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Article Archives >> Lead Stories >> February 1-29, 2008

Bluetooth Association Fails to Qualify
As 501(c)(6) Trade Association
IRS and Court say group carries on business for profit
and provides substantial services to individual members

A federal District Court in Washington state has agreed with the IRS that Bluetooth SIG, Inc., a nonprofit association formed to advance its members’ common business interests in the development and regulation of standards for wireless products within a wireless personal area network, is not qualified as a trade association or business league under Section 501(c)(6) of the Tax Code.  The Court agreed that the Association carries on its own business for-profit and provides substantial services to individual members. (Bluetooth SIG v. U.S., W.D. WA, No. C05-1778-JCC, 2/1/08.)

“Bluetooth” is a radio-based technology that supports short-range wireless connections in devices such as cell phones in cars, telephone headsets, or computers and printers.  The Association has more than 4000 members in three categories.  It functions to develop specifications and use applications, test products and develop the trademark, and promote consumer awareness and marketing.

Bluetooth applied for (c)(6) status in 2002 and the IRS issued a final denial in 2004.  Bluetooth then filed corporate tax returns, paying almost $1 million in taxes, and filed for a refund claiming that it should be exempt.

Section 501(c)(6) exempts “business leagues, chambers of commerce, real-estate boards, boards of trade or professional football leagues …, not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.”

The Regulations define a business league as “an association of persons having some common business interest, the purpose of which is to promote such common interest and not to engage in regular business of a kind ordinarily carried on for profit.  …its activities should be directed to the improvement of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons.  An organization whose purpose is to engage in a regular business of a kind ordinarily carried on for profit, even though the business is conducted on a cooperative basis or produces only sufficient income to be self-sustaining, is not a business league.”

The Court said the Ninth Circuit had distilled the regulations into a six-factor test, which requires the entity be (1) persons having a common business purpose; (2) whose purpose is to promote the common business interest; (3) not organized for profit; (4) that does not engage in a business ordinarily conducted for profit; (5) whose activities are directed to the improvement of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons; and (6) of the same general class as a chamber of commerce or a board of trade.”

The crux of the case here, it said, were the fourth and fifth factors, whether it conducted a for-profit business and whether it provided services to its members.

The IRS claimed that Bluetooth was operating a business.  The Association asserted that its activities were consistent with other trade associations.  “The Association has created a particular technology standard that enables multiple devices, of different types and perhaps by different manufacturers, to be used together,” the Court said.  Its dominance in the field “has made its trademark a valuable commodity.”  It said that the Association was “developing and selling a ‘product,’ much like a business ordinarily conducted for profit.”  The Association also defends its property interests by threat of litigation for trademark infringement.

The Association relied on a 1967 case involving the American Plywood Association, which was declared a business league by the same District Court.  “Whereas the plywood association served as a vehicle for advancing a common and pre-existing interest between members,” the Court wrote, “the Association in this case was formed to create a common interest between its members.  Put another way, the product in American Plywood was something the members were already selling to begin with; the product here is something the members banded together to create.”

The Court said the distinction was one “of consequence” because the “primary purpose” of the plywood association was to broaden the use of plywood in the building materials market.  “In this case, the Association creates, markets and sells a thing of value.”

On the question of whether the Association promoted a line of business, the Court spent some time discussing the arguments over the definition of the “industry” that was being promoted.  It cited cases in which an association to promote IBM computers was denied (c)(6) status and another in which an association for Midas muffler dealers was denied.

Without resolving the definition of the industry involved in this case, the Court concluded that the benefits of the Association “inhere to the exclusive benefit of its members.”  The use of the Bluetooth trademark is “absolutely limited to members who pay the appropriate listing fee,” it said. 

YOU NEED TO KNOW

This is an interesting and significant case, showing how difficult it may be to draw the lines between an association improving the conditions of a line of business and one running a business itself and providing substantial direct services to its members.

Article Archives >> Lead Stories >> February 1-29, 2008