Exempt Organizations

Exempt Organizations

Technical Guide

TG 6: Business Leagues – IRC Section

501(c)(6)

This document is not an official pronouncement of the law or the position of the Service and cannot be

used, cited, or relied upon as such. This guide is current through the revision date. Changes after the

revision date may affect the contents of this document and users should consider any subsequent

resources to ensure technical accuracy. All references to “Section” in this document refer to the Internal

Revenue Code of 1986, as amended, unless specifically noted otherwise. The taxpayer names and

addresses shown in examples within this publication are fictitious.

Technical Guide Revision Date: 2/1/2024

Publication 5710 (Rev. 2-2024) Catalog Number 93464S Department of the Treasury Internal Revenue Service www.irs.gov

Table of Contents

I. Overview................................................................................................ 4

A. Background / History ...................................................................... 4

B. Relevant Terms ............................................................................... 7

C. Law / Authority ................................................................................ 7

II. Exemption Requirements .................................................................... 8

A. Association of Persons .................................................................. 8

B. Common Business Interest ......................................................... 10

C. Is There a Bona Fide Membership ............................................... 11

D. Purpose Must Promote Common Business Interest.................. 12

E. Not Organized for Profit ............................................................... 14

F. Not Engaged in Regular Business Conducted for Profit ........... 14

G. Improvement of Business Conditions as Opposed to

Performance of Services .............................................................. 17

G.1. Improvement of Business Conditions ............................... 17

G.2. Line or Lines of Business ................................................... 19

G.3. Performance of Particular Services for Individuals.......... 21

H. Net Earnings Must Not Inure to Benefit of Any Individual......... 28

I. Nonmember Income and Inurement ............................................ 29

III. Other Considerations ......................................................................... 30

A. Political and Legislative Activities .............................................. 30

A.1. Dues Used for Political and Legislative Purposes ........... 30

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A.2. Deductibility of Dues and Grassroots Lobbying .............. 30

B. Effect of Section 527(f) on Political Expenditures ..................... 32

C. Classification Issues for Business Leagues ............................... 32

C.1. Section 501(c)(6) v. Section 501(c)(3) ................................ 32

C.2. Section 501(c)(6) v. Section 501(c)(5) Agricultural Orgs .. 32

C.3. Section 501(c)(6) v. Section 501(c)(5) Labor Orgs ............ 33

D. Non-Deductibility of Contributions .............................................. 33

E. Unrelated Business Income Tax .................................................. 34

E.1. Trade Publications ............................................................... 35

E.2. Qualified Trade Show Activities.......................................... 35

E.3. Provision of Pension and Health Benefits......................... 36

F. Selling Marts .................................................................................. 38

IV. Application for Recognition of Exemption ....................................... 39

V. Examination Techniques ................................................................... 39

A. Section 501(c)(6) Membership Examination Techniques .......... 39

B. Inurement Examination Techniques ........................................... 39

C. Unrelated Business Income Examination Techniques .............. 40

D. Compensation Examination Techniques .................................... 40

E. Legislative Activities Examination Techniques ......................... 41

F. Political Activities Examination Techniques .............................. 41

VI. References .......................................................................................... 42

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I. Overview

(1) This Technical Guide (TG) document discusses tax exemption of business

leagues, chambers of commerce, real estate boards, and boards of trade

described under Internal Revenue Code (IRC) Section 501(c)(6).

Note: This TG references General Counsel Memoranda (GCM). Although

GCMs may not be used or cited as precedent, they do offer additional tax law

analysis considerations when precedential guidance doesn’t exist.

A. Background / History

(1) The Sixteenth Amendment to the U.S. Constitution, ratified in February,1913,

permitted Congress to levy a tax on income. Eight months later, the Revenue

Act of 1913, also known as the Underwood Tariff Act, provided for an income

tax exemption on business leagues, chambers of commerce, and boards of

trade. Tax exemption for business leagues has been part of U.S. tax law ever

since and is now found in Section 501(c)(6). The evolution of the term “business

league” or trade organization is thoroughly explained in Natl. Muffler Dealers

Assn. v. United States, 440 US 472 (1979):

The exemption for “business leagues” from federal income tax had

its genesis at the inception of the modern income tax system with

the enactment of the Tariff Act of October 3, 1913, 38 Stat. 114,

172. In response to a House bill which would have exempted,

among others, “labor, agricultural, or horticultural organizations,”

the Senate Finance Committee was urged to add an exemption that

would cover nonprofit business groups. Both the Chamber of

Commerce of the United States and the American

Warehousemen’s Association, a trade association for warehouse

operators, submitted statements to the Committee. The Chamber’s

spokesman said:

“The commercial organization of the present day is not organized

for selfish purposes, and performs broad patriotic and civic

functions. Indeed, it is one of the most potent forces in each

community for the improvement of physical and social conditions.

While its original reason for being is commercial advancement, it is

not in the narrow sense of advantage to the individual, but in the

broad sense of building up the trade and commerce of the

community as a whole . . .” (Emphasis added). Briefs and

Statements on H. R. 3321 filed with the Senate Committee on

Finance, 63d Cong., 1st Sess., 2002 (1913) (hereinafter Briefs and

Statements).

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The Chamber’s written submission added:

“These organizations receive their income from dues . . . which

business men pay that they may receive in common with all other

members of their communities or of their industries the benefits of

cooperative study of local development, of civic affairs, of industrial

resources, and of local, national, and international trade.”

(Emphasis added). Id., at 2003.

The Committee was receptive to the idea, but rejected the

Chamber’s proposed broad language which would have exempted

all “commercial organizations not organized for profit.” Instead, the

Committee, and ultimately the Congress, provided that the tax

would not apply to “business leagues, nor to chambers of

commerce or boards of trade, not organized for profit or no part of

the net income of which inures to the benefit of the private

stockholder or individual.” Tariff Act of Oct. 3, 1913, § IIG (a), 38

Stat. 172.

Congress has preserved this language, with few modifications, in

each succeeding Revenue Act.

The Commissioner of Internal Revenue had little difficulty

determining which organizations were “chambers of commerce” or

“boards of trade” within the meaning of the statute. Those terms

had commonly understood meanings before the statute was

enacted. “Business league,” however, had no common usage, and

in 1919 the Commissioner undertook to define its meaning by

regulation. The initial definition was the following:

“A business league is an association of persons having some

common business interest, which limits its activities to work for

such common interest and does not engage in a regular business

of a kind ordinarily carried on for profit. Its work need not be similar

to that of a chamber of commerce or board of trade.” Treas. Regs.

45, Art. 518 (1919).

This language, however, proved too expansive to identify with

precision the class of organizations Congress intended to exempt.

The Service began to cut back on the last sentence of the material

just quoted when, in 1924, the Solicitor of Internal Revenue invoked

noscitur a sociis to deny an exemption requested by a stock

exchange. He reasoned that, while a stock exchange conceivably

could come within the definitions of a “business league” or “board of

trade,” it lacked the characteristics that a “business league,”

“chamber of commerce,” and “board of trade” share in common and

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that form the basis for the exemption. Congress must have used

those terms, he said, “to indicate organizations of the same general

class, having for their primary purpose the promotion of business

welfare.” The primary purpose of the stock exchange, by contrast,

was “to afford facilities to a limited class of people for the

transaction of their private business.” L. O. 1121, III-1 Cum. Bull.

275, 280-281 (1924). The regulation was then amended so as

specifically to exclude stock exchanges. T. D. 3746, IV-2 Cum. Bull.

77 (1925).

In 1927, the Board of Tax Appeals, in a reviewed decision with

some dissents, applied the principle of noscitur a sociis and denied

a claimed “business league” exemption to a corporation organized

by associations of insurance companies to provide printing services

for member companies. Uniform Printing & Supply Co. v.

Commissioner, 9 B. T. A. 251, aff’d, 33 F. 2d 445 (CA7), cert.

denied, 280 U. S. 591 (1929). In 1928, Congress revised the

statute so as specifically to exempt real estate boards that local

revenue agents had tried to tax. The exclusion of stock exchanges,

however, was allowed to remain.

In 1929, the Commissioner incorporated the principle of noscitur a

sociis into the regulation itself. The sentence, “Its work need not be

similar to that of a chamber of commerce or board of trade,” was

dropped and was replaced with the following qualification:

“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 or to the promotion of

the general objects of one or more lines of business as

distinguished from the performance of particular services for

individual persons.” Treas. Regs. 74, Art. 528 (1929).

This language has stood almost without change for half a century

through several re-enactments and one amendment of the statute.

During that period, the Commissioner and the courts have been

called upon to define “line of business” as that phrase is employed

in the regulation. True to the representation made by the Chamber

of Commerce, in its statement to the Senate in 1913, that benefits

would be received “in common with all other members of their

communities or of their industries,” supra, at 478, the term “line of

business” has been interpreted to mean either an entire industry,

see, e. g., American Plywood Assn. v. United States, 267 F. Supp.

830 (WD Wash. 1967); National Leather & Shoe Finders Assn. v.

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Commissioner, 9 T. C. 121 (1947), or all components of an industry

within a geographic area, see, e. g., Commissioner v. Chicago

Graphic Arts Federation, Inc., 128 F. 2d 424 (CA7 1942); Crooks v.

Kansas City Hay Dealers’ Assn., 37 F. 2d 83 (CA8 1929);

Washington State Apples, Inc. v. Commissioner, 46 B. T. A. 64

(1942).

See Natl. Muffler Dealers Assn. v. United States, 440 U.S. 472, 99 S. Ct.

1304, 59 L. Ed. 2d 519 (1979).

B. Relevant Terms

(1) Business League: A business league, as defined by Treasury Regulation

(Treas. Reg.) 1.501(c)(6)-1, 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.

(2) Trade Association: A trade association, as defined by the U.S. Department of

Commerce, is a nonprofit, cooperative, voluntarily-joined organization of

business competitors designed to assist its members and its industry in dealing

with mutual business problems.

(3) Line of Business: A line of business, as defined by Natl. Muffler Dealers Assn.

v. United States, 440 U.S. 472 (1979), is interpreted to mean either an entire

industry or all components of an industry within a geographic area.

(4) Segment of a Line of Business: Organizations that help provide a competitive

advantage to a business and to its customers at the expense of competitors

and their customers may be promoting a segment of a line of business rather

than a line of business. See Rev. Rul. 83-164.

(5) Particular Service: A particular service for individual members includes any

particular activity or service performed by an organization which does not inure

to the benefit of all its members generally and which would otherwise have to

be done by or for the member in order for the member to properly perform their

business.” See S. Hardwood Traffic Ass’n v. United States, 283 F. Supp. 1013

(W.D. Tenn. 1968).

C. Law / Authority

(1) Section 501(a) says, in part, an organization described in subsection (c) shall

be exempt from taxation. Section 501(c)(6) then provides for exemption 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.

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(2) Treas. Reg. 1.501(c)(6)-1 provides a fuller definition of Section 501(c)(6)

organizations with the following:

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. An

association engaged in furnishing information to prospective

investors, to enable them to make sound investments, is not a

business league, since its activities do not further any common

business interest, even though all of its income is devoted to the

purpose stated. A stock or commodity exchange is not a business

league, a chamber of commerce, or a board of trade within the

meaning of section 501(c)(6) and is not exempt from tax.

Organizations otherwise exempt from tax under this section are

taxable upon their unrelated business taxable income. See part II

(Section 511 and following), subchapter F, chapter 1 of the Code,

and the regulations thereunder.

II. Exemption Requirements

A. Association of Persons

(1) Treas. Reg. 1.501(c)(6)-1 establishes the requirement for a Section 501(c)(6)

business league to be an association of persons having some common

business interest. To determine whether an organization meets this

requirement, three component requirements should be considered:

a. whether there is an association,

b. whether there is a common business interest, and

c. whether there is a bona fide membership.

(2) Failure to meet one of these components affects whether the organization

meets this requirement and whether it qualifies for exemption under Section

501(c)(6).

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(3) To meet the association of persons having a common business interest

requirement, there must be an association. An association, or league, for

purposes of Section 501(c)(6) possesses three characteristics:

a. There is an agreement or covenant between two or more parties or

persons for the accomplishment of some purpose. See Associated

Industries of Cleveland v. Commissioner, 7 T.C. 1449 (1946) acq. 1947-1

C.B. 1.

b. Membership is voluntary and open. See Rev. Rul. 73-411, 1973-2 C.B.

180.

c. It has a meaningful extent of membership support. Consider GCM 39108

(1982).

(4) The first two points cite precedential guidance and can be objectively

measured. The third point cites nonprecedential guidance and is more

subjective.

(5) The nonprecedential guidance in GCM 39108 explains that a Section 501(c)(6)

organization is a membership organization characteristically supported by dues.

(See also the discussion of bona fide membership below.) While such an

organization may receive a substantial portion or even the primary part of its

income from non-member sources, membership support, both in the form of

dues and involvement in the organization’s activities, must be at a meaningful

level. To assess that meaningful level, consider the following:

a. Any income derived from the performance of the organization’s exempt

functions or from substantially-related activities should be treated as

membership support.

b. Contributions or gifts from the general public should be treated as

membership support.

c. Unrelated income should be excluded in measuring the extent of

membership support.

(6) Rev. Rul. 66-222, 1966-2 C.B. 223 describes an organization whose income

derives from fees from an activity that furthers its exempt purpose and provides

a meaningful extent of membership support. This organization is described in

Section 501(c)(6) even though it has no income from member dues.

(7) Another consideration regarding the extent of meaningful membership support

is the term “member.” Dues support isn’t automatically considered membership

support simply because it is labeled as from a member. See the discussion on

bona fide membership below. A principal purpose test is used to determine

whether a particular class of dues income will be subject to unrelated business

income tax provisions. See Rev. Proc. 97-12, 1997-1 C.B. 631, which amplified,

in part, and modified, in part, Rev. Proc. 95-21, 1995-1 C.B. 686.

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B. Common Business Interest

(1) To meet the association of persons having a common business interest

requirement, the makeup of membership must primarily share some common

business interest. A valid shared common business interest should possess the

following characteristics:

a. The interest is in business as opposed to an interest other than business.

See American Kennel Club, Inc. v. Hoey, 148 F.2d 920 (2d Cir. 1945).

b. The interest in business is at a common or general level of business. It

should be an interest directed to the improvement of business conditions

of one or more lines of business, rather than to promote the private

interests of its members. Furthermore, since a common business interest

is a requirement for exemption under Section 501(c)(6), it is important to

ascertain what the “business” is.

(2) The opinion in Crooks v. Kansas City Hay Dealers’ Ass’n, 37 F.2d 83 (8th Cir.

1929) states:

‘Business’ is defined in Black’s Law Dictionary as follows:

“‘Business’ is a very comprehensive term and embraces everything

about which a person can be employed,’ which definition is

approved by the Supreme Court in Flint v. Stone Tracy Co., 220

U.S. 107 (1911).”

(3) In Flint, the Supreme Court additionally defined business as “[t]hat which

occupies the time, attention and labor of men for the purpose of a livelihood or

profit.” Thus, the term “business” is construed broadly and includes almost any

enterprise or activity conducted for remuneration or profit.

(4) Some examples of members sharing a common business interest include the

following:

a. A board is formed by members of the medical profession to improve the

quality of medical care available to the public and to establish and

maintain high standards of excellence in a particular medical specialty.

The board’s activities include devising and administering written

examinations and issuing certificates to successful candidates in the

medical specialty. Listings of the certified physicians are made available

by the board to various medical groups who in turn make the listings

available to the public. The organization is promoting the common

business interest of the physicians and is exempt under Section 501(c)(6).

See Rev. Rul. 73-567, 1973-2 C.B. 178.

b. An organization formed to stimulate the development and free interchange

of information pertaining to systems and programming of electronic data

processing equipment qualifies under Section 501(c)(6). The membership

is composed of representatives of diversified businesses that own, rent, or

lease one or more digital computers produced by various manufacturers.

Semi-annual conferences open to the general public are held at which

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operational and technical problems are discussed. Here the common

business interest of the members of the organization is their common

business problems concerning the use of digital computers. The activities

of this organization provide a forum for the exchange of information that

will lead to the more efficient use of computers by members and other

interested users, and thus improve the overall efficiency of the business

operations of each. See Rev. Rul. 74-147, 1974-1 C.B. 136.

c. An organization formed by members of a state medical association to

operate peer review boards qualifies for exemption under Section

501(c)(6). Its primary purpose of establishing and maintaining standards

for quality, quantity, and reasonableness of costs of medical services

serve to maintain the professional standards, prestige and independence

of the medical profession and thereby further the common interest of the

organization’s members. See Rev. Rul. 74-553, 1974-2 C.B. 168.

d. An organization formed as a membership organization of business and

professional women that promotes the acceptance of women in business

and the professions qualifies for exemption under Section 501(c)(6). By

sponsoring events devoted to the discussion and consideration of

problems affecting women in business and the professions, the

organization is promoting a common business interest. To the extent that

the organization achieves its goal of improving opportunities for and

attitudes toward women, it improves conditions in each of the industries or

lines of business from which its members are drawn. See Rev. Rul. 76400, 1976-2 C.B. 153.

(5) Some examples of members not sharing a common business interest include

the following:

a. 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 interest other than a mutual desire to

increase their individual sales. The activities aren’t directed to the

improvement of one or more lines of business, but rather to the promotion

of private interests of its members. See Rev. Rul. 59-391, 1959-2 C.B.

151. Distinguished by Rev. Rul. 70-461, 1970-2 C.B. 119

b. Hobbies are activities that aren’t conducted as businesses. Organizations

that promote the common interest of hobbyists don’t qualify under Section

501(c)(6). An association of dog owners, most of whom were not in the

business of raising and selling dogs, was found not to further a common

business interest. See American Kennel Club, Inc. v. Hoey, 148 F.2d 920

(2nd Cir. 1945).

C. Is There a Bona Fide Membership

(1) To meet the association of persons having a common business interest

requirement, the makeup of the membership must primarily consist of bona fide,

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or genuine, members. In other words, the individual bona fide members must

comprise the primary component of total members. To make that assessment,

it’s necessary to define what constitutes a bona fide member.

(2) The code and regulations do not expressly define the term “member” for

purposes of Section 501(c)(6), although there is case law providing guidance on

identifying bona fide members.

(3) In Hunt v. Washington State Apple Advertising Commission, 432 U.S. 333

(1977), the Supreme Court described the indicia of organization membership.

Those factors of membership include the following:

a. Electing the members of the governing body

b. Being able to serve on the governing body, and

c. Financing the organization’s activities.

(4) In National Association of Life Underwriters, Inc. v. Commissioner, 64 T.C.M.

379 (1992), the Tax Court provided guidance on how “membership or similar

status” should be interpreted. The Tax Court stated a member possesses the

following characteristics:

a. A member has specified rights and obligations in relation to an

organization.

b. A member has the right to participate in the organization’s direction.

c. A member has the obligation to help support the organization through

regular financial contributions.

The Tax Court also stated all the facts and circumstances, including the

organization’s charter and bylaws, may be consulted in determining what those

rights and obligations are.

(5) In National Association of Life Underwriters the Tax Court further stated, “labels

are not determinative; a person’s status will determine whether that person will

be considered a member of an organization.” Because labels aren’t

determinative, it’s important to consider the factors of bona fide membership.

D. Purpose Must Promote Common Business Interest

(1) Treas. Reg. 1.501(c)(6)-1 establishes the requirement that a Section 501(c)(6)

business league must promote some common business interest. This

requirement focuses on the organization’s common business interest rather

than the common business interest of the association members individually. It’s

also worth noting this requirement is focused on the organization’s purpose

rather than the activities conducted by the organization.

(2) On the surface, it may be difficult to distinguish the members’ common business

interest, the organization’s purpose, and the organization’s activities from each

other. As noted above, the courts have stated these requirements are each

distinct. To distinguish this purpose requirement from the others, three Tax

Court opinions provide some guidance.

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(3) Associated Master Barbers & Beauticians, Inc. v. Commissioner, 69 T.C. 53

(1977); American Automobile Association v. Commissioner, 19 T.C. 1146

(1953); and Associated Industries of Cleveland v. Commissioner, 7 T.C. 1449

(1946), acq. 1947-1 C.B. 1, are three cases that analyze compliance with each

requirement individually. For this requirement, the Tax Court examined the

language of the organizations’ governing documents to determine whether its

purpose promoted a common business interest.

(4) In Associated Master Barbers, the Tax Court found the language of the

governing documents established the purpose of the organizations was to

promote a common business interest. In American Automobile Association, the

Tax Court noted how provisions in the governing documents resulted in the

organization’s failure to meet the requirement.

(5) Some examples of organizations whose purpose is to promote a common

business interest include the following:

a. An organization formed to promote the commercial fishing industry in a

particular state through the publication and dissemination of a newspaper

that contains news of events of interest to the fisherman and new

techniques and advances in the commercial fishing industry qualifies

under Section 501(c)(6). The activities of the organization are directed

toward the betterment of the conditions of those engaged in commercial

fishing. By operating in the manner described, it is promoting the common

business interest of fishermen. See Rev. Rul. 75-287, 1975-2 C.B. 211.

b. An organization composed of persons studying for a degree in a particular

profession may qualify under Section 501(c)(6). Even though the students

aren’t persons engaged in a business, the purpose of the organization is

to promote their common interests as future members of that profession.

See Rev. Rul. 77-112, 1977-1 C.B. 149.

c. A trust established for the purpose of monitoring and coordinating

business league activities of its member business leagues and collecting,

administering, and distributing funds to the member business leagues for

league purposes is exempt under Section 501(c)(6). The trust was created

pursuant to collective bargaining agreements between a labor union and

several business leagues, which promote the home building industry in a

particular geographic area. See Rev. Rul. 82-138, 1982-2 C.B. 106.

d. An example of an organization whose purpose isn’t to promote a common

business interest is American Automobile Association v. Commissioner,

19 T.C. 1146 (1953). In this case, the organization was held not to be

exempt as a business league under Section 501(c)(6). This organization

was a national association composed of individual automobile owners and

affiliated auto clubs. Notwithstanding its broad purposes to improve

highway traffic safety and to educate the public in traffic safety, its

principal activities were determined to consist of securing benefits and

performing particular services for members.

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E. Not Organized for Profit

(1) Section 501(c)(6) organizations are required to be “not organized for profit.” It

is worth noting the “not organized for profit” requirement appears closely related

to the “not to engage in a regular business of a kind ordinarily carried on for

profit” and “no part of the net earnings of which inures to the benefit of any

private shareholder or individual” requirements, however, they are distinct from

one another.

(2) For this requirement, consider the language of an organization’s governing

documents to determine whether those documents establish that it is not

organized for profit. That assessment is distinct from whether its activity is

conducted for profit or whether any net earnings result in private benefit.

(3) This requirement prohibits a Section 501(c)(6) organization from authorizing

issuance of shares of stock that carry the right to dividends. This requirement

does not mean a Section 501(c)(6) organization can’t have net earnings in the

form of an excess of income over expenses.

(4) The distribution of net earnings during the life of an organization differs from the

distribution of net earnings upon the organization’s dissolution. A provision in an

organization’s charter providing for the distribution of assets to its members in

the event of dissolution won’t in itself preclude exemption. See Crooks v.

Kansas City Hay Dealers’ Ass’n., 37 F.2d 83 (8th Cir. 1929).

F. Not Engaged in Regular Business Conducted for Profit

(1) Treas. Reg. 1.501(c)(6)-1 establishes the requirement that a Section 501(c)(6)

business league shouldn’t engage in a regular business of a kind ordinarily

carried on for a profit.

(2) Retailers Credit Ass’n of Alameda County v. Commissioner, 90 F.2d 47 (9th Cir.

1937), provides some guidance on interpreting this requirement. The opinion

states, “[i]f an association is a business league, and has proper purposes

without prohibited ones, then, if it operates in conformity to the statute and

regulations construing it, the association is entitled to exemption.” Notice the

court describes two conditions that need to be met.

a. The first condition considers two aspects of the language of the

organization’s governing documents. The first aspect is whether the

organization has a proper purpose. A proper purpose promotes a common

business interest as described above.

b. The second aspect is whether the organization has a prohibited purpose.

A prohibited purpose expressly authorizes the organization to conduct a

regular business of a kind ordinarily carried on for profit.

(3) If the organization meets the two aspects of the first condition, the second

condition considers whether the activities, or operations, of the organization

comply with the statute and regulations. Retailers Credit Ass’n provides:

The statute as interpreted by the regulations say that the purpose

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of the business league must not be “to engage in a regular

business of a kind ordinarily carried on for profit.” We believe that

the proper interpretation of that rule is that, if the purpose to engage

in such a business is only incidental or subordinate to the main or

principal purposes required by statute, then exemption cannot be

denied on the ground that the purpose is to engage in such a

business.

(4) Retailers Credit Ass’n further provides: “[i]n determining when a purpose to

engage in a regular business of a kind ordinarily carried on for profit is merely

incidental or subordinate, each case must stand on its own facts. No rigid rules

may be established as a gauge.” In other words, the facts and circumstances

determine whether the organization isn’t primarily engaged in a regular

business of a kind ordinarily conducted for a profit.

(5) Associated Master Barbers & Beauticians, Inc. v. Commissioner, 69 T.C. 53

(1977) illustrates how facts and circumstances are reviewed to make this

determination. In this case, the court reviewed the persuasive financial data and

the substantial amount of time devoted to the business activity in concluding it

was substantial and not merely incidental.

(6) An organization engaging in business activities is exempt under Section

501(c)(6) only when it can be determined that such activities don’t constitute its

primary activity. Examples of organizations not engaged in a regular business

of a kind ordinarily conducted for a profit and found to be exempt under Section

501(c)(6) include:

a. A chamber of commerce operating a credit bureau as one of its fifteen

departments. See Milwaukee Ass’n of Commerce v. United States, 72 F.

Supp. 310 (E.D. Wisc. 1947).

b. A chamber of commerce developing an industrial park to attract new

industry to the community. See Rev. Rul. 70-81, 1970-1 C.B. 131, Rev.

Rul. 81-138, 1981-1 C.B. 358.

c. An organization of insurance agents collecting commissions on municipal

insurance placed through its members. See King County Insurance

Association v. Commissioner, 37 B.T.A. 288 (1938), acq. 1938-1 C.B. 17.

d. A sports promotion organization selling television rights to tournaments it

conducts as its primary source of support. See Rev. Rul. 80-294, 1980-2

C.B. 187. This revenue ruling clarifies Rev. Rul. 58-502, 1958-2 C.B. 271

to remove the implication that the sale of broadcasting rights to an

organization’s tournaments furthers Section 501(c)(6) purposes only when

the amount of the income derived therefrom is insignificant in amount.

15

(7) Examples of organizations engaged in a regular business of a kind ordinarily

conducted for a profit and found not to be exempt under Section 501(c)(6)

include:

a. An organization testing the safety of electrical products for commercial

enterprises. See Underwriters’ Laboratories, Inc. v. Commissioner, 135

F.2d 371 (7th Cir. 1943).

b. An organization selling credit information and collection services. See

Credit Bureau of Greater New York, Inc. v. Commissioner, 162 F.2d 7 (2nd

Cir. 1947).

c. An organization operating as an employment agency. See American

Association of Engineers Employment, Inc. v. Commissioner, 11 T.C.M.

207 (1952) aff’d, 204 F.2d 19 (7th Cir. 1953).

d. An automobile association providing commercial towing for its members.

See American Automobile Association v. Commissioner, above.

e. A board of trade that provides members and nonmembers with laboratory

services is not exempt because its principal activity and only source of

income is from a business of a kind ordinarily carried on for profit. See

Rev. Rul. 78-70. 1978-1 C.B. 159.

f. An organization providing insurance for its members or other individuals,

except in very limited instances, is considered to be providing an economy

or convenience in the conduct of members’ businesses. It relieves the

members of obtaining insurance on an individual basis or is engaged in a

regular business of a kind ordinarily carried on for profit. Neither an

association of insurance companies that provides malpractice insurance to

health care providers nor an association of insurance companies that

accepts for reinsurance high-risk customers who would ordinarily be

turned down by member companies is exempt under Section 501(c)(6).

See Rev. Rul. 81-174, 1981-1 C.B. 335, and Rev. Rul. 81-175, 1981-1

C.B. 337. The organizations described in these revenue rulings are

distinguishable from the one described in Rev. Rul. 71-155, 1971-1 C.B.

152, which doesn’t assume the risk on a policy and therefore isn’t itself

engaged in the insurance business. Also, distinguishable is Rev. Rul. 73452, 1973-2 C.B. 183, wherein an organization created under state statue

to pay claims against insolvent fire and casualty insurance companies

qualifies for exemption as a business league under Section 501(c)(6).

(8) When business activities also benefit an organization’s members by providing

them with goods or services, such activities may also constitute the

performance of particular services for individual persons and thus preclude

exemption if such activities are the organization’s primary activities.

16

G. Improvement of Business Conditions as Opposed to Performance

of Services

(1) The previously discussed requirements analyzed the first sentence in Treas.

Reg. 1.501(c)(6)-1: “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.”

(2) The regulation goes on to state: “It is an organization of the same general class

as a chamber of commerce or board of trade” and “[t]hus, 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.”

G.1. Improvement of Business Conditions

(1) In order to establish the improvement of a business condition, the meaning of

“chamber of commerce” and “board of trade” needs to be considered. The

meaning of those terms help defines what “improvement of business conditions”

means.

(2) Crooks v. Kansas City Hay Dealers’ Ass’n., 37 F.2d 83 (8th Cir. 1929) defines a

chamber of commerce as “a society of the principal merchants and traders of a

city who meet to promote the general trade and commerce of the place.” It

defines a board of trade as “a body… appointed for the advancement and

protection of business interests.” Rev. Rul. 73-411, 1973-2 C.B. 180, provides,

“a chamber of commerce or board of trade must be one whose efforts are

directed at promoting the common economic interests of all the commercial

enterprises in a given trade community.” The ideas “general trade” and

“common economic interests” may be applied to the concept of “improvement of

business conditions.” The regulations don’t state that a business league must

promote the betterment of general commercial welfare. See Rev. Rul. 59-391,

1959-2 C.B. 151.

(3) The regulations require the activities of the organization improve conditions of

one or more lines of business. See Rev. Rul. 59-391. Additionally, the

organization’s principal or primary activities must meet the requirement. See

Associated Master Barbers, Evanston-North Shore Bd. of Realtors, and

Retailers Credit Ass’n, mentioned above.

(4) To illustrate how activities improve business conditions, consider two

contrasting revenue rulings:

a. In Rev. Rul. 67-295, 1967-2 C.B. 197 an organization composed of

businessmen is exempt where its activities were limited to holding

luncheon meetings devoted to discussions of various problems in a

particular industry directed to the improvement of business conditions as a

whole.

17

b. In Rev. Rul. 70-244, 1970-1 C.B. 132 an organization of business and

professional persons of a community, providing luncheon and bar facilities

for its members, but having no specific program directed to the

improvement of business conditions doesn’t qualify under Section

501(c)(6).

c. The distinction is the exempt organization actively organized activities to

discuss business conditions while the nonexempt organization didn’t

organize activities involving the improvement of business conditions.

(5) Whether the activities of a business league lead to real and permanent

improvement of business conditions is immaterial as long as reasonable

prudent businessmen believe they’ll improve business conditions. See

Associated Industries of Cleveland v. Commissioner, mentioned above.

(6) To help illustrate what it means to direct an activity toward the improvement of

business conditions, consider the distinction between legislative activities and

political campaign intervention activities.

a. For legislative activity, the content of specific legislative proposals can be

readily identified and related to the business interests of an organization

seeking exemption under Section 501(c)(6). An organization which is

exclusively engaged in support of legislative proposals germane to

business interests would thereby confine its activities to the improvement

of business conditions. See Rev. Rul. 61-177, 1961-2 C.B. 117.

b. Conversely, support of or opposition to a candidate for public office

necessarily involves the organization in policitcal campaign intervention.

That involvement is broader than the business interest of an organization

described in Section 501(c)(6). If the primary purpose or activity of an

organization is to engage in political action, then it isn’t organized primarily

as a business league and can’t qualify for exemption under Section

501(c)(6). However, if the primary purpose and activities of an

organization otherwise qualify it under Section 501(c)(6), then participation

in political activities won’t disqualify it from exemption. Thus, an

organization whose primary activity is directed to influencing legislation,

which is germane to the interests of the organization, wouldn’t be

disqualified if it incidentally engaged in political activity. Consider GCM

34233 (1969). For legislative and political campaign interventions activities

conducted by an IRC Section 501(c)(6) organization, there are additional

compliance issues that apply. See Other Considerations section below.

(7) Examples of activities that improve business conditions and don’t constitute the

performing of particular services for individual members include:

a. An organization presenting information, trade statistics, and group

opinions to government agencies and bureaus. See American

Refractories Institute v. Commissioner, 6 T.C.M. 1302 (1947), and Atlanta

Master Printers Club v. Commissioner, 1 T.C.M. 107 (1942).

18

b. An organization promoting the members’ line of business by publishing

statistics on business conditions in the industry based on data reported by

members on specific forms, which members also use in the analysis of

their own operations. See Rev. Rul. 68-657, 1968-2 C.B. 218.

c. An organization promoting the common business interests of members

through advocacy of the open shop principle. See Associated Industries of

Cleveland v. Commissioner, 7 T.C. 1449, at 1465 (1946); acq., 1947-1

C.B. 1.

d. An organization maintaining a nonprofit lawyer referral service aimed at

improving the image and functioning of the legal profession rather than

being just a business referral service for its members. See Rev. Rul. 80287, 1980-2 C.B. 185.

G.2. Line or Lines of Business

(1) In National Muffler Dealers Ass’n, Inc. v. United States, 440 U.S. 472 (1979),

the Supreme Court defined “line of business” as used in the regulation, to mean

either an entire industry or all components of an industry within a geographic

area.

(2) The Supreme Court additionally noted exemption has been consistently denied

by the Internal Revenue Service to business groups whose membership and

purposes are narrower than those that meet the “line of business” test. This is

because they fail to benefit either an entire industry or all components of an

industry within a geographic area. Examples of those denied exemption for

failure to meet the “line of business” test include those that bottle a single brand

of soft drink, market a single brand of automobile, or have licenses to a single

patented product. Complimenting the analysis of National Muffler Dealers

Ass’n, Inc., Rev. Rul. 83-164, 1983-2 C.B. 95, noted organizations that failed to

meet the line of business test were found to have served only a “segment of a

line.” In the ruling, the failed groups promoted segments of an industry at the

expense of others in the industry.

(3) For additional guidance regarding line of business versus segment of a line,

consider the following:

a. American Plywood Assn. v. United States, 267 F. Supp. 830 (W.D. Wash.

1967)

b. National Leather & Shoe Finders Assn. v. Commissioner, 9 T.C. 121

(1947); acq., 1947-2 C.B. 3

c. Commissioner v. Chicago Graphic Arts Federation, Inc., 128 F.2d 424 (7th

Cir. 1942)

d. Crooks v. Kansas City Hay Dealers’ Assn., 37 F.2d 83 (8th Cir. 1929)

e. Washington State Apples, Inc. v. Commissioner, 46 B. T. A. 64 (1942);

acq., 1942-1 C.B. 17

f. Rev. Rul. 58-294, 1958-1 C.B. 244

19

g. Rev. Rul. 67-77, 1967-1 C.B. 138

h. Rev. Rul. 68-182, 1968-1 C.B. 263

(4) A “segment of a line” isn’t limited to a specific product or brand within a line of

business. A segment of a line also includes the users of a product or brand.

When an organization limits its activities to the users of a specific product, it

helps to provide a competitive advantage to that producer and to its customers

at the expense of competitors and their customers that may use other brands of

the specific product. In this instance, the organization’s activities aren’t directed

towards the improvement of business conditions in one or more lines of

business.

a. See Rev. Rul. 83-164, above.

b. See National Prime Users Group, Inc. v. U.S., 667 F. Supp. 250 (D. Md.

1987).

c. See Guide International Corporation v. U.S., 948 F.2d 360 (7th Cir 1991).

d. Contrast Rev. Rul. 74-147, 1974-1 C.B. 136.

(5) Regarding “a line or lines” of business, there is no limit on the number of lines of

business that may be represented by one organization. A chamber of

commerce represents all the lines of business in a given trade area to fulfill this

requirement as all the lines of business within the area it encompasses are

included. See Retailers Credit Ass’n of Alameda County v. Commissioner, 90

F.2d 47 (9th Cir. 1937).

(6) Examples of organizations not qualifying for exemption under Section 501(c)(6)

because they only served a segment business and not a line of business

include:

a. An association of licensed dealers of a certain type of patented product

where the association owns the controlling interest in a corporation

holding the basic patent. The organization is engaged mainly in furthering

the business interests of its member-dealers, and doesn’t benefit people

who manufacture competing products of the same type covered by the

patent. See Rev. Rul. 58-294, 1958-1 C.B. 244.

b. An association of dealers selling a particular make of automobile that

engages in financing general advertising campaigns to promote the sale of

that make isn’t exempt because it is performing particular services for its

members rather than promoting a line of business; i.e., the automotive

industry as a whole. See Rev. Rul. 67-77, 1967-1 C.B. 138.

c. An organization whose members represent diversified businesses that

own, rent, or lease computers produced by a single computer

manufacturer. This organization is distinguishable from the one described

in Rev. Rul. 74-147, 1974-1 C.B. 136. While members of both

organizations have a common business interest concerning the use of

computers, the organization in Rev. Rul. 74-147 directs its activities to

users of computers made by diverse and competing manufacturers, while

20

this organization directs its activities to users of computers made by one

manufacturer. See Rev. Rul. 83-164, 1983-2 C.B. 95.

(7) In National Muffler Dealers Ass’n, Inc. v. United States, 440 U.S. 472 (1979) the

Supreme Court held that an association of a particular brand name of muffler

dealers didn’t qualify for exemption because the association wasn’t engaged in

the improvement of a business condition of a line of business. This effectively

settled a question raised in Pepsi-Cola Bottlers’ Association, Inc. v. United

States, 369 F.2d 250 (7th Cir. 1966), where the court held an association of the

bottlers of a particular brand of soft drink was promoting a line of business. The

government had contended that it wasn’t promoting a line of business since the

entire soft drink industry rather than a particular brand was the line of business.

The Service then reiterated its position in Rev. Rul. 68-182, 1968-1 C.B. 263.

(8) In Bluetooth SIG Inc. v. United States, 611 F.3d 617 (9th Cir. 2010), the court

held an organization holding the rights to technology and trademark to a single

product didn’t create a line of business.

G.3. Performance of Particular Services for Individuals

(1) If an organization’s activities are primarily directed at improving business

conditions for one or more lines of business, the organization will satisfy this

requirement. If the activities are primarily the performance of particular services

for individual persons, the organization will fail to satisfy this requirement.

(2) In general, a particular service is an activity that serves as a convenience or

economy to individual members in the operation of their businesses. A

particular service assists members in the pursuit of their individual business

rather than advancing the members’ interests generally, by virtue of their

membership in the industry. See MIB, Inc. v. Commissioner, 734 F.2d 71 (1st

Cir. 1984).

(3) There are several factors that help indicate an activity is a particular service:

a. Whether the activity is directly related to the members’ businesses or is

merely an extension of those businesses. Revenue rulings addressing this

type of activity include:

•

Rev. Rul. 74-308, 1974-2 C.B. 168 which describes an organization

whose principal activity is providing a telephone answering service to

distribute calls for towing services on a rotational basis to its member

tow truck owners and operators.

•

Rev. Rul. 70-591, 1970-2 C.B. 118 which describes an organization

of commercial banks that provides and promotes a credit card plan

for member banks.

•

Rev. Rul. 68-264, 1968-1 C.B. 264 which describes a traffic bureau

that arranges shipping and billing for a fee.

b. Whether the activity is generally something the members could do for

themselves. The activities described above (providing a telephone service,

21

providing and promoting a credit card plan, or operating a traffic bureau),

are activities that member businesses would otherwise have to perform or

pay to have performed in the ordinary course of business. These activities

are merely methods of providing necessary business activities cheaper

than they could be performed by the individual members. Additional law

and guidance addressing this type of activity include:

•

Rev. Rul. 71-175, 1971-1 C.B. 153, describing a telephone answering

service operated for member doctors.

•

Rev. Rul. 68-265, 1968-1 C.B. 265, describing a credit information

bureau operated for members.

•

United States v. Oklahoma City Retailers Association, 331 F. 2d 328

(10th Cir. 1964), describing another credit information bureau

operated for members.

c. Whether the activity is a convenience or economy. This depends on

whether each member’s contribution is in proportion to what is received

and is most commonly implicated where the activity is conducted as a

business and members pay for the goods or services as they are

received. See the following court cases:

•

Evanston-North Shore Board of Realtors v. United States, 320 F.2d

375 (Ct. Cl. 1963);

•

Carolinas Farm & Power Equipment Dealers Ass’n, Inc. v. United

States, 699 F.2d 167(4th Cir. 1983) (rebates from insurance fund

maintained by organization unrelated business taxable income);

•

Contracting Plumbers Cooperative Restoration Corp. v. United

States, 488 F.2d 684 (2d Cir.1973), cert. denied, 419 U.S. 827

(1974).

(4) In contrast to an activity being a particular service, there are several factors that

help indicate that an activity provides an industry-wide benefit and thus is

directed to the improvement of business conditions of one or more lines of

business:

a. The activity is one for which individual members couldn’t be expected to

bear the expense and lends itself to cooperative effort. For example, in

Rev. Rul. 67-175, 1967-1 C.B. 139, an organization of growers and

processors of agricultural products that subsidized a lawsuit instituted by

one of its members to prevent air pollution in the area served by the

organization was held to qualify for exemption under Section 501(c)(6).

Although the lawsuit could be undertaken by an individual grower, or

processor, its purpose, which is to improve conditions for all growers and

processors in the area, lends itself to a cooperative effort. Also, it isn’t

reasonable to expect one business to bear the cost of an activity that

benefits the entire industry.

22

b. Another characteristic of activities that don’t provide a convenience or

economy is the benefits are intangible and only indirectly related to the

individual businesses. In other words, the benefits aren’t susceptible to

being priced. The lawsuit described above is an example of an intangible

benefit. The industry-wide advertising campaign of the organization

described in Rev. Rul. 55-444, 1955-2 C.B. 258, also provides an

intangible benefit.

(5) There is a good deal of guidance available on the subject of performance of

particular services for members and advertising activities. Whether advertising

activities constitute performance of services for members depends on the facts

and circumstances.

(6) Advertising promoting the names of members generally constitutes the

performance of particular services for members. Examples of this type of

advertising include the following:

a. An association of the merchants in a particular shopping center whose

advertising material contained the names of the individual merchants. See

Rev. Rul. 64-315, 1964-2 C.B. 147.

b. An association created to attract tourists to a local area, but whose

principal activity is the publication of a yearbook consisting largely of paid

advertisements by its members. See Rev. Rul. 65-14, 1965-1 C.B. 236.

c. An association that published catalogues that listed only products

manufactured by the members. See Automotive Electric Association v.

Commissioner, 168 F.2d 366 (6th Cir. 1948).

d. A nonprofit trade association of manufacturers, whose principal activity is

the promotion of its members’ products under the association’s required

trademark. See Rev. Rul. 70-80, 1970-1 C.B. 130. Contrast with American

Plywood Association (see below).

e. A shopping center merchants’ association whose membership is restricted

to, and required of, the tenants of a one-owner shopping center and their

common lessor and whose activities include promotional affairs and

advertising to publicize the center. These don’t qualify as a business

league or chamber of commerce under Section 501(c)(6) because these

activities are directed to promoting the general business interest of its

members only, rather than of the industry as a whole. See Rev. Rul. 73411, 1973-2 C.B. 180.

(7) In contrast, advertising for the industry as a whole is directed at the

improvement of business conditions for the line of business as opposed to the

performance of particular services to members. Examples of this type of

advertising include the following:

a. An association of apple growers engaged in promoting the sale of apples

grown in the state was held exempt since its purpose was to promote the

industry as a whole and not members of the organization and to improve a

line of business, even though its benefits were limited to a particular

23

geographic area. See Washington State Apples, Inc. v. Commissioner, 46

B.T.A. 64 (1942), acq., 1942-1 C.B. 17.

b. An organization formed to promote the business of a particular industry

and conducts a general advertising campaign to encourage the use of

products and services of the industry as a whole is exempt. This

organization did have an incidental amount of advertising with members’

names that didn’t adversely affect qualification. See Rev. Rul. 55-444,

1955-2, C.B. 258.

c. An association of plywood manufacturers owned a trademark licensed for

use only by its members. Advertising sponsored by the association didn’t

contain the names of individual manufacturers but did refer to the

trademark. The court found the trademark was analogous to the

industrywide advertising approved in Washington State Apples, Inc. v.

Commissioner, and the trademark was only an incidental part of the

advertising, which extolled the virtues of plywood in general. See

American Plywood Association v. United States, 267 F. Supp. 830 (W.D.

Wash. 1967).

d. The publication of ordinary commercial advertising for products and

services used by the legal profession in a bar association’s journal is

unrelated trade or business under Section 513 because it is commercial in

nature and doesn’t contribute importantly to the association’s exempt

purposes. The publication of legal notices, however, promotes the

common interests of the legal profession and thus isn’t an unrelated trade

or business under Section 513. See Rev. Rul. 82-139, 1982-2 C.B. 108.

(8) Other activities that are considered the performance of particular services to

members include the following:

a. Commodity and stock exchanges serving their members as a convenience

and economy in buying and selling. See Treas. Reg. 1.501(c)(6)-1.

b. An organization formed to sell advertising in its members’ publications.

See Rev. Rul. 56-84, 1956-1 C.B. 201.

c. An organization promoting the publication of its members’ writings. See

Rev. Rul. 57-453, 1957-2 C.B. 310.

d. An organization facilitating the purchase of supplies and equipment and to

supply management services for their members. See Rev. Rul. 66-338,

1966-2 C.B. 226; Indiana Retail Hardware Association, Inc. v. United

States, 177 Ct. Cl. 288 (1966); and Uniform Printing & Supply Co. v.

Commissioner, 33 F.2d 445 (7th Cir. 1929).

e. A nurses’ registry controlled and financed by participating nurses that

assigns nurses to jobs. See Rev. Rul. 61-170, 1961-2 C.B. 112.

f. A real estate board primarily operating a multiple listing service for its

members. See Rev. Rul. 59-234, 1959-2 C.B. 149; and Evanston-North

Shore Board of Realtors v. United States, 320 F.2d 375 (Ct. Cl. 1963).

24

g. An organization conducting a trading stamp plan whereby patrons of

members receive trading stamps redeemable for merchandise at local

stores. See Rev. Rul. 65-244, 1965-2 C.B. 167.

h. An organization primarily operating a parking stamp plan whereby patrons

of its members are afforded parking privileges while shopping at members’

stores. See Rev. Rul. 64-108, 1964-1 (Part 1) C.B. 189.

i. An organization operating a laundry and dry-cleaning plant for its

members who were in the laundry business. See A-1 Cleaners and Dyers

Co. v. Commissioner, 14 B.T.A. 1314 (1929).

j. An organization operating a cold storage warehouse for its members on a

cooperative basis. See Growers Cold Storage Warehouse Co. v.

Commissioner, 17 B.T.A. 1279 (1929).

k. A traffic bureau arranging shipments and billings for a fee. See Rev. Rul.

68-264, 1968-1 C.B. 264.

l. An organization of florists promoting the exchange of orders by wire

among its members. See Florists Telegraph Delivery Association, Inc. v.

Commissioner, 47 B.T.A. 1044 (1942).

m. An organization formed by building and loan associations appraising

properties that are offered by borrowers and to appraise plans for building

contracts entered into by members. See Central Appraisal Bureau v.

Commissioner, 46 B.T.A. 1218 (1942).

n. An organization of investment brokers investigating causes of bonds

defaults and performing other services members would have been

required to perform in making bond investments. See Northwestern

Municipal Association, Inc. v. United States, 99 F.2d 460 (8th Cir. 1938).

o. An organization formed estimating quantities of building materials required

in members’ projects. See General Contractors’ Ass’n of Milwaukee v.

United States, 202 F.2d 633 (7th Cir. 1953).

p. An organization ensuring the discharge of legal obligations of its members

to pay certain taxes. See Rev. Rul. 66-354, 1966-2 C.B. 207.

q. An organization giving financial assistance to people entering a particular

profession. See Rev. Rul. 67-176, 1967-1 C.B. 140.

r. An organization of oil geologists maintaining a library for use by its

members. See Rev. Rul. 67-182, 1967-1 C.B. 141.

s. An organization furnishing particular information and specialized individual

service to its members through publications and other means to effect

economies in the operation of their individual businesses. See Rev. Rul.

56-65, 1956-1 C.B. 199, clarified by Rev. Rul. 65-164, 1965-1 C.B. 238

and Rev. Rul. 72-211, 1972-1 C.B. 150.

25

t. A bureau operating a credit information service for its members. See

United States v. Oklahoma City Retailers Association, 331 F.2d 328 (10th

Cir. 1964), and Rev. Rul. 68-265, 1968-1 C.B. 265.

u. A manufacturers organization conducting research and making the results

available only to its members rather than to the whole industry. See Rev.

Rul. 69-106, 1969-1 C.B. 153, and Glass Container Industry Research

Corp. v. U.S., 70-1 USTC 9214 (W.D. Pa. 1970).

v. An organization operating a telephone-answering service for member

doctors. See Rev. Rul. 71-175, 1971-1 C.B. 153.

w. An organization of commercial banks providing and promoting a credit

card plan for member banks. See Rev. Rul. 70-591, 1970-2 C.B. 118.

x. An organization principally providing its members with group workmen’s

compensation insurance. See Rev. Rul. 74-81, 1974-1 CB. 135.

y. An organization principally providing a telephone answering service to

distribute calls for towing service on a rotational basis to its members who

are tow truck owners and operators. See Rev. Rul. 74-308, 1974-2 C.B.

168.

z. An organization formed by carriers engaged in regular transoceanic

passenger service, primarily appointing travel agents to book passenger

travel on its members’ ships. See Rev. Rul. 74-228, 1974-1 C.B. 136.

aa. An organization maintaining the good will and reputation of credit unions

in a particular state by making interest-free loans to credit unions in

financial difficulty. See Rev. Rul. 76-38, 1976-1 C.B. 157.

bb. An organization publishing and distributing to its members’ customers

and potential customers a directory containing members’ names and

addresses. See Rev. Rul. 76-409, 1976-2 C.B. 154.

cc. An organization promoting one of a number of possible technologies, for

the interest of its members who had to purchase licenses, was providing

services to its members. See Bluetooth SIG, Inc. v. United States, 611

F.3d 617 (9th Cir. 2010).

dd. An organization sponsoring retirement plans for attorneys was providing

services to individual attorneys and didn’t show it improved conditions in

the legal profession generally. See ABA Retirement Funds v. United

States, 759 F.3d 718 (7th Cir. 2014).

(9) An activity carried on by a business league can benefit the common business

interest even though there is also an incidental benefit to individual members

that, standing alone, might have appeared to be a particular service to

individuals. Examples include the following:

a. An organization of tuna fishermen negotiating with packers for standard

prices to be paid to all tuna fishermen, both members and nonmembers.

26

See American Fishermen’s Tuna Boat Association v. Rogan, 51 F. Supp.

933 (S.D Calif. 1943).

b. An organization of employers in an industry negotiating terms of a uniform

labor contract for the entire industry, mediates and settles labor disputes

affecting the industry, and interprets contracts. See Rev. Rul. 65-164,

1965-1 C.B. 238.

c. An organization operating a bid registry open to all individuals or firms in a

particular trade or industry to encourage fair bidding practices within the

industry. See Rev. Rul. 66-223, 1966-2 C.B 224.

d. An association of insurance companies investigating criminal aspects of

claims against its members. See Rev. Rul. 66-260, 1966-2 C.B. 225.

e. An organization of growers and processors of agricultural products

subsidizing a lawsuit instituted by one of its members to prevent air

pollution in the area served by the organization. See Rev. Rul. 67-175,

1967-1 C.B. 139.

f. An insurance rating bureau, operated by casualty insurers under the

authority of a state insurance commissioner, establishing uniform rates

and compiling information for the industry. See Oregon Casualty

Association v. Commissioner, 37-B.T.A. 340 (1938), acq., 1938-1 C.B. 22.

g. An organization formed by fire insurance companies conducting fire

patrols and salvage operations. See Minneapolis Board of Fire

Underwriters v. Commissioner, B.T.A.M. 10,464-A (1938).

h. An organization of financial institutions offering rewards for information

leading to the arrest and conviction of individuals committing crimes

against its members. See Rev. Rul. 69-634, 1969-2 C.B. 124.

i. An organization formed by manufacturers of a particular product

conducting a program of testing and certifying the product to establish

acceptable standards within the industry as a whole. See Rev. Rul. 70187, 1970-1 C.B. 131.

j. An association of insurance companies making insurance available to

persons in high-risk categories who can’t otherwise obtain coverage by

providing for the equitable distribution of such policies among its

members. See Rev. Rul. 71-155, 1971-1 C.B. 152.

k. An organization formed to regulate the sale of a specific agricultural

commodity assuring equal treatment of producers, warehousemen, and

buyers, where it doesn’t provide facilities for buying or selling

commodities. See Rev. Rul. 55-715, 1955-2 C.B. 263.

l. An organization of advertising agencies verifying the advertising claims of

publications selling advertising space and makes reports available to

members of the advertising industry generally. See Rev. Rul. 69-387,

1969-2 C.B. 124.

27

m. An organization formed to promote the interests of its members and others

in the building and construction industry providing a plan room and news

bulletin available to the entire industry. See Rev. Rul. 72-211, 1972-1 C.B.

150 which clarifies Rev. Rul. 56-65.

n. An organization created under a state statute paying claims against

insolvent fire and casualty insurance companies, where membership in

the organization is required of all insurance companies writing fire and

casualty insurance in the state and its income is derived from membership

assessments and claims against the assets of the insolvent companies

See Rev. Rul. 73-452, 1973-2 C.B. 183.

H. Net Earnings Must Not Inure to Benefit of Any Individual

(1) Section 501(c)(6) states, “no part of the net earnings of which inures to the

benefit of any private shareholder or individual.”

(2) Before considering whether an organization’s net earnings result in inurement,

it’s important to remember business league members receive permissible

benefits as a result of the organization’s exempt function. The members

generally benefit from the general improvement of business conditions of the

line of business. See MIB, Inc. v. Commissioner, mentioned above. Also,

benefits that serve the common business interest of members received through

membership such as educational programs, lobbying activities, and industrywide advertising services are permissible benefits. See Louisiana Credit Union

League v. United States, 693 F.2d 525 (5th Cir. 1982).

(3) Commenting on inurement, the non-precedential guidance of GCM 38559

(1980) states the following:

First, the proper performance by an organization of the functions for

which it was exempted will never result in inurement of the type

proscribed by the statute. Second, for there to be inurement of the

type proscribed by the statute, there must be something more than

an incidental benefit to members of the organization or those in

privity with it. There must be an expenditure of organizational funds

resulting in a benefit which is beyond the scope of the benefits

which logically flow from the organization’s performance of its

exempt functions.

(4) When making a determination of inurement, it’s important to remember that a

determination of inurement is based on an organization’s individual facts and

circumstances. See Michigan Mobile Home & Recreational Vehicle Institute v.

Commissioner, 66 T.C. 770 (1976).

(5) Funds distributed for the benefit of individual members often result in inurement.

Differing terms such as dividend, refund, or rebate can be used to describe a

distribution. The term used doesn’t affect the inurement consideration. These

distribution activities may occur in several forms.

a. An organization pays cash dividends. See Michigan Mobile Home, above.

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b. An organization provides financial assistance and welfare benefits for the

members. See Rev. Rul. 67-251, 1967-2 C.B. 196.

c. An organization pays its members for expenses they incurred in defending

malpractice suits and paying judgments rendered in the suits. See

National Chiropractic Association, Inc. v. Birmingham, 96 F. Supp. 874

(N.D. Iowa 1951).

d. An association of wholesale grocers owns a copyright on certain grocery

labels and pays royalties to its members. See Wholesale Grocers

Exchange, Inc. v. Commissioner, 3 T.C.M. 699 (1944).

(6) Certain distributions don’t result in inurement if the distributions represent no

more than a reduction in dues or contributions previously paid to the league to

support its activities and distributed equally to all who paid dues or

contributions.

a. The refund of excess dues to members of an exempt agricultural

organization in the same proportion as the dues are paid does not

disqualify the organization from exemption. See Rev. Rul. 81-60, 1981-1

C.B. 335.

b. 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, are made to all

exhibitors on the same basis, and may not exceed the amount of the

deposit, don’t adversely affect the association’s exempt status. See Rev.

Rul. 77-206, 1977-1 C.B. 149.

I. Nonmember Income and Inurement

(1) As Rev. Rul. 77-206 and Rev. Rul. 81-60 describe, funds received from

nonmembers and then used to provide a benefit to members may result in

inurement. As mentioned above, a determination of inurement is based on an

organization’s individual facts and circumstances. Some factors to consider that

may indicate inurement include, but aren’t limited to, the following:

a. A distribution to an individual exceeds the amount that individual originally

paid to the organization. See King County Ins. Ass’n v. Commissioner, 37

B.T.A. 288 (1938).

b. Rebates are made to all exhibitors on the same basis and may not exceed

the amount of the deposits. See Rev. Rul. 77-206, 1977-1 C.B. 149.

c. The method of distribution treats members differently from nonmembers.

See Michigan Mobile Home and Recreational Vehicle Institute v.

Commissioner, 66 T.C. 770 (1976).

(2) It’s possible the nonmember activities could result in inurement to the members.

This type of inurement occurs when profits are used to expand and enlarge

activities and the resulting increased service and activity inures to the benefit of

its members. See American Auto. Asso. v. Commissioner, 19 T.C. 1146 (1953).

29

(3) Nonmember income doesn’t result in inurement when the income is related to

the organization’s exempt purpose and does not inure to the benefit of

individual members except through the general improvement of business

conditions of the line of business. Consider the following:

a. An organization formed to promote a professional sport that receives

income from the operation of championship tournaments open to the

public, the sale of broadcasting rights, and the sale of publications. See

Rev. Rul. 58-502, 1958-2 C.B. 271.

b. A veterinarians’ association collecting fees from operating a rabies clinic

open to the general public. See Rev. Rul. 66-222, 1966-2 C.B. 223.

c. An association of insurance agents receiving commissions from handling

insurance programs. See Rev. Rul. 56-152, 1956-1 C.B. 56.

d. A professional association receiving fees from nonmembers for a training

program. See Rev. Rul. 67-296, 1967-2 C.B 212.

(4) Where an exempt business league derives revenue from sources other than

membership dues, it becomes necessary to determine whether the income

producing activity is an unrelated trade or business. See section III.E, below.

III. Other Considerations

A. Political and Legislative Activities

A.1. Dues Used for Political and Legislative Purposes

(1) Section 162(e)(1) provides in part, in the case of a business taxpayer, no

deduction is allowed for expenditures for participation or intervention in a

political campaign on behalf of any candidate for public office, or in connection

with any attempt to influence the general public or segments thereof with

respect to legislative matters, elections, or referendums. If a substantial part of

the activities of a trade association, labor union, or similar organization consists

of one or more of the above activities, a deduction is allowed only for that

portion of a member’s dues to the organization the taxpayer can clearly

establish is attributable to other activities. See Treas. Reg. 1.162-20(c)(3) and

Treas. Reg. 1.162-20(d).

A.2. Deductibility of Dues and Grassroots Lobbying

(1) Since there is a prohibition on the deductibility of dues used for “grassroots”

lobbying, the activities that constitute “grassroots” lobbying must be determined.

For example, media ads must be analyzed to determine whether they were

produced in connection with any attempt to influence the general public, or

segments thereof, with respect to legislative matters, elections, or referendums.

This determination can be difficult at times, since the regulations under Treas.

Reg. 1.162-20(a)(2) make clear that expenses for institutional or “good will”

advertising are generally deductible. “Institutional” or “good will” advertising, for

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example, includes ordinarily allowable expenses incurred to bring the

organization’s name before the public. Similarly, institutional advertising

expenses, such as those incurred for the purpose of presenting views on

economic, financial, social, or other subjects of a general nature that don’t

directly or indirectly propose, support, or oppose legislation are also ordinarily

deductible if they otherwise meet the requirements of the regulations under

Section 162. The problem is determining whether the advertising is entirely

“institutional” or “good will” in nature, or whether it is an attempt through words,

phrases, pictures, etc. to develop a “grassroots” point of view regarding the

promotion or defeat of legislation or a referendum.

(2) Rev. Ruls. 78-111, 112, 113, and 114, 1978-1 C.B. 41-44 discuss grassroots

lobbying and analyze examples of non-deductible grassroots lobbying

expenditures. While only Rev. Ruls. 78-113 and 78-114 deal specifically with

Section 501(c)(6) organizations, the analysis in all four revenue rulings is

applicable to the determination of whether a particular activity is grassroots

lobbying.

a. Rev. Rul. 78-111 concludes a corporation engaged in grassroots lobbying

when it distributed to its shareholders its president’s testimony against an

environmental bill. The testimony emphasized the cost to the corporation

and recommended defeat of the bill. Although the communication didn’t

ask the shareholders to contact their legislators it was a clear attempt to

influence the opinion of the shareholders (members of the public) and

therefore constituted grassroots lobbying.

b. Rev. Rul. 78-112 concludes that a corporation engaged in grassroots

lobbying when it placed advertisements in newspapers and magazines

urging the rejection of a certain land use bill that would hamper the

corporation’s land development business. Although these advertisements

didn’t ask the readers to contact their representatives, they were clear

attempts to influence the public on proposed legislation and therefore

constituted grassroots lobbying.

c. Rev. Rul. 78-113 concludes that a tax-exempt trade association engaged

in grassroots lobbying when it urged its members to ask their employees

and customers to support the repeal of certain legislation.

Communications between the trade association and its members about

legislation are legitimate business activities, the expenses for which are

deductible. Conversely, communications directed beyond the

organzation’s members to a segment of the public (employees and

customers in this case) are grassroots lobbying, the expenses for which

are not deductible under Section 162(e)(1).”

d. Rev. Rul. 78-114 concludes that a tax-exempt trade association engaged

in grassroots lobbying when it urged its prospective members to contact

their congressmen in support of certain legislation favorable to the

association. The trade association’s communication with its members

about the legislation is a legitimate business activity the expenses for

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which are deductible; however, the communication to the prospective

members is a communication with the public and is therefore grassroots

lobbying the expenses for which aren’t deductible under Section 162(e)(1).

(3) The examination of any Section 501(c)(6) organization should include a

thorough review of the organization’s legislative and political activities.

B. Effect of Section 527(f) on Political Expenditures

(1) Section 527(f) imposes a tax on any direct political expenditures of an

organization exempt under Section 501(c)(6). Section 527(f)(3) permits an

exempt Section 501(c) organization to spin its political activities off into a

separate segregated fund which would then be subject to Section 527. If an

organization is primarily engaged in political activities, it isn’t described in

Section 501(c)(6).

C. Classification Issues for Business Leagues

(1) Because of the rather broad language of some of the paragraphs under Section

501(c), there are situations where a certain amount of overlap occurs, thus

creating a question whether an organization should be classified under Section

501(c)(6) or under some other paragraph. The following information illustrates

some distinctions.

C.1. Section 501(c)(6) v. Section 501(c)(3)

(1) A professional society may also qualify for exemption under Section 501(c)(3) if

its purpose is to advance the profession by engaging in exclusively educational

or scientific activities.

(2) An organization may not be classified under Section 501(c)(3) if it has

substantial non-charitable and non-educational purposes and activities,

regardless of the number or importance of truly charitable or educational

purposes it may otherwise have. See Rev. Rul. 71-504, 1971-2 C.B. 231, and

Rev. Rul. 71-505 C.B. 232.

(3) Rev. Rul. 71-506, 1971-2 C.B. 233, describes a professional society that does

qualify for exemption under Section 501(c)(3), in contrast to the organizations

described in Rev. Rul. 71-504 and Rev. Rul. 71-505.

C.2. Section 501(c)(6) v. Section 501(c)(5) Agricultural Orgs

(1) Section 501(c)(5) provides exemption for, among others, nonprofit agricultural

organizations. Many associations that are to some degree related to agriculture

may be more properly classified as business leagues. The decisive factor is

whether the organization’s purpose is to promote the common business

interests and better the conditions of persons directly engaged in agricultural

pursuits or to promote the common business interest of some other business

groups closely related to agriculture such as suppliers of goods or services to

the agricultural community or packers or processors of raw agricultural

commodities. See Rev. Rul. 67-252, 1967-2 C.B. 195.

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(2) Contrast with an organization of fur ranchers that was formed to encourage

better and more economical methods of raising fur-bearing animals, provide for

an orderly system for marketing the pelts of animals raised by its members, and

create a public demand for their products. It carried out its purposes by

furnishing its members educational material on the breeding and raising of furbearing animals and the marketing of pelts, procuring agreements from auction

companies to market the products of its members, and conducting advertising

to encourage the use of fur products. This organization was held to be

principally occupied with improving the conditions and products of persons

engaged in agriculture, and therefore, exempt under Section 501(c)(5). See

Rev. Rul. 56-245, 1956-1 C.B. 204. This ruling is silent as to whether, based on

these facts, the organization would qualify for exemption under Section

501(c)(6).

C.3. Section 501(c)(6) v. Section 501(c)(5) Labor Orgs

(1) When considering whether the activities of an organization qualify it for

exemption as a business league described under Section 501(c)(6) rather than

a Section 501(c)(5) labor organization, consider how the amount of the activity

affects qualification or who controls the organization. The following rulings

illustrate some of those distinctions:

a. A corporation whose membership is made up of individuals, partnerships,

firms and corporations engaged in a particular industry was organized for

the purpose, among others, of assisting in the making of trade agreements

respecting employment of labor by its members generally; conducting

collective bargaining with employees and labor groups for its members;

promoting settlement of labor disputes and preventing strikes and

lockouts. Its activities consist solely of negotiation of collective bargaining

contracts, interpretation of such contracts, and adjustment of labor

disputes. Such organization qualifies for exemption as a business league.

See Rev. Rul. 65-164, 1965-1 C.B. 238.

b. See also the Section 501(c)(6) favorable rulings, Rev. Rul. 70-31, 1970-1

C.B. 130, and Rev. Rul. 82-138, 1982-2 C.B. 106, in which the members

are labor unions and business leagues. Contrast with the Section

501(c)(5) favorable rulings, Rev. Rul. 59-6, 1959-1 C.B. 121, and Rev.

Rul. 75-473, 1975-2 C.B. 213, in which employees or labor unions were

among the members and for which the activities primarily promoted labor.

Note that these rulings are silent on whether the facts would qualify

exemption under Section 501(c)(6).

D. Non-Deductibility of Contributions

(1) Contributions to Section 501(c)(6) organizations aren’t allowable as a deduction

under Section 170. Section 6113 requires certain tax-exempt organizations that

are ineligible to receive tax deductible charitable contributions to disclose, in “an

express statement (in a conspicuous and easily recognizable format),” the nondeductibility of contributions during fundraising solicitations. Section 6710

33

provides penalties for failure to comply with Section 6113 without reasonable

cause. Organizations whose annual gross receipts don’t normally exceed

$100,000 are excepted from this disclosure requirement.

(2) For solicitations involving membership dues of Section 501(c)(6) organizations

that are normally deductible as business expenses under another section of the

Internal Revenue Code, additional stipulated safe harbor notices may be

substituted, such as, “Contributions or gifts to [name of organization] aren’t tax

deductible as charitable contributions. However, they may be tax deductible as

ordinary and necessary business expenses.” See Notice 88-120, 1988-2 C.B.

454.

E. Unrelated Business Income Tax

(1) As noted in the overview of essential exemption requirements, a Section

501(c)(6) organization’s principal or primary activities must further Section

501(c)(6) purposes in order to qualify for exemption. An incidental amount of

non-exempt activity generally doesn’t adversely affect qualification for

exemption. Again, see Associated Master Barbers, above. A business league

might generate income from these non-exempt activities as noted above such

as dues from certain associate members and from the performance of particular

services for individual persons. Those non-exempt activities may subject the

organization to unrelated business income tax.

(2) Section 511 imposes a tax on the unrelated business taxable income, as

computed under Section 512, of organizations otherwise exempt from tax under

Section 501(c)(6). The term “unrelated business taxable income” as defined in

Section 512 means, with certain exceptions, additions, and limitations, the

gross income derived by any subject organization from any unrelated trade or

business regularly carried on by it, less allowable deductions directly connected

with the carrying on of such trade or business. Section 513 defines the term

“unrelated trade or business,” in the case of any organization subject to the tax

imposed by Section 511, as any trade or business the conduct of which isn’t

substantially related (aside from the need of such organization for income or

funds or the use it makes of the profits derived) to the exercise or performance

by such organization of its exempt functions.

(3) Examples of activities subjecting a Section 501(c)(6) organization to unrelated

business income tax include the following:

a. An exempt business league may engage in business with its own

members so long as this isn’t its primary activity. A business league that

manages its members’ employee welfare programs is subject to unrelated

business income tax on the fees it receives from its members. See Rev.

Rul. 66-151, 1966-1 C.B. 152.

b. An exempt retail food merchants’ association that regularly carries on as a

minor portion of its activities a coupon redemption service for its members

is engaged in an unrelated trade or business. See Rev. Rul. 68-267, 19681 C.B. 284.

34

c. The income from the operation of a park and shop plan in which patrons of

particular member merchants receive stamps entitling them to free parking

is unrelated business income. See Rev. Rul. 79-31, 1979-1 C.B. 206.

d. A language translation service, provided by an exempt trade association

that promotes and develops trade relations between entities located in the

U.S. and the government of a foreign country, is an unrelated trade or

business within the meaning of Section 513. See Rev. Rul. 81-75, 1981-1

C.B. 356.

e. A Section 501(c)(6) organization, created by a chamber of commerce to

encourage business development in a particular area, obtains a mortgage

to help finance the construction of a building that is leased to an industrial

tenant at less than the fair market value. The leasing of the property is

substantially related to the organization’s exempt purpose of attracting

industry to the community. For this reason, the property doesn’t constitute

debt-financed property within the meaning of Section 514(b)(1). See Rev.

Rul. 81-138, 1981-1 C.B. 358, amplifying Rev. Rul. 70-81, 1970-1 C.B.

131.

E.1. Trade Publications

(1) The publishing of trade journals has been found to constitute the performance

of particular services where the journals are mainly catalogs of the products of

members.

(2) However, exemption was recognized for an association of wholesalers of shoe

supplies, one of whose principal functions was the publication of a magazine

containing information of interest to the entire industry distributed free to shoe

repairmen. The court found the magazine wasn’t a sales medium for individual

members and wasn’t a business of a kind ordinarily carried on for profit. See

National Leather & Shoe Finders Association v. Commissioner 9 T.C. 121

(1947), acq. 1947-2 C.B. 3.

(3) National Leather can be contrasted with a case referenced therein that draws

the opposite conclusion about a proposed trade journal. See Auto. Elec. Ass’n

v. Comm’r, 8 T.C. 894, 901 (1947), aff’d, 168 F.2d 366 (6th Cir. 1948).

E.2. Qualified Trade Show Activities

(1) Under certain circumstances, income received from trade show activity

conducted at a convention, annual meeting, or trade show won’t constitute

unrelated trade or business income.

(2) Section 513(d)(3), added to the Code by Section 1305 of the Tax Reform Act of

1976, provides that qualified convention and trade show activities conducted by

an organization described in Sections 501(c)(5) or 501(c)(6) aren’t unrelated

trade or business if certain requirements are met:

a. Per Section 513(d)(3)(B), qualified convention or trade show activity is

activity that is in conjunction with an international, national, State, regional,

or local convention, annual meeting, or show conducted by an

35

organization described in subparagraph (C) if one of the purposes of such

organization in sponsoring the activity is the promotion and stimulation of

interest in, and demand for, the products and services of that industry in

general or to educate persons in attendance regarding new developments

or products and services related to the exempt activities of the

organization, and the show is designed to achieve such purpose through

the character of the exhibits and the extent of the industry products

displayed.

b. A qualifying organization is one described in Section 501(c)(5) or 501(c)(6)

that regularly conducts as one of its substantial exempt purposes a show

that stimulates interest in, and demand for, the products and services of

the particular industry.

(3) If a convention or trade show activity is not unrelated trade or business by

reason of Section 513(d), it’s also an exempt activity of the particular Section

501(c)(5) or 501(c)(6) organization.

(4) The provisions dealing with qualified convention and trade show activities are

applicable to taxable years beginning after October 4, 1976.

(5) Activities conducted on the supplementary section of an organization’s internet

website during the 16-day period that coincides with the organization’s qualified

trade show are part of a “qualified convention and trade show activity” under

Section 513(d)(3)(B). See Rev. Rul. 2004-112, 2004-2 C.B. 985. The same

internet activities of a different organization that don’t coincide with a qualified

trade show aren’t covered by Section 513(d)(3)(B).

(6) Because of Section 513(d), the holdings of certain revenue rulings that the

rental of display space constitutes unrelated trade or business are no longer

correct. Therefore, Rev. Ruls. 75-517, 75-518, 75-519, and 75-520, 1975-2 C.B.

221-226, have been revoked for taxable years beginning after October 4, 1976,

by Rev. Rul. 85-124, 1985-2 C.B. 168. Rev. Rul. 67-219, 1967-2 C.B. 210, and

Rev. Rul. 75-516, 1975-2 C.B. 220, aren’t inconsistent with Section 513(d), but

they imply that had there been selling at the shows, unrelated business income

could have resulted. Because this implication is no longer correct, those

revenue rulings have been made obsolete by Rev. Rul. 85-123, 1985-2 C.B.

168, effective for taxable years beginning after October 4, 1976.

E.3. Provision of Pension and Health Benefits

(1) The activity of providing pension and health benefits to members is unrelated to

the purpose or function constituting the basis for exemption of an IRC 501(c)(6)

business league and results in unrelated business income within the meaning of

Section 512.In ABA Retirement Funds v. United States, 759 F.3d 718 (7th Cir.

2014), aff’g 2013-1 U.S. Dist. LEXIS 60086 (N.D. Ill. 2013), an appeals court

upheld a district court’s ruling that an organization formed to create and

maintain retirement plans for adoption by lawyers and law firms was not a taxexempt “business league” under Section 501(c)(6). ABA Retirement entered

into a contract with State Street Bank and Trust to be the trustee and ABA

36

Retirement became the plan fiduciary. In its role as plan fiduciary, ABA

Retirement had a variety of duties, such as vendor oversight, negotiating

contracts, reviewing and approving the marketing plan, and recommending

ways to grow its participant list and assets. ABA Retirement assisted State

Street in its marketing efforts by publicizing and mailing promotional materials

about its retirement plans to attorneys, sections of the ABA, and others

engaged in the legal profession. Although State Street was authorized to hire

and fire investment consultants, ABA also had input in the investment

decisions. ABA was authorized to fire State Street.

(2) The Plan paid ABA Retirement for the expenses incurred in providing

administration, marketing and other services related to the retirement program.

The fee was based on a percentage of all the investments. In considering

whether ABA Retirement was a business league for purposes of section

501(c)(6), the court looked for guidance in section 1.501(c)(6)-1 of the Treasury

regulations, specifically, the six points enumerated earlier. The court stated:

ABA Retirement fails every necessary condition for business

league status. Because the district court’s opinion is thorough, we

focus on just two of the reasons why ABA retirement is not a

business league: 1) its activities are not directed to the

improvement of business conditions for the legal field generally;

and 2) it engages in a business ordinarily conducted for profit.

(3) The appeals court agreed with the district court that an organization that

engages in business activities incidentally will not lose its tax exemption.

However, in this case, both courts found that the association’s insurance

activities were directed towards providing benefits to individuals within the

industry and those activities were substantial.

(4) The court found that ABA Retirement’s activities were not directed to the

improvement of business conditions of one or more lines of business because it

carried on substantial activities directed towards promoting its own retirement

plan, rather than promoting general retirement savings in the legal profession.

The court stated that while retirement planning is a business, it provides

benefits to individual persons, not to an entire field of commerce, and doesn’t

qualify ABA Retirement for exempt status. The court found that ABA Retirement

was engaged in business ordinarily conducted for profit because ABA

Retirement was not just a sponsor of the retirement plan, it provided a service in

connection with the retirement program for which it was paid a program

expense fee based on a percentage of the total assets. Accordingly, the court

concluded that ABA Retirement was not exempt from federal income tax under

IRC 501(c)(6). If an organization is providing a particular service to its

members, and possibly their families, employees, and others it is not a regularly

carried on trade or business substantially related to the purpose or function

forming the basis of exemption. This is also consistent with the holding in Rev.

Rul. 67-251, 1967-2 C.B. 196, where a business league that extended financial

aid and welfare services to its members did not qualify under Section 501(c)(6)

since part of its net earnings inured to the benefit of private individuals; this was

37

so, even though its financial aid to members was minor in relation to its other

activities which were directed to improvement of business conditions in a line of

business. See also, Rev. Rul. 67-176, 1967-1 C.B. 140 (providing an

emergency loan plan, practice loan plan, hotel discounts, and a car leasing plan

is tantamount to performing particular services for members as opposed to

improvement of a line of business.)

(5) Providing members with a variety of services, such as the collection of freight

claims and the preparation of bills of lading, is the performance of individual

services rather than benefiting the membership as a whole. Southern Hardwood

Traffic Association v. United States. In providing insurance or textbooks for

members, an organization is relieving its members of obtaining insurance or

textbooks on an individual basis from a nonexempt commercial business; thus,

the organization is rendering “particular services” for the individual members as

distinguished from an improvement of business conditions. Associated Master

Barbers & Beauticians of America, Inc. v. Commissioner. Finally, an association

that performed managerial services, weekly bookkeeping services, quarterly

audits, annual preparation of federal income tax returns and other services for

its members was engaged in particular services for its members. Indiana Retail

Hardware Association v. United States. Contrast with an association whose

activities consisted of the negotiation of written collective bargaining labor

contracts, the interpretation of such contracts, and the adjustment of labor

disputes; these activities further the common purpose with respect to the

common labor problems of the business group and do not represent services to

individual members that they could purchase elsewhere. Rev. Rul. 65-164,

1965-1 C.B. 238.

(6) In general, providing pension and health benefits to members does not further

Section 501(c)(6) purposes and is not substantially related to the promotion of

the common interest of the membership of an Section 501(c)(6) business

league. These activities relieve members of the business expense and burden

of separately providing for and managing their health and pension benefits.

Therefore, these activities are generally subject to tax under Section 511

because they constitute unrelated trade or business under Section 512 and are

not substantially related within the meaning of Section 513.

F. Selling Marts

(1) If an organization’s sole purpose or activity is to conduct a sales facility for its

members or the suppliers of its members, it is not entitled to exemption. In Rev.

Rul. 58-224, 1958-1 C.B. 242, an organization’s sole activity is to conduct an

annual trade show only for the purpose of bringing buyers and sellers together.

The show isn’t held in conjunction with a convention or annual meeting. The

organization isn’t exempt under Section 501(c)(6). Section 513(d) doesn’t affect

the holding in Rev. Rul. 58-224.

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IV. Application for Recognition of Exemption

(1) Organizations seeking exemption under Section 501(c)(6) are required to

electronically submit the Form 1024, Application for Recognition of Exemption

Under Section 501(a) or Section 521 of the Internal Revenue Code. See Rev.

Proc. 2024-5, 2024-1 I.R.B. 262, updated annually.

(2) Since December 18, 2015, denials may be appealed. Organizations described

in Section 501(c)(6) may institute a declaratory judgment proceeding in court in

response to a denial under the rules of Section 7428. See Sections 9 and 10 of

Rev. Proc. 2024-5, 2024-1 I.R.B. 262, updated annually, and Publication 892.

V. Examination Techniques

(1) The following sections provide examination techniques to assist in identifying

and developing issues commonly encountered during the examination of a

Section 501(c)(6) organization. These guidelines are not all-inclusive, and the

intent is not to restrict the examiner in identifying issues or using examination

techniques not included herein.

A. Section 501(c)(6) Membership Examination Techniques

(1) Ask the following questions and appropriate follow-up questions during the

initial contact or initial interview:

a. What are the membership requirements?

b. Does the organization have different classes of memberships?

c. If so, what are the membership requirements for each class of members?

(2) Read the articles of incorporation, bylaws, etc. for the membership

requirements to verify membership is limited to persons with a common

business interest.

(3) Review lists of members and activities to ensure that actual membership does

not represent only a segment of a line of business.

(4) Review membership solicitation materials to determine requirements, classes of

memberships, and benefits.

B. Inurement Examination Techniques

(1) Review the organizational documents, membership solicitation materials,

minutes, and contracts with employers to identify the types of benefits provided

to officers and members.

(2) Review the organization’s employment contracts, Forms W-2 and other

employment records to determine the number and duties of the organization’s

employees and the reasonableness of salaries and benefits.

(3) Review the disbursement journal to identify any payments to members and

determine the reason for any such payments.

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C. Unrelated Business Income Examination Techniques

(1) Read the minutes, newsletters, and other publications. Look for indications of

particular services to members and other unrelated activities.

(2) Review publications to determine whether they:

(3) Contain advertising, which may subject the organization to the tax on unrelated

business income,

(4) Contain advertising naming the products or services of members only. See

Treas. Regs.1.512(a)-1(f), Rev. Rul. 64-315, 1964-2 C.B. 147, and Rev. Rul.

65-14, 1965-1 C.B. 236.

(5) Check the organization’s website for advertising and other indications of

unrelated trade or business activities.

(6) Review any accounts involving non-member income or other income. Such

income may be due to a regular business of a kind ordinarily carried on for

profit.

(7) Analyze income from members (other than dues) to identify any payments for

particular or individualized services.

(8) Review the dues account in the cash receipts journal for associate member

dues. See Rev. Proc. 97-12, 1997-1 C.B. 631.

D. Compensation Examination Techniques

(1) During the initial interview ask about bonuses, fringe benefits, and expense

reimbursements for employees.

(2) Look for discussions of the payment of bonuses in the minutes. Common

examples include:

a. Holiday bonuses

b. Performance related bonuses

c. Non-cash bonuses such as gift certificates

(3) Review the employee handbook for information about the organization’s

expense reimbursement policy.

(4) Determine whether the organization maintains an accountable plan. Pay close

attention to expense allowances, expense accounts, and similar arrangements.

(5) Inspect vouchers and other documentation provided by employees.

(6) Check the disbursement journal for payments made to employees in addition to

payroll checks. Look for:

a. Payments for the same amount made each month

b. Payments for even dollar amounts

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(7) Review any restrictions on the use of employer provided vehicles for personal

purposes. (See Treas. Reg. 1.61-21 for a discussion of the valuation of the

personal use of an employer provided vehicle.)

(8) Review employment contracts, employee handbooks, etc. for benefits offered

by the organization to identify taxable fringe benefits. Fringe benefits are

taxable unless specifically excluded by the Code. Examples of taxable fringe

benefits include:

a. Club dues

b. Deferred compensation (nonqualified arrangements) plans

c. Group term life insurance in excess of $50,000

d. Employer provided meals and lodging

e. Benefit plans (employee contributions)

E. Legislative Activities Examination Techniques

(1) Interview the organization’s officers and review the minutes, newsletters, web

sites, and correspondence to identify any legislative activities.

(2) Determine whether any lobbying is related to the organization’s exempt

purpose.

(3) Determine whether any officials of the organization are registered lobbyists.

(4) Review any contracts with outside lobbyists to determine the extent and the

nature of such lobbying.

(5) Review additional payments to officers, attorneys, etc. for lobbying expenditures

disguised as compensation.

(6) Determine whether the business league is subject to the reporting requirements

of Section 6033(e).

(7) Review dues statements of business leagues subject to such requirements to

determine whether amounts used for lobbying were properly reported.

(8) Inspect Form 990-T filed by business leagues which elected not to or failed to

provide such notification to verify the proxy tax under Section 6033(e)(2)(A) was

properly calculated.

F. Political Activities Examination Techniques

(1) Interview the officers and review the minutes, newsletters, web sites, and

correspondence to identify possible political activities conducted by the

organization or the existence of a separate segregated political fund.

(2) Analyze the following accounts for possible political expenditures:

a. Legal fees

b. Bonuses

c. Printing

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d. Advertising

e. Entertainment

(3) Analyze bank statements, disbursement journals, etc., to identify whether the

organization maintained a separate segregated fund for the purpose of making

political expenditures.

VI. References

(1) EO CPE Text

a. 1979 EO CPE Topic L: Recent Issues Under IRC 501(c)(6)

b. 1981 EO CPE Topic H: IRC 501(c)(6): Business Leagues, Chambers of

Commerce, etc.

c. 1981 EO CPE Topic P: Insurance Activities of Exempt Organizations

d. 1986 EO CPE Topic F: Insurance Activities of Exempt Organizations

e. 1988 EO CPE Topic A: New Developments in IRC 501(c)(5) and IRC

501(c)(6)

f. 1992 EO CPE Topic G: Economic Development Corporations

g. 1995 EO CPE Topic G: Limited Member Dues as Unrelated Business

Income

h. 2003 EO CPE Topic K: IRC 501(c)(6) Organizations

Note: Although the precedent cited in these CPE texts was current at the time

they were published, some of the references may now be outdated.

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