Organization Denied Exemption for Providing Services to Members

• DOI: http://doi.org/10.1002/npc.30367
• Published date: 01 September 2017
• Date: 01 September 2017

Bruce R. Hopkins’ NONPROFIT COUNSEL

September 20176THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonprofit Counsel DOI:10.1002/npc

The organization also failed to convince the IRS that

it will be lessening the burdens of government. The IRS

ruled that it is not enough to furnish pipe that will be

used on bridges owned by the government and other-

wise engage in activities that are sometimes undertaken

by government. The facts that its pipe may be cheaper

than that provided by other suppliers and may allow

the project to be completed more quickly were deemed

irrelevant; it is still selling pipe at a price above cost for

the projects.

The IRS observed that a strong working relationship

between the government and an organization is strong

evidence that the organization is actually lessening the

burdens of government. This organization, the IRS held,

will not have a close working relationship with the

government but will be working with contractors on

projects that win bids.

The organization protested, saying that the president

of the United States and the Speaker of the House have

called for an increased focus on infrastructure, particu-

larly roads and bridges. The IRS retorted that that fact

is insufficient to establish lessening the burdens of gov-

ernment. The IRS noted that the organization “will not

work directly with government authorities to improve a

bridge or other structure.” The organization’s activities

were dismissed as merely working with engineering

firms and similar companies “who will include your pipe

product as part of the engineering plans.” [4.11, 7.7] ◆

ORGANIZATION DENIED

EXEMPTION FOR PROVIDING

SERVICES TO MEMBERS

An organization was ruled to not qualify as a tax-

exempt business league because its primary activity

is serving its members as a bargaining and disbursing

agent, which is not a function that improves conditions

in a line of business but is a particular service for indi-

vidual members (Priv. Ltr. Rul. 201726014).

Facts

An organization has been holding itself out as a

tax-exempt business league, without recognition of

exemption. A review of its annual information returns

“suggest[ed]” to the IRS that its primary activity is

“negotiating bulk trade purchases and vendor rebates”

on behalf of its members.

The IRS also reviewed the organization’s website.

(See last month’s issue.) From this review, the IRS con-

cluded that the organization’s objective is to “encourage

and foster the idea of unity, goodwill, and friendship

as a basis to work together for developing, advancing

and improving the economic, financial, business and

social interests of its members.” This organization, the

IRS wrote, “provides its members bargaining power and

act[s] as a bargaining agent for and on their behalf to

effectively negotiate and contract for better deals, and

better terms and conditions of doing business, with

vendors, suppliers and service providers, with whom its

members do business.” The entity was said to “act as a

disbursing agent for equitably and fairly disbursing the

benefits amongst its members received for and on their

behalf from any source(s).”

Law and Analysis

For an organization to qualify as a tax-exempt

business league (IRC § 501(c)(6)), its activities must 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. This organization was held to not be exempt as

a business league because this effort of functioning as a

bargaining and disbursing agent for its members violates

the particular services rule. [14.2(c)] ◆

ISSUE ADVOCACY/POLITICAL

ACTIVITY TEST HELD

CONSTITUTIONAL

The US District Court for the Northern District of Texas,

on July 7, held in a facial challenge that Rev. Rul. 2004-6’s

facts-and-circumstances test is neither void for vagueness

in violation of the Due Process Clause nor unconstitution-

ally vague and/or overbroad in violation of the First Amend-

ment (Freedom Path, Inc. v. Internal Revenue Service).

Facts

Freedom Path applied to the IRS for recognition of

tax exemption as a social welfare organization. The IRS

proposed to deny this application on the grounds that Free-

dom Path is not operating exclusively for the promotion of

social welfare—that is, it is engaging in an unwarranted

amount of political campaign activity. To reach that conclu-

sion, the IRS analyzed Freedom Path’s television advertise-

ments and mailers, using this facts-and-circumstances test.

Freedom Path alleged that the IRS has targeted it

because of its conservative political views. The organiza-

tion contended that the IRS delayed processing its appli-

cation, wrongly subjected it to burdensome requests for

information, and leaked its confidential tax information.

Law

Rev. Rul. 2004-6 is used to determine whether a tax-

exempt organization has engaged in issue advocacy or

taxable (IRC § 527(f)) political activity. Its facts-and-circum-

stances test utilizes 11 factors, six of which indicate politi-

cal activity and five of which do not. These factors are not

weighted; other, unspecified factors may be considered.