The Revenue Act of 1913, also known as the Underwood Tariff Act, established the federal income tax exemption for business leagues. This exemption continues today in Section 501(c)(6) of the Internal Revenue Code (IRC). Determining whether your entity qualifies for the Sec. 501(c)(6) exemption requires significant analysis, and a clear understanding of what the Internal Revenue Service (IRS) considers to be a business league is key. If you have questions about the Sec. 501(c)(6) exemption and other tax benefits that may apply to your organization, contact Church Law Center at (949) 892-1221 today to learn more.
Defining a Business League
According to technical guidance published by the IRS and Treasury Regulation 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.” Business leagues generally fall within the same class as chambers of commerce and boards of trade, which also are exempt from federal tax under Sec. 501(c)(6).
Furthermore, a business league’s activities generally improve the business conditions of one or more lines of business instead of performing services for a particular individual. A “line of business” refers to an entire industry or the components of an industry within a particular geographic area.
Meeting the Requirements for the Business League Exemption
Organizations must meet various requirements to qualify as business leagues for a federal tax exemption under Sec. 501(c)(6). Each requirement has a different test to determine whether an organization fulfills the elements of that requirement.
Association of Persons
Business leagues must constitute an association of persons having some common business interest. Therefore, the organization must meet the following three components:
- Whether there is an association;
- Whether there is a common business interest; and
- Whether there is a bona fide membership.
An organization is an association if it involves an agreement between two or more persons to accomplish some purpose. Additionally, an association must have an open and voluntary membership and a meaningful extent of membership support, such as through membership dues. Alternatively, meaningful membership support could come from fees charged for an activity that furthers the association’s exempt purpose.
Common Business Interest
The definition of a business league also requires the organization to consist of members with some common business interest. Valid common interests must be specifically business-related. Furthermore, the business interest must be at a common or general level of business. As used in this definition, business is a broad term that includes almost any activity one engages in for remuneration or profit.
Bona Fide Membership
The membership of a business association must consist of bona fide or genuine members. A bona fide member can engage in the following activities concerning the organization:
- Electing members of the association’s governing body;
- Being eligible to serve on the governing body: and
- Financing the organization’s activities.
Typically, a bona fide member also has specified rights and obligations concerning the organization, including the right to participate in its direction and the obligation to support it financially.
Purpose Promotes a Common Business Interest
The overall purpose of the organization must promote a common business interest. Discerning the nature of the organizational purpose is separate from the organization’s activities and the members’ common business interest. One example of an organization that meets this requirement includes an organization that promotes the common business interest of the commercial fishing industry by publishing and distributing a newspaper in a state directed at fishermen. Another group that qualifies for this requirement is a group of students all studying toward the same degree to promote their common interest as future members of a particular profession.
Not Organized for Profit / Not Engaged in Regular Business for Profit
These requirements are closely related but distinct. First, the language of the organization’s governing documents determines whether it was established as a not-for-profit organization. The second requirement goes beyond the purpose articulated in the organization’s governing documents and focuses on organizational activities. To meet this requirement, the organization should refrain from regularly engaging in a business that is the kind normally conducted for profit, although it may do so incidentally.
Improvement of Business Conditions
The principal or primary activities of business leagues must improve the conditions of one or more lines of business to qualify for the tax exemption under 501(c)(6). However, whether those activities lead to the improvement of conditions is immaterial so long as the activities are reasonably calculated to improve conditions.
Line(s) of Business
The improvement of business conditions requirement refers to “one or more lines of business.” A line of business is an entire industry or all components of an industry in a particular geographic area. Furthermore, organizations fail to meet this requirement if the purpose of their primary activities is to serve only a segment of a line of business. The IRS technical guidance explains that a segment of a line of business is merely the users of a specific product or brand within a line of business.
Performance of Particular Services for Individuals / Net Earnings Must Not Inure to Benefit Any Individual
If an organization’s activities involve performing particular services for individuals, it fails to meet the requirement under Sec. 501(c)(6) that its activities be designed to improve the conditions of one or more lines of business. A particular service is an activity that provides convenience or economy to individual members in the operation of their businesses. Similarly, an organization’s net earnings may not inure to any individual’s benefit but instead toward the organization’s overall purpose.
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Church Law Center gears its practice to legal matters that affect nonprofit organizations, churches, and other religious organizations, including nonprofit political activity in California. This focus allows us to concentrate on keeping abreast of the ever-changing laws and policies as they develop over time. We are here to represent your interests throughout every stage of your legal matter. Call us today at (949) 892-1221, or visit us online and see what we can do for you.