As a tax-exempt organization it’s a bad situation to lose your exemption for a failure to file the required tax forms for three consecutive years. But, as the association that requested reinstatement of their status as a §501(c)(6) organization discovered in PLR 201622033, it’s worse to discover that the IRS believes you never really were qualified to be treated as such an organization.
The organization was an incorporated not for profit office condominium association. The organization had self-declared itself as an exempt §501(c)(6) organization. The IRC provides the following types of organizations that qualify as a §501(c)(6) organization:
(6) 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.
In part Regulation 1.501(c)(6)-1 provides the following additional details for this definition:
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.
The letter ruling also notes Revenue Ruling 73-411 that describes an organization which did not meet the business league definition:
Rev. Rul. 73-411; 1973-2 C.B. 180; 1973 held 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 are directed to promoting the general business interests of its members, does not qualify as a business league or chamber of commerce under section 501(c)(6) of the Code. The organization’s activities were not directed at improvement of business conditions of one or more lines of business or business conditions of any community as a whole, within the meaning of section 501(c)(6) of the Code. They serve instead the individual business interests of the owner of the shopping center and, therefore, fall outside the scope of the exemption accorded by section 501(c)(6). The same conclusion applies with respect to those phases of the organization’s activities that relate to such matters as the maintenance and policing of the shopping areas, walkways and parking areas, hours of business, and similar functions. These activities are characteristic of a tenants’ association, rather than of a chamber of commerce or trade association and fall short of supporting any section 501(c)(6) exemption for the organization because they primarily serve special interests of the members related to their status as tenants of a common facility rather than any common business purposes in relation to the status of the members as representatives of the commercial interests of a community.
The IRS also notes a Supreme Court case that looked at a similar question of benefits to members of the organization instead of the business community as a whole:
In Indiana Retail Hardware Assn., Inc. v. United States (1966), 177 Ct. Cl. 288, the Court held that when conducting particular services for members is a substantial activity of an organization, the organization will be precluded from exemption under section 501(c)(6) of the Code.
The association argued that they were not the same as those organizations described in Revenue Ruling 73-411 and in Indiana Retail Hardware Assn., Inc.:
You claim to be a business league, which is comprised of the owners of an office condominium community, having the common business interest of promoting, maintaining and improving the overall business conditions within your community. You claim that this is a line of business.
You contend that your members represent a “line of business” as defined in Section 501(c)(6) of the Code. You argue you are not similar to the organization described in Revenue Ruling 73-411 because the organization in that ruling furthered the for-profit interests of the owner of a retail shopping center whereas you improve the business conditions of the condominium “community.”
Effectively, they argued that they improved the business conditions for all of those with offices in the condominium, thus they were a business community and the organization functioned much like a (very small) local chamber of commerce.
The IRS did not accept this view, noting:
Your members have no common business interest other than owning a unit in your office condominium “community.” Therefore, you are not promoting the interests of one or more lines of business. Your activities focus solely on maintaining the condominium property, not furthering business interests. These activities constitute services to members that would have to be performed by your individual member businesses if not for you. You are essentially a condominium association which maintains a building for your owners, not a business league that is formed for the promotion of business interests of one or more lines of business.