Racing-sport organization denied 501(c)(6) business-league exemption

Plain-English summary

An organization applied to be recognized as a tax-exempt business league under section 501(c)(6), the category that covers chambers of commerce and boards of trade. Its actual purpose was to promote a racing sport: it organized races, set rules, ran a year-end awards banquet, and distributed leftover sponsorship and race income to the top points-scoring racers. The IRS denied the exemption. To qualify under 501(c)(6), a group must share a common business interest and work to improve conditions across a line of business, not just serve its members or run what amounts to a hobby. The IRS found the members shared an interest in a sport, not a business, likened the group to the American Kennel Club case (dog owners who were hobbyists, not a business), and also found the payouts to top racers meant net earnings inured to private individuals. The document is the final adverse determination (Letter 1371) with the earlier proposed adverse determination (Letter 4034) attached; the organization must file Form 1120 corporate returns and can seek declaratory judgment under section 7428.

Ruling snapshot

• Question: Does an organization that promotes and runs a racing sport, and pays out excess income to top competitors, qualify as a tax-exempt business league under section 501(c)(6)?
• Outcome: Denied (final adverse determination).
• Key authorities: IRC § 501(c)(6); Treas. Reg. § 1.501(c)(6)-1; Rev. Ruls. 59-391, 70-244, 73-411, 77-206, 81-60; American Kennel Club v. Hoey, 148 F.2d 920 (2d Cir. 1945); Bluetooth SIG, Inc. v. United States, 611 F.3d 617 (9th Cir. 2010).

Full text (IRS public release)

                                              Department of the Treasury          Date: DEC 08 2022

Independent Office of Appeals                 Person to contact:
IRS  550 Main Street, Room 9-491              Name:
Cincinnati, OH 45202                          Employee ID Number
                                              Phone:
                                              Employer ID number:
                                              Uniform Issue List (UIL):
Release Number: 202309016
Release Date: 3/3/2023                        501.06-00, 501.32-00, 503.01-00
Certified Mail

Dear

This is a final adverse determination that you do not qualify for exemption from federal income tax under

Internal Revenue Code (the "Code") Section 501(a) as an organization described in Section 501(c)(6)
of the Code.

We made the adverse determination for the following reasons:

You have not established that you meet the requirements of section 501(c)(6) of the Code. You have not shown
that you are 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.
You have not demonstrated that you are an organization of the same general class as a chamber of commerce or
board of trade. You have not shown that your activities are 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. Your net earnings also inure to the benefit of private shareholders or individuals.

You're required to file federal income tax returns on Forms 1120, U.S. Corporation Income Tax Return. Mail
your form to the appropriate Internal Revenue Service Center per the form's instructions. You can get forms and
instructions by visiting our website at www.irs.gov/forms or by calling 800-TAX-FORM (800-829-3676).

We'll make this letter and the proposed adverse determination letter available for public inspection under
Section 6110 of the Code after deleting certain identifying information. We provided to you, in a separate
mailing, Notice 437, Notice of Intention to Disclose. Please review the Notice 437 and the documents attached
that show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in
Notice 437.

If you decide to contest this determination, you can file an action for declaratory judgment under the provisions
of Section 7428 of the Code in either:

» The United States Tax Court,

* The United States Court of Federal Claims, or
* The United States District Court for the District of Columbia

Letter 1371 (Rev. 10-2021)
Catalog Number 40683R

You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this
determination letter to you. Contact the clerk of the appropriate court for rules and the appropriate forms for
filing petitions for declaratory judgment. You can write to the courts at the following addresses:
United States Tax Court        US Court of Federal Claims        US District Court for the District of Columbia
400 Second Street, NW          717 Madison Place, NW             333 Constitution Avenue, NW
Washington, DC 20217           Washington, DC 20005              Washington, DC 20001

Note: We will not delay processing income tax returns and assessing any taxes due even if you file a petition for
declaratory judgment under Section 7428 of the Code.

You also have the right to contact the Taxpayer Advocate Service (TAS). 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 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.

TAS assistance is not a substitute for established IRS procedures, such as the formal appeals process. TAS
cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a
petition in a United States Court.

If you have questions, contact the person at the top of this letter.

Sincerely,

Doug O'Donnell
Acting Commissioner
By

Valeria B. Farr
Acting Appeals Team Manager

Enclosures:
IRS Appeals Survey

Letter 1371 (Rev. 10-2021)
Catalog Number 40683R


                              Department of the Treasury
                              Internal Revenue Service

IRS  PO Box 2508
Cincinnati, OH 45201

Date: DEC 2 2 2021

Employer ID number:

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

Legend:                          UIL:

B = state                        501.00-00
C = Date                         501.06-00
j percent = %

x dollars = dollar amount

y dollars = dollar amount

z dollars = dollar amount

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 in the state of B on C as a nonprofit corporation. Your Articles of Incorporation state that you
are organized to promote the sport of        and racing for        and other        race        You also

provide a structured environment that allow racers to safely participate in competitions. You encourage good
sportsmanship in a competitive environment.

Your Articles of Incorporation also indicate that you have one class of members and each has full voting rights.

No part of net earnings, property, or assets shall inure to the benefit of any private person or director. Upon
dissolution, your assets remaining after the payment of debts shall be conveyed to a charity as determined by
your membership at the final meeting.

On the contrary, your application states upon dissolution all assets would be distributed to participating tracks
evenly.

You stated on your application that your activities are:

Letter 4034 (Rev. 01-2021)
Catalog Number 47828K

Providing        at each race event that is held on        from        through
Hosting a year-end awards banquet each year in

Scheduling races with the

Providing a set of rules and regulations to keep racers and        safe.

Your primary funding comes from sponsorships, race fees, donations, and memberships. Your application
indicates that a member is any racer who pays x dollars annually to register his/her race number. Members
towards the race season. At the end of the season,        from sponsorships and race        are
distributed to the top points holders in all        classes.

Your total income over the last        years is y dollars and out of which z dollars were paid to the top points
holders. This payout is around j percent of total income.

Law

IRC Section 501(c)(6) provides for exemption from federal income tax for business leagues, chambers of
commerce, real-estate boards, boards of trade, or professional football leagues (whether or not administering a
pension fund for football players), 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 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 59-391, 1959-2 C.B. 151, held that an organization composed of individuals, firms,
associations, and corporations, each representing a different trade, business, occupation, or profession whose
purpose is to exchange information on business prospects has no common business other than a mutual desire to
increase their individual sales. The activities are not directed to the improvement of one or more lines of
business, but rather to the promotion of private interests of its members and is not exempt under IRC Section

501(c)(6).

In Rev. Rul. 70-244, 1970-1 C.B. 132, the organization's membership consists of business and professional
persons in the community. Its articles of incorporation state it was formed to bring together members and their
guests to exchange idea for improving business conditions within the community. It does not have any specific
program directed to the improvement of business conditions in the community. Since this organization has no
program designed to improve business conditions of one or more lines of business, it is held that the
organization is not exempt from federal income tax under IRC Section 501(c)(6).

Rev. Rul. 73-411, 1973-2 C.B. 180, describes an organization that was not structured along industry or business
lines but was composed of and restricted to various types of businesses and commercial endeavors comprising a
shopping center. Therefore, its right to exemption, if any, had to rest on its characterization as a chamber of

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

3

commerce or board of trade or similar organization. The revenue ruling further indicated that chambers of
commerce and boards of trade direct their efforts at promoting the common economic interests of all the
commercial enterprises in a given trade community. In the case of a chamber of commerce or similar
organizations, the common business interest is usually the general economic welfare of a community. The
ruling held that organization did not qualify for exemption under IRC Section 501(c)(6) because its activities
were directed to promoting the general business interests of its members.

Rev. Rul. 77-206, 1977-1 C.B. 19, held that cash rebates made by an exempt business association to member
and nonmember exhibitors who participate in the association's annual industry trade show, that represent a
portion of an advance floor deposit paid by each exhibitor to insure the show against financial loss, and which
are made to all exhibitors on the same basis, and which may not exceed the amount of the deposit, do not
adversely affect the association's exemption status under IRC Section 501(c)(6).

Rev. Rul. 81-60, 1981-1 C.B. 335, relied on well established principles under IRC Section 501(c)(6) to hold that
a refund of excess dues to members of an exempt agricultural organization in the same proportion as the dues
are paid does not constitute inurement, and therefore does not disqualify an organization from exemption under
IRC Section 501(c)(5) or Section 501(c)(6).

King County Insurance Association, 37 B.T.A. 288 (1938), acq. 1938-1 C.B. 17 stated that pro rata refunds of
excess dues to members do not affect an association's status as an exempt business league.

In American Kennel Club v. Hoey, 148 F.2d 920 (2nd Cir. 1945), the court held that an association of dog
owners, most of whom were not in the business of raising and selling dogs, did not further a common business
interest and thus was not exempt under IRC Section 501(c)(6).

In Bluetooth SIG, Inc. v. United States, 611 F.3d 617 (9th Cir. 2010), the court examined an organization that
was formed to advance the common business interests of its members in the development and regulation of
technical standards for the compatibility and interoperability of wireless products and devices within a wireless
personal area network. The organization develops specifications and use applications and promotes consumer
awareness and marketing through its Bluetooth technology and trademark. The court held that the organization
was not a tax-exempt business league under IRC Section 501(c)(6) because the organization's activities
exclusively benefit its members, rather than an entire line of business. The court noted that it "strains credulity"
for the organization to argue that its services indirectly benefit the industry as a whole simply by generating
consumer awareness of the availability and reliability of its technology. The court reiterated in order to decide
whether a particular entity qualifies as a business league under the Section 501(c)(6), a business league must
have the following characteristics:

(1) It must be an association of persons having some common business interest

(2) Its purpose must be to promote this common business interest

(3) It must not be organized for profit

(4) It should not be engaged in a regular business of a kind ordinarily conducted for a profit

(5) Its activities should be directed toward the improvement of business conditions of one or more lines
of business as distinguished from the performance of particular services for individual persons

(6) It must be the same general class as a chamber of commerce or a board of trade

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

Application of law

You are not described in IRC Section 501(c)(6) and Treas. Reg. Section 1.501(c)(6)-1 because the facts show
you are not formed to promote the common business interests of a particular industry or trade, but rather you are
formed to promote a sport. Your members come together with a common interest, however, you have not
demonstrated that the interest is a business interest. You also have not demonstrated you have met any of the
Section 501(c)(6) characteristics spelled out in Bluetooth SIG, Inc.

You are similar to Rev. Rul. 70-244 and Rev. Rul. 73-411 that you do not have any programs to improve any
business conditions and promote the general business interests of your members.

You are distinguished from Rev. Rul. 77-206, Rev. Rul. 81-60, and King County Insurance Association that you
distribute excess of sponsorships and race income to top points holders. The distribution is more than x dollars
of the annual membership fee. In addition, you further the private interest of your members by sharing your
excess income which is similar to Rev. Rul. 59-391.

Your membership is primarily interested in a sport, not in any business. Hobbies are activities that aren't
conducted as businesses. You are similar to American Kennel Club that does not further a common business
interest but further the common interest of hobbyists.

Conclusion

Based on the above facts and law, we conclude you do not qualify for exemption under IRC Section 501(c)(6).
Your activities are not directed to the improvement of business conditions of one or more lines of business nor
do you share any common business interest. Rather, you facilitate        for        and your members have
no common business interest. Accordingly, you do not qualify for exemption as an organization described in
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

* 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

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

5

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
will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778.

Sincerely,

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

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

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