In Bluetooth SIG, Inc. v. United States, No. C05-1778, the U.S. District Court for the Western District of Washington in Seattle on Friday granted the government’s motion for summary judgment and concluded that the Bluetooth Association is not a tax-exempt § 501(c)(6) business league.  For details of the opinion, see below the fold:

The Bluetooth Association was incorporated as a Delaware nonprofit corporation to advance its members’ “common business interest in the development and regulation of technical standards for the compatibility and interoperability of wireless products and devices within a wireless personal area network (‘WPAN’)."  Bluetooth is a radio-based technology that supports short-range, wireless connections between different devices.

The Association has 4,148 members, including major technology companies like Apple, Hewlett-Packard, IBM, Microsoft, Motorola, Nokia, Sony, and Toshiba. The Association conducts three categories of activities through its Bluetooth technology and trademark:

1. Development of specifications and use applications.
2. Development of testing procedures and trademark usage.
3. Promotion of consumer awareness and marketing.

The Association is comprised of three classes of members:

1. Adopter Members pay no membership fees but pay $10,000 to list a product as Bluetooth-compliant if it satisfies a qualification standard (and can access the Profile Tuning Suite ("PTS") with a one-time payment of $7,500).
2. Associate Members pay an annual $7,500 to $35,000 membership fee (depending on their total revenues) and receive free access to PTS, the right to participate in various meetings and groups, a 50% discount on the listing fee charged to Adopter Members, and the right to access research reports.
3. Promoter Members pay a one-time $350,000 fee and receive the privileges of Associate Members  and get a seat on the Association’s board of directors.

The IRS denied the Association’s request to be treated as a § 501(c)(6) business league and paid almost $1 million in corporate taxes for 2000-02.  The Association brought a tax refund claim on the ground that the IRS improperly denied its classification as a § 501(c)(6) business league.  The court granted the government’s motion for summary judgment:

To decide whether a particular entity qualifies as a “business league” under the Code, courts in this circuit have distilled the definition set forth in the regulations into a six factor test, which requires that the entity be:

1. of persons having a common business interest;
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;
6. of the same general class as a chamber of commerce or a board of trade.

… [T]he crux of the dispute is whether Plaintiff has demonstrated that it satisfies the fourth and fifth factors.

Defendant contends that the Association’s activities, in particular its development and marketing of the Bluetooth technology and brand, are of a kind ordinarily carried on for profit … The Bluetooth specification and accompanying trademark is obviously something worth paying for, and therefore the standard is the brand. In this way, the Association’s activities are more like a garden variety business than a business league or chamber of commerce. …

Plaintiff must also demonstrate that its “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,” in order to qualify for an exemption under § 501(c)(6). Defendant contends that Plaintiff’s activities do not improve business conditions for “one or more lines of business,” but rather offer “particular services” for individual members… Defendant maintains that the Association in this case devotes its activities “to the promotion of a particular product at the expense of others in the industry.” …  [I]t is clear that the Association performs “particular services for individual persons” … and therefore fails to demonstrate it is a “business league” within the meaning of the IRS Code. That is, even assuming that the Association’s activities do not place a thumb on the scale in favor of a particular brand or manufacturer within an industry, they most certainly inhere to the exclusive benefit of its members. It is undisputed that use of the Bluetooth trademark is absolutely limited to members who pay the appropriate listing fee. … [S]omething of value is offered to all comers on the condition that they pay for it, and the benefits are in proportion to the contribution. … Furthermore, that the service may have “indirect and intangible benefits” for the industry as a whole, however defined, is not sufficient. …

Conclusion.  The issue decided here is not whether the Association’s activities are socially and economically beneficial. Certainly the stature of the companies comprising the Association’s membership would suggest that its activities at the very least make good business sense. The issue is whether the Association qualifies as a “business league” under § 501(c)(6) of the tax code. For this proposition, the Court decides in the negative.