IRS Delivers Guidance on Trade Association Tax Exemption

The Internal Revenue Service (IRS) Office of Exempt Organizations held an informational call yesterday to provide guidance for 501(c)(6) organizations on obtaining and maintaining tax-exempt status. Although the presentation (available here) did not provide an insider’s view on the IRS’s current activities, it nevertheless offered a succinct description of the IRS’s perspective on the application process for 501(c)(6) classification, the ins and outs of tax-exempt compliance, and recent areas of IRS enforcement.

Internal Revenue Code Section 501(c)(6) provides for tax exemption for several types of organizations, including business leagues (i.e., trade associations), chambers of commerce, real estate boards, boards of trade, and professional football leagues.

The IRS’ presentation emphasized several key points for trade associations to consider:

• The nature of the group’s activities must benefit the industry as a whole. The organization may not operate primarily for the purpose of an unrelated, for-profit activities or for the benefit of particular industry participants.

• Primarily providing particular services for members should not constitute more than 50% of the organization’s expenses or resources. This includes connecting buyers with sellers, loan-making, referral services, or advertising not designed to generally promote the industry.

• Benefits to members in the form of cost-savings or financial returns that are not available to non-members should be carefully evaluated, particularly if the related activities are not designed to “improve business conditions” for the industry and are focused on each member’s profit.

• Unrelated Business Income Tax (UBIT) does not generally apply to revenue from conventions, trade shows, or trade publications that do not primarily consist of product listings, but could include insurance brokering, advertising services, and other activities that resemble the activities of for-profit companies.

• Legislative and political activities limited to supporting or opposing legislation or regulations typically are tax-exempt, while support or opposition of a particular political candidate may require certain notifications to members and be subject to tax. Additional guidance on this topic is available from the IRS’s Revenue Ruling 2004-6 and a 2003 guidance document.

• The choice between creating a 501(c)(3) versus a 501(c)(6) organization typically is driven by the purpose of the organization and, potentially, by the types of political activities the organization may engage in.

Arent Fox’s Nonprofit team regularly helps organizations obtain and maintain tax-exempt status, expertly identifying business strategies and opportunities for trade associations and other nonprofits. If you have any questions, please contact the attorneys listed with this alert, or the Arent Fox professional who handles your matters.