If your association wishes to obtain recognition of exemption from
federal income tax as a nonprofit business league, chamber of
commerce, real estate board, board of trade, or professional football
league (whether or not administering a pension fund for football
players), it should file an application for recognition of exemption
on Form 1024. For a discussion of the procedure to be followed, see
Chapter 1.
Your organization must indicate in its application form and attached
statements that no part of its net earnings will inure to the benefit
of any private shareholder or individual and that it is not organized
for profit or organized to engage in an activity ordinarily carried on
for profit (even if the business is operated on a cooperative basis or
produces only sufficient income to be self-sustaining).
In addition, your organization must be primarily engaged in activities
or functions constituting the basis for its exemption. It must be
primarily supported by membership dues and other income from
activities substantially related to its exempt purpose.
A business league, in general, 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. Trade associations and professional
associations are considered to be business leagues.
A chamber of commerce usually is composed of the merchants and traders
of a city.
Board of trade. A board of trade often consists of persons engaged in
similar lines of business. For example, a nonprofit organization
formed to regulate the sale of a specified agricultural commodity to
assure equal treatment of producers, warehouse workers, and buyers
would be a board of trade.
Chambers of commerce and boards of trade usually direct their efforts
at promoting the common economic interests of all the commercial
enterprises in a given trade community.
Real estate board. A real estate board consists of members interested
in improving the business conditions in the real estate field. It is
not organized for profit and no part of the net earnings inures to the
benefit of any private shareholder or individual.
General purpose. You must indicate in the material submitted with your
application that your organization will be devoted to the improvement
of business conditions of one or more lines of business as
distinguished from the performance of particular services for
individual persons. It must be shown that the conditions of a
particular trade or the interests of the community will be advanced.
Merely indicating the name of the organization or the object of the
local statute under which it is created is insufficient to demonstrate
the required general purpose.
Line of Business. This term generally refers either to an entire
industry or to all components of an industry within a geographic area.
It does not include a group composed of businesses that market a
particular brand within an industry.
A common business interest of all members of the organization must be
established by the application documents.
Examples of activities that would tend to illustrate a common business
interest are:
1) Promotion of higher business standards and better business methods
and encouragement of uniformity and cooperation by a retail
merchants association;
2) Promotion of the interest of the business community by educating
the public in the use of credit;
3) Establishment of uniform casualty rates and compilation of
statistical information by an insurance rating bureau operated by
casualty insurance companies;
4) Establishment and maintenance of the integrity of a local
commercial market;
S) Operation of a trade publication primarily intended to benefit an
entire industry; and
6) Encouragement of the use of goods and services of an entire
industry (such as a lawyer referral service whose main purpose is
to introduce individuals to the use of the legal profession in the
hope that they will enter into a lawyer-client relationships on a
paying basis as a result of the experience).
Improvement of business conditions generally must be shown to be the
purpose of the organization. This is not established by evidence of
particular services that provide a convenience or economy to
individual members in their businesses, such as advertising that
carries the name of members, interest free loans, assigning exclusive
franchise areas, operation of a real estate multiple listing system,
or operation of a credit reporting agency.
Stock or Commodity Exchange. A stock or commodity exchange is not a
business league. chamber of commerce, real estate board, or board of
trade and is not exempt under section 501(c)(6).
Contributions to organizations described in this section are not
deductible as charitable contributions on the donor's federal income
tax return. They may be deductible as trade or business expenses if
ordinary and necessary in the conduct of the taxpayer's business.
Legislative Activity. An organization that is exempt under section
501(c)(6) may permissibly engage in any amount of legislative activity
germane to the common business interests of the organization's
members.
Dues and Assessments used for Political and Certain Legislative
Activities. No deduction is allowed a business taxpayer for
expenditures for participation or intervention in a political campaign
on behalf of any candidate for public office or in connection with any
attempt to influence the general public or segments thereof with
respect to legislative matters (otherwise known as grassroots
lobbying), elections, or referendums. Also, deductions are not
allowable for expenses in connection with direct attempts to influence
legislation that is not of a direct business interest to the taxpayer.
Therefore, if a substantial part of the activities of a trade
association, labor union, or similar organization consists of one or
more of these activities, a deduction is allowable only for that
portion of a member's dues to the organization that the taxpayer can
clearly establish is attributable to other activities. Special
assessments or similar payments (including an increase in dues) made
to such organization for any of these political or legislative
activities are never deductible by a taxpayer.
Members may deduct dues (or assessments) to an organization that are
attributable to expenses for:
1) Appearances before, submission of statements to, or sending
communications to members of legislative bodies with respect to
legislation (or proposed legislation) of direct interest to the
member; and
2) Communications of information between the member and the
organization with respect to their proposing, supporting, or
opposing legislation of direct interest to either the organization
or a member.
Caution: A tax-exempt trade association, labor union, or similar
organization is considered to be engaging in grassroots lobbying if it
contacts prospective members or calls upon its own members to contact
their employees and customers for the purpose of urging such persons
to communicate with their elected State or Congressional
representatives to support the promotion, defeat, or repeal of
legislation that is of direct interest to the organization. Any dues
or assessments directly related to such activities are not deductible
by the taxpayer, since the individuals being contacted, who are not
members of the organization, constitute a segment of the general
public.
Appeal procedures. If the Service determines that dues or other
payments made by contributors to a labor union, trade association, or
similar organization are not deductible because of the lobbying or
political activity of the organization, the appeal procedures
discussed in Chapter 1 will apply to the organization.
