapter meetings. There are currently Y unpaid members.

Your largest revenue source is from registration fees from customers of partners in the digital communications
industry to attend your annual event. Other sources of revenue are from partners in the industry of digital
communications, including G, to sponsor your annual event, virtual events or the webinars, to address how their
products work; membership dues; and, hotel commissions from where your events are held.

You have a large volunteer board elected by your paying members. Both your paid staff and volunteers conduct
your activities.

Law

IRC Section 501(c)(6) 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.

In Revenue Ruling 74-147, 1974-1 C.B. 136, an organization whose members represent diversified businesses
that own, rent, or lcase digital computers produced by various manufacturers and that was formed to provide a
forum for the exchange of information leading to the more efficient utilization of computers by its members,

and thus improving the overall efficiency of the business operations of each member, was granted exemption
under IRC Section 501(c)(6).

Revenue Ruling 83-164, 1983-2 C.B. 95, describes an organization whose purpose is to conduct conferences for
the dissemination of information concerning computers manufactured by one specific company, M. Although
membership is composed of various businesses that own, rent, or lease computers made by M, membership is
open to businesses that use other brands of computers. At the conferences, presentations are given by
representatives of M, as well as other experts in the computer field. Problems related to the use of M's
computers are also discussed and current information concerning M's products is also provided. The revenue
ruling holds that by directing its activities to businesses that use computers made by one manufacturer, the
organization is improving business conditions in a segment of a line of business rather than in an industry and is
not exempt under IRC Section 501(c)(6). The revenue ruling concludes that by providing a focus on the

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

4

products of one manufacturer, the organization is providing M with a competitive advantage at the expense of
manufacturers other of computer brands.

In Guide International Corporation v. U.S., 948 F.2d 360 (7th Cir. 1991), aff No. 89-C-2345 (N.D. Ill. 1990),
the Court concluded that an association of computer users did not qualify for exemption under IRC Section
501(c)(6) because it benefitted users of IBM equipment. The Court stated that the organization also served as an
influential marketing tool for IBM because it held conferences that allowed IBM to showcase its products and
services.

Application of law

You are not described in IRC Section 501(c)(6) or in Treas. Reg. Section 1.501(c)(6)-1. You are not organized
and operated to benefit the industry as a whole or to improve the business conditions of the entire industry but
instead for the improvement of business conditions in segments of the various lines of business to which your
members belong, notably that of G and its related products

You are dissimilar to the organization described in Rev. Rul. 74-147. The organization in the revenue ruling
represented diversified businesses who use computers manufactured by different companies. Your activities are
tailored to G and primarily to its customers, its employees, IT professionals who are responsible for deploying
and managing G products in their roles, and individuals who work for organizations responsible for selling G
products, or solutions.

You are like the organization in Rev. Rul. 83-164. Similarly, you are directing your activities to the users of a
specific products and solutions only offered by G. Therefore, you are directing your activities towards the
improvement of business conditions in only segments of the various lines of business to which your members
belong. Because your activities are primarily focused to the users in various roles of G products and solutions,
you help provide a competitive advantage to G and to its customers and as well as to all those in the G
ecosystem at the expense of G’s competitors and their customers. Your activities are not directed towards the

improvement of business conditions in one or more lines of business which precludes exemption under IRC
Section 501(c)(6).

You are like the organization described in Guide International Corporation v. U.S. Your membership primarily
consists of users of G which represents a segment of the industry and not an entire line of business. You are
alsv an influential marketing tool for G, as illustrated by the services and the educational events focused on G
products and solutions that you provide to members. Therefore, you are not operating for the improvement of
business conditions of one or more lines of business as required by IRC Section 501(c)(6).

Conclusion

You do not qualify for exemption under IRC Section 501(c)(6). Your activities are not directed to the
improvement of business conditions in one or more lines of business, but rather to the improvernent of business
conditions in only segments of the various lines of business to which your members belong.

Accordingly, we conclude that you are not exempt under 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.

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

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 Determination 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

PO 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.

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

6

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.

We sent a copy of this letter to your representative as indicated in your power of attorney.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

cc:

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K