Internal Revenue Service
Revenue Ruling
Rev. Rul. 69-632
1969-2 C.B. 120
Sec. 501
IRS Headnote
A nonprofit organization composed of members of a particular industry to
develop new and improved uses for existing products of the industry is not
exempt under section 501(c)(3) of the Code but may qualify for exemption
under section 501(c)(6).
Full Text
Rev. Rul. 69-632
Advice has been requested whether an association organized and operated as
described below qualifies for exemption from Federal income tax under
either section 501(c)(3) or section 501(c)(6) of the Code.
The nonprofit association composed of members of a particular industry was
formed to develop new and improved uses for existing products of the
industry. The association's income is from membership dues and assessments.
The association itself conducts no scientific research. It contracts with
various research organizations, institutes, and universities for specific
research projects selected by a committee of technical experts chosen from
the association's membership. The results of these projects are published
and made available to the interested public.
Patents and trademarks that may result from research projects sponsored by
the association are licensed royalty-free to all applicants meeting the
quality standards set by the association.
Section 501(c)(3) of the Code provides for the exemption from Federal
income tax of organizations organized and operated exclusively for
scientific purposes.
Section 1.501(c)(3)-1(d)(1)(ii) of the Income Tax Regulations provides that
an organization is not organized or operated exclusively for any purpose
set forth in section 501(c)(3) of the Code unless it serves a public rather
than a private interest.
Section 1.501(c)(3)-1(d)(5) of the regulations provides that the term
"scientific" as used in section 501(c)(3) of the Code includes the carrying
on of scientific research in the public interest. For research to be
scientific within the meaning of section 501(c)(3), it must be carried on
in furtherance of a scientific purpose.
Section 1.501(c)(3)-1(d)(5)(iv) of the regulations provides that an
organization will not be regarded as organized and operated for the purpose
of carrying on scientific research in the public interest and will not
qualify for exemption under section 501(c)(3) of the Code as a scientific
organization if that organization will perform research only for persons
which are (directly or indirectly) its creators and which are not described
in section 501(c)(3).
The association's research projects may result in new products and
processes that benefit the public, but such benefit is secondary to that
derived by the association's members. The association's members select
research projects in order to increase their sales by creating new uses and
markets for their product. Therefore, it is held that the primary purpose
of the association's research is to serve the private interests of its
creators, rather than the public interest. Accordingly, the association
does not qualify for exemption from Federal income tax under section
501(c)(3) of the Code.
Section 501(c)(6) of the Code provides for the exemption from Federal
income tax of business leagues, not organized for profit and no part of the
net earnings of which inures to the benefit of any private shareholder or
individual.
Section 1.501(c)(6)-1 of the regulations requires that in order to qualify
for exemption under section 501(c)(6) an organization's activities should
be directed to the improvement of business conditions in one or more lines
of business as distinguished from the performance of particular services
for individual persons.
No services are performed by this association for any individual member,
nor are any of the association's patents and trademarks licensed to any
member on an exclusive basis. Since the association's activities are
directed towards improving the business conditions of the industry, in
general, it is held that the organization is exempt from Federal income tax
under section 501(c)(6) of the Code.
Even though an organization considers itself within the scope of the
Revenue Ruling, it must file an application on Form 1024, Exemption
Application, in order to be recognized by the Service as exempt under
section 501(c)(6) of the Code. The application should be filed with the
District Director of Internal Revenue for the district in which is located
the principal place of business or principal office of the organization.
See section 1.501(a)-1 of the regulations.
