Rev. Rul. 83-164
1983-2 C.B. 95.
Internal Revenue Service
Revenue Ruling
BUSINESS LEAGUES; COMPUTER USERS
Published: October 31, 1983
26 CFR 1.501(c)(6)-1: Business leagues, chambers of commerce, real estate
boards, and boards of trade
Business leagues; computer users. An organization whose members
represent diversified businesses that own, rent, or lease computers
produced by a single computer manufacturer does not qualify for exemption
from federal income tax as a business league under section 501(c)(6) of the
Code. Rev. Rul. 74-147 distinguished.
ISSUE
Does the nonprofit organization described below, whose primary activity
is promoting the common business interests of users of one particular brand
of computers, qualify for exemption from federal income tax as a business
league under section 501(c)(6) of the Internal Revenue Code?
FACTS
The organization was formed to develop and disseminate information
pertaining to the electronic data processing equipment manufactured by the
M Corporation.
Its membership is made up primarily of representatives of diversified
businesses that own, rent, or lease one or more computers produced by M.
Membership is also open to representatives of other businesses that do not
use M's computers.
The organization holds conferences at which operational and technical
problems relating to computer use are discussed. Nonmembers are invited to
attend the conferences and are encouraged to join as members. The speakers
at the conferences typically include members as well as recognized
professionals in the computer industry. Also, some representatives of M
attend and disseminate current information relative to M's equipment.
Income is from conference registration fees. Expenditures are made for
conference expenses and miscellaneous administrative costs.
LAW AND ANALYSIS
Section 501(c)(6) of the Code provides for the exemption from federal
income tax of business leagues not organized for profit, 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 Income Tax Regulations defines a business
league as an association of persons having some common business interest,
the purpose of which is to promote such common interest. Its activities
should be directed towards the improvement of business conditions in one or
more lines of business as distinguished from the performance of particular
services for individual persons.
Rev. Rul. 74-147, 1974-1 C.B. 136, holds that a nonprofit organization,
whose members represent diversified businesses that own, rent, or lease
digital computers produced by various manufacturers, and that is organized
to improve the efficiency of its members' use of computers, qualifies for
exemption under section 501(c)(6) of the Code. Rev. Rul. 74-147 states
that the common business interest of the members of the organization is
their common business problem concerning the use of digital computers. The
primary objective of the organization is to provide a forum for the
exchange of information that will lead to the more efficient utilization of
computers by its members and other interested users, and thus improve the
overall efficiency of the business operations of each.
In addition to promoting the common business interest of its members, a
business league exempt under section 501(c)(6) of the Code must also seek
to improve conditions in one or more lines of business. In National
Muffler Dealers Association, Inc. v. United States, 440 U.S. 472, Ct.D.
1997, 1979-1 C.B. 198 (1979), the United States Supreme Court held that an
organization of muffler dealers franchised by Midas International
Corporation does not qualify for exemption from federal income tax as a
business league under section 501(c)(6) of the Code because the
organization's purpose was too narrow to satisfy the line of business test
of section 1.501(c)(6)-1 of the regulations. The Court concluded that the
line of business limitation of section 1.501(c)(6)-1 is well grounded in
the origin of section 501(c)(6) and in its enforcement over a long period
of time. The Court further concluded that exemption under section
501(c)(6) is not available to aid one group in competition with another
within an industry.
The term "line of business" has been interpreted to mean either an entire
industry, see American Plywood Assn. v. United States, 267 F.Supp. 830
(W.D. Wash. 1967); and National Leather & Shoe Finders Assn. v.
Commissioner, 9 T.C. 121 (1947), acq., 1947-2 C.B. 3, or all components of
an industry within a geographic area, see Commissioner v. Chicago Graphic
Art Federation, Inc. 128 F.2d 424 (7th Cir. 1942); Crooks v. Kansas City
Hay Dealers' Assn., 37 F.2d 83 (8th Cir. 1929); and Washington State
Apples, Inc. v. Commissioner, 46 B.T.A. 64 (1942), acq., 1942-1 C.B. 17.
Organizations that have failed to meet the line of business test but
instead were found to have served only a "segment of a line" include groups
composed of businesses that have licenses to a single patented product
(Rev. Rul. 58-294, 1958-1 C.B. 244); market a certain make of automobile
(Rev. Rul. 67-77, 1967-1 C.B. 138); or bottle one type of soft drink (Rev.
Rul. 68-182, 1968-1 C.B. 263). These groups promote segments of an industry
at the expense of others in the industry.
Although the members of both the organization described in Rev. Rul.
74-147 and the organization under consideration here have a common business
interest concerning the use of computers, the organization in Rev. Rul.
74-147 directs its activities to users of computers made by diverse and
competing manufacturers, while the instant organization directs its
activities to users of computers made by one manufacturer. By directing
its activities only to the users of brand M computers, the instant
organization is directing its activities towards the improvement of
business conditions in only segments of the various lines of business to
which its members belong. Because it limits its activities to the users of
M computers, the organization helps to provide a competitive advantage to M
and to its customers at the expense of M's competitors and their customers
that may use other brands of computers. Thus, the organization's
activities are not directed towards the improvement of business conditions
in one or more lines of business within the meaning of section
1.501(c)(6)-1 of the regulations.
HOLDING
The organization described above, whose primary activity is promoting the
common business interests of users of one particular brand of computers,
does not qualify for exemption from federal income tax as a business league
under section 501(c)(6) of the Code.
EFFECT ON OTHER REVENUE RULINGS
Rev. Rul. 74-147 is distinguished.
Rev. Rul. 83-164, 1983-2 C.B. 95.
