Software user group denied business league exemption

Plain-English summary

An organization sought business league exemption for a user group limited to businesses in one industry that licensed a particular software product. Its activities promoted that product through training, networking, newsletters, events, and member discounts. The IRS found that the organization served only a segment of a line of business and promoted a single technology brand rather than improving conditions across one or more lines of business. It therefore denied exemption under Section 501(c)(6), and the determination became final after no protest was filed.

Ruling snapshot

• Question: Did the software-specific user group qualify as an exempt business league under IRC § 501(c)(6)?
• Outcome: denied
• Key authorities: IRC § 501(c)(6); Treas. Reg. § 1.501(c)(6)-1; Rev. Ruls. 74-147, 83-164

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Date: 03/07/2024
Tax Exempt and Government Entities
Employer ID number:

IRS PO Box 2508
Cincinnati, OH 45201

Person to contact:

Release Number: 202422011
Release Date: 5/31/2024
UIL Code: 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
Letter 4038

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

Department of the Treasury
Internal Revenue Service
IRS PO Box 2508
Cincinnati, OH 452011
Date: 12/27/2023

Employer ID number:

Person to contact:

Name:
ID number:
Telephone:
Fax:
Legend: UIL:
B = State 501.06-00
C = Date
D = noun
E = Name
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 incorporated in B on C. Your Articles of Incorporation (AOI) state you are formed to exclusively
represent and promote the common business interests of and improve business conditions among members of
the D industry using E software. Furthermore, your AOI state your specific mission and activities will be a
resource for any organization using E software and to maximize your members’ use of E software through
knowledge sharing, collaboration, training, and events. Events are held monthly and annually in conjunction
with third party software providers where you can further your mission.

Your goal, along with the help of the software developer, is to drive improvements and efficiencies in the D
industry by promoting a single product, E software. You encourage member networking so that members will
better learn how to use the best practices and training that E software offers. You create and publish newsletters
about E software to report changes, new functionalities, and aid in determining future enhancements and
customizations to it. You work with outside vendors to entice them to provide group discounts to your
members. You limit your membership to only those in the D industry who currently use and license E software.

You have one class of members who currently have no voting rights, and no one is required to join. You have
officers, and they will be appointed by your board of directors. The officers shall consist of a president, a
secretary, and a treasurer. You may also have a chairperson, a vice president, and any other offices the board

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

2

deems appropriate. The president shall be a voting member of the board. The same person may hold one or
more offices at the same time, but the same person can only verify an instrument in one office capacity.

Your financial statement shows approximately two thirds of your revenue comes from membership fees, and
approximately one third of your revenue comes from annual conference registrations. You pay no salaries to
officers, directors, and trustees nor employee salaries and wages. You have expenses for professional fees and
program fees.

Law

IRC Section 501(c)(6) provides exemption from federal income tax for business leagues, chambers of
commerce, real-estate boards, boards of trade, or professional football leagues, (whether or not they administer
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 a particular service for
individual persons. An organization, whose purpose is to engage in a regular business of any 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 74-147, 1974-1 C.B. 136, held that an organization formed to stimulate the development of,
with free interchange of information pertaining to, systems and programming of electronic data processing
equipment whose membership was made up of representatives of diversified businesses who owned, rented, or
leased one or more digital computers, produced by various manufacturers, without regard to identity of the
manufacturer of any such computer, and invited nonmembers to attend conferences and join as members, and
did not provide counseling or other services to its members with respect to specific individual problems
qualifies for exemption under IRC Section 501(c)(6).

Rev. Rul. 83-164, 1983-2 C.B. 95, held that an organization whose primary activity was promoting the common
business interests of users of one particular brand of computers, did not qualify for exemption from federal
income tax as a business league under IRC Section 501(c)(6) because it was found to have served only a
segment of a line, instead of one or more lines of business, at the expense of others in the industry.

In National Muffler Dealers Association Inc. v. United States, 440 U.S. 472, 99 S. Ct. 1304, 59 L. Ed. 2d 519
(1979), the United States Supreme Court held 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 IRC
Section 501(c)(6) because the organization's purpose was too narrow to satisfy the line of business test of Treas.
Reg. Section 1.501(c)(6)-1. The Court concluded that the line of business limitation of Treas. Reg. Section
1.501(c)(6)-1 is well grounded in the origin of Section 501(c)(6) and in its enforcement over a long period of
time. The Court further concluded that exemption under Section 501(c)(6) is not available to aid one group in
competition with another within an industry.

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

In Engineers Club of San Francisco v. United States, 791 F.2d 686 (9th Cir.1986), the Ninth Circuit Court of
Appeals held that in order to qualify for a business league classification, each and every requirement of Treas.
Reg. Section 1.501(c)(6)-1 must be met. Treas. Reg. Section 1.501(c)(6)-1 requires a business league to be an
association (1) of persons having a common business interest; (2) whose purpose is to promote the common
business interest; (3) not organized for profit; (4) that does not engage in a business ordinarily conducted for
profit; (5) whose 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; (6) of the same
general class as a chamber of commerce or a board of trade.

In Bluetooth SIG Inc. v. United States, 611 F.3d 617 (9th Cir. 2010), the Ninth Circuit Court of Appeals held
that an association that owned and marketed a wireless networking protocol and trademark was not exempt
under IRC Section 501(c)(6). Its primary purpose is to promote a single brand of technology rather than to
improve business conditions in one or more lines of business.

Application of law

You are not described in IRC Section 501(c)(6) because you do not meet each and every requirement of Treas.
Reg. Section 1.501(c)(6)-1 as described in Engineers Club of San Francisco. Specifically, you are not an
association (1) of persons having a common business interest; (2) whose purpose is to promote the common
business interest; (5) whose 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.

You are not an association of persons having a common business interest because your membership is only
open to those in the D industry who license and currently use E software. Your purpose is not to promote the
common business interests of one or more lines of business because your activities are directed to the
improvement of only a segment of a line of business. You only promote the business interests of those in the D
industry who license and currently use E software. Thus, you promote the private interests of your members
instead of the common business interests of the D industry. Moreover, you aid one group in competition with
another within an industry. For these reasons, you are like the organizations described in Rev. Rul. 83-164 and
National Muffler Dealers Association Inc.

You are like the organization described in Bluetooth SIG Inc because your primary purpose is to promote a
single brand of technology (E software) rather than to improve business conditions in one or more lines of
business,

You are not like the organization described in Rev. Rul. 74-147 because you limit yourself to one specific
product, E software. Your activities and membership are limited to D businesses who license and currently use
E software.

Conclusion

You are not an association of persons having a common business interest whose purpose is to promote the
common business interest. Moreover, you do not direct your activities to the improvement of business
conditions of one or more lines of business, rather you direct your activities to the improvement of only a
segment of a line of business. Since you do not satisfy all the requirements of Treas. Reg. Section 1.501(c)(6)-1,
you do not qualify for exemption under IRC Section 501(c)(6).

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

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 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 452012

Cincinnati, OH 452011

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

5

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

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