Franchise advertising cooperative denied business-league exemption

Plain-English summary

A group of franchisees for one company formed a marketing cooperative to pool required advertising contributions and buy sponsorships, direct mail, digital advertising, and other promotions for their local outlets. Membership was limited to franchisees of that single brand, and the cooperative selected and purchased advertising intended to increase their individual sales. The IRS found that these activities performed particular services for members and promoted one brand, rather than improving conditions for an entire line of business. It therefore concluded that the organization did not qualify as a business league under section 501(c)(6). The denial became final after the organization did not protest within 30 days.

Ruling snapshot

• Question: Did a single-brand franchise advertising cooperative qualify as a section 501(c)(6) business league?
• Outcome: denied
• Key authorities: IRC § 501(c)(6); Treas. Reg. § 1.501(c)(6)-1; Rev. Ruls. 55-444, 67-77, 68-182, and 76-409; National Muffler Dealers Association v. United States

Full text (IRS public release)

Department of the Treasury Date:

Internal Revenue Service 09/07/2022

Tax Exempt and Government Entities Employer ID number:
IRS Po Box 2508

Cincinnati, OH 45201

Form you must file:

Tax years:

Number: 202248013
Release Date: 12/2/2022 Person to contact:

UIL: 501.06-00

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)(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,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Letter 437

Redacted Letter 4034
Redacted Letter 4038

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

Department of the Treasury
Internal Revenue Service
PO Box 2508
IRS Cincinnati, OH 45201
Date:

July 11, 2022

Employer ID number:

Person to contact:

Name:
ID number:
Telephone:
Fax:
Legend: UIL:
B = date 501.06-00
C = state
D = company
E = city
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 were formed on B as an with the Secretary of State of C. Your Articles of Organization state you are
a marketing co-op with the objective to share marketing funds for larger advertising buys. Franchisees of D,
from the E area, elected to form an organization in order to purchase better advertising and marketing for the E
area franchise outlets. Your Bylaws stipulate rules each franchisee must follow including contributions of net
sales to an advertising fund.

By forming this organization, D franchisees can join together to determine best strategies for joint advertising.
Income is provided by the D corporate office from advertising percentages that each franchisee pays. The
money provided from the advertising royalties are paid to the D franchisees. You conduct calls between the D
franchisees weekly to discuss options in advertising and marketing. Such discussions are as to what advertising
or marketing to purchase by the collected group of D franchisees. Once joint decisions are made on what
advertising and marketing is best, you purchase the advertising and marketing agreed upon for the D franchisees
in the E area. The franchisee must use the advertising fund as specified in the franchisee agreement.

You indicated that you have or plan to purchase advertising in the form of Sponsorship,
Sponsorship, landing page/website development and maintenance services, Direct Mailers for coupons, Valpak

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

2

Monthly mailers for coupons, social media advertising/Instagram/Facebook, and Radio
sponsorship for your members.

All your members are required to be part of D in good standing and with a store operating and open to the
public.

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 states that a business league is an association of persons having some
common business interests, 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. The Regulations further state that the activities of a
business league 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 members.

Revenue Ruling 55-444, 1955-2 C.B. 258, provides that an organization formed to promote the business of a
particular industry that carries out its purposes primarily by conducting a general advertising campaign to
encourage the use of products and services of the industry as a whole is exempt from tax notwithstanding that
such advertising to a minor extent constitutes the performance of particular services for its members.

Revenue Ruling 67-77, 1967-1 C.B. 138, provides that an association of dealers selling a particular make of
automobile that engaged in financing general advertising campaigns to promote the sale of that particular make
was not exempt because it was performing particular services for its members rather than promoting a line of
business, i.e., the automotive industry as a whole. In this ruling, membership in the organization was restricted
to dealers who held franchises for the sale of the automobiles designated in the area.

Revenue Ruling 68-182, 1968-1 C.B. 263, provides that organizations promoting a single brand or product
within a line of business do not qualify for exemption under section 501(c)(6) of the Code.

Revenue Ruling 76-409, 1976-2 C.B. 154, provides a nonprofit organization of individuals in the business of
furnishing finance adjusting services, which assigns exclusive franchise areas to its members and publishes and
distributes to their potential customers a directory containing members’ names and addresses, is performing
particular services for its members and does not qualify for exemption under section 501(c)(6) of the Code. The
publication and distribution of a directory containing the names and addresses of members constitutes
advertising for the individuals so listed, and is, therefore, the performance of particular services for such
individuals rather than an activity aimed at the improvement of general business conditions.

National Muffler Dealers Association, Inc. v. United States, 440 U.S. 472 (1979), concludes that an
organization of muffler dealers franchised by Midas International Corporation did not qualify for exemption
from federal income tax as a business league under section 501(c)(6) of the Code. The organization's purpose
was too narrow to satisfy the line of business test of section 1.501(c)(6)-1 of the regulations,

Application of law
You are not described in Treas. Reg. Section 1.501(c)(6)-1 because your activities are directed at performing
services for the benefit of a particular franchise business rather than to the improvement of business conditions

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

of one or more lines of business. For this reason, you are not described in IRC Section 501(c)(6) of the Code,
because you are not organized and operated as a business league.

You are not similar to the organization described in Revenue Ruling 55-444 because your advertising campaign
is specific to the one patented product and service sold by your members rather than to encourage the use of
products and services of the industry as a whole. Instead of a general advertising campaign you are specifically
targeting only your members and their franchise businesses.

You are similar to the organizations described in Revenue Rulings 67-77 and 68-182 because your activities
further the business interests of your member franchisees of a single brand or product. You perform particular
services for your members to increase individual sales and revenues rather than benefit the industry as a whole.
You were established for member franchisees to be more successful through joint activities and leveraging in D
brand awareness, promotions, marketing and sales. Because you are only improving business conditions for
your franchisees, and for the above reasons, you are precluded from exemption under IRC Section 501(c)(6).

Similar to the organization in Revenue Ruling 76-409, by restricting membership to only those franchisees of D,
and by offering advertising and marketing strategies, you are performing particular services to members.
Further, by limiting membership you are not aimed at the general improvement of conditions for all those in the
industry related to D. As a result, you do not qualify for exemption under IRC Section 501(c)(6).

You are similar to the organization described in National Muffler Dealers Association, because your activities
serve members who are D franchise owners. Specifically, you were formed to purchase better advertising and
marketing for these members. By doing so you provide particular services toward particular franchisees which
does not represent one or more line of businesses. Therefore, you are precluded from exemption under IRC
Section 501(c)(6).

Conclusion

You do not meet the requirements of IRC Section 501(c)(6) because your benefits are directed toward a
segment of a line of business versus the industry as a whole. Your activities are not directed to the improvement
of business conditions of one or more lines of business, rather, they are providing particular services for your
individual members. 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.

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

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

* 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.

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

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

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. 01-2021)
Catalog Number 47628K