11 January 2018 IRS denies 501(c)(6) exemption for local business owners' association In PLR 201751023, the IRS has determined that a membership organization that holds regular meetings to foster business relationships between local business owners in various industries does not qualify for tax-exempt status under Section 501(c)(6). The organization subject to the private letter ruling (ORG) is a business-to-business networking membership organization whose bylaws limit membership to individuals. ORG's members, who must be approved by ORG's Board of Directors, consist mostly of small business owners and managers from a broad variety of companies and industries in ORG's metropolitan area. ORG holds monthly meetings at which two members are allowed to describe their businesses as well as their referral prospects. The meetings also involve informal, open networking. Quarterly meetings feature a speaker to update members on business and cultural issues within the metropolitan area. ORG is supported by membership dues and assessments in addition to fees collected by members who wish to present their businesses at the monthly meetings. The IRS compared ORG to the association described in Revenue Ruling 59-391 (the Ruling). In the Ruling, membership was limited by the association's bylaws to one representative from each line of business so that no competition existed among the members. The IRS determined that ORG is similar because it is operated primarily to aid its members in their individual business endeavors. In addition, the IRS found that, because ORG's members were not from the same line of business, they shared no common business interest other than increasing their individual sales and thus did not qualify as a business league under Section 501(c)(6). ORG asserted that it was distinguishable from the association in Revenue Ruling 59-391, specifically noting that: (1) it accepts only individuals as members, (2) it does not restrict competitors from joining, and (3) its members do not furnish other members with lists of business acquaintances. ORG further added that it regularly features non-member speakers to discuss issues of general business interest. The IRS disagreed with ORG and concluded that ORG's members have no common business interest other than to increase their individual sales. In reaching this conclusion, the IRS did not find the limitation of membership to individuals to be a significant distinction. ORG's members do not exchange business acquaintance lists, the IRS noted, but they do verbally exchange referrals. ORG's hosting non-member business speakers, it added, was not ORG's primary activity. Accordingly, the IRS determined that ORG's activities are directed at serving the private interests of its members, and that ORG did not qualify for exemption under Section 501(c)(6). In general, a business league is defined as an association of persons having some common business interest, the purpose of which is to promote that common interest and not to engage in a regular business of any 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 (Treas. Reg. Section 1.501(c)(6)-1). In PLR 201751023, the IRS found that an organization cannot be solely organized for the purpose of exchanging mutual business information and contacts among members. Rather, the organization must be comprised of persons each representing a similar business, occupation or profession to show that a common interest exists and that the organization's activities are directed toward the improvement of one or more lines of business. The ruling in PLR 201751023 is consistent with other "common business interest" rulings issued in 2017 by the IRS. In PLR 201733016, however, the IRS cited Revenue Ruling 56-65 to include a geographic area to demonstrate the existence of a common business interest in addition to involvement with a particular industry. Organizations are encouraged to review the contents of their bylaws and membership rules to ensure that a common business interest exists between its members. Organizations should also be mindful of any conduct that could be viewed as inuring to the benefit of a private shareholder or individual. — For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg.
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