Trade Associations (Portfolio 614)

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Hugh K. Webster

Hugh K. Webster, Esq., Webster, Chamberlain & Bean; A.B., Middlebury College (1983); J.D., Duke Law School (1986); Co-Author, The Law of Associations (Matthew Bender & Company, Supp. 1997); Author, 450 T.M., Tax-Exempt Organizations: Organizational Requirements, 451 T.M., Tax-Exempt Organizations: Operational Requirements, 452 T.M., Tax-Exempt Organizations: Reporting, Disclosure and Other Procedural Aspects, 488 T.M., Fiduciary Duties of Nonprofit Directors and Officers, and 613 T.M., Lobbying and Political Expenditures.

Table of Contents

Detailed Analysis

I. Introduction

A. Legislative and Regulatory Background

1. The Term “Trade Association”

2. History

3. Unrelated Business Income Tax

B. Procedure for Obtaining Exemption

1. Application Process

2. Group Exemptions

a. Who May Obtain a Group Exemption Letter

b. Who May Be Included in a Group Exemption Letter

c. Information Required for a Group Exemption Letter

d. Group Returns

II. Eligibility for Exemption

A. Summary

B. Common Business Interest

1. Business

2. Commonality

a. Same Industry or Profession

b. Different Industry or Profession

c. Hobbies

C. Promotion of Common Business Interest

1. Industry Marketing

2. Trade Shows

3. Research

4. Providing Information

5. Legislative Activities

6. Miscellaneous

7. Illegal Activity

D. Line of Business Test

1. General

2. “Line of Business” Defined Broadly

3. Association Members Need Not Be in the Same Business

4. Single Supplier

a. General

b. User Groups

E. Particular Services

1. Basic Definition

a. Individually Tailored Services

b. Fee for Service

2. Common Association Activities

a. Advertising

b. Employment Services

c. Credit Reporting

d. Insurance

3. Miscellaneous

4. Broader Exempt Purpose

5. Relationship to UBIT

6. Permissible Amount of Particular Services

F. Not Organized for Profit

G. Inurement

1. Definition

2. Examples of Inurement

a. Dividends

b. Rebates

c. Financial Assistance

d. Price Differential

e. Compensation

f. Insider Transactions

3. Distribution of Assets upon Dissolution

4. No De Minimis Rule

5. Nonmember Income and Inurement

III. Sections 501(c)(6) and 501(c)(3) Compared

A. Introduction

B. Scope of “Education”

C. Professional Societies

IV. Unrelated Business Income Tax

A. Introduction

B. Three-Part Test

1. Trade or Business

2. Regularly Carried On

3. Substantially Related

C. Specific Activities

1. Insurance

2. Advertising

a. Periodicals

b. Directories

c. Allocation of Expenses

3. Associate Member Dues

4. Fundraising Activities

D. Exceptions

1. Dividends

2. Interest

3. Royalties

4. Mailing Lists and Affinity Cards

5. Rents

6. Disposition of Property

7. Research

E. Controlled Organizations

F. Debt-Financed Property

G. How Much UBI Is Too Much?

V. Subsidiary Entities

A. Taxable Subsidiaries

1. Decision Making

2. Financial Dependence

3. Administrative Personnel

4. Shared Facilities

5. Common Directors

6. Funding the Subsidiary

7. Corporate Formalities

8. Public Perception

9. Stock Ownership

B. Tax-Exempt Subsidiaries

C. Associations as Subsidiaries

VI. Political Activities

A. General

B. Effect on Dues Payments

C. Tax on Political Acts

D. Political Action Committees

VII. Legislative Activities

Introductory Material

A. Proxy Tax

B. Nondeductible Dues Exception

C. Influencing Legislation

D. Supporting Activities

E. Volunteers

F. Local Lobbying

G. De Minimis Exception

H. Allocation and Record Keeping Rules

1. General Rule

2. General Definitions

3. Special Safe Harbor Allocation Methods

a. Ratio Method

b. Gross-Up Methods

c. Section 263A Method

VIII. Reporting Requirements

A. Form 990

B. Form 990-EZ

C. Form 990-T

D. Compensation

E. Statute of Limitations

F. Public Availability

G. Penalties

H. Other Disclosure Rules

IX. Relinquishing Exempt Status

X. Conclusion

Working Papers

Working Papers

Table of Worksheets

Worksheet 1 IRS Exempt Organizations Determination Manual, IRM 7.25.6 - Business Leagues

Worksheet 2 Sample Articles of Incorporation for Trade Association

Worksheet 3 Sample Bylaws for Trade Association

Worksheet 4 Sample Group Exemption Application

Worksheet 5 Sample License Agreement with Treatment of Unrelated Income as a Royalty

Worksheet 6 Sample Articles of Incorporation of Taxable Subsidiary

Worksheet 7 Sample Bylaws of Taxable Subsidiary

Worksheet 8 Sample Articles of Incorporation of Tax-Exempt Subsidiary

Worksheet 9 Sample Bylaws of Tax-Exempt Subsidiary

Worksheet 10 Sample Articles of Incorporation of 527 Political Action Committee

Worksheet 11 Sample Minutes of Organizational Meeting of Association

Worksheet 12 Sample Conflict of Interest Policy

Worksheet 13 Sample Plan of Merger Agreement




Committee Reports:

Treasury Regulations:

Treasury Rulings: