Decoding the ICC pt. 2
Last time we saw that, contrary to its public image as an association of builders that write codes, train members, and sell thick books, the main business of the ICC ($65M of $120M of revenue in 20241) comes from “conformity assessments” — selling product testing and certification against laws the ICC itself writes. That’s a nice little loop they have! Write the codes, do the compliance, and with a tax exemption cherry on top.
This bothered me because there are many private labs that do testing against various standards. Why should the public subsidize the ICC against private labs with tax exemption? I wanted to understand the legal justification for this arrangement, so I dug into the ICC’s 501(c)(6) designation.
What is a 501(c)(6)?
You may be familiar with 501(c)(3) and 501(c)(4), which are respectively charitable organizations (barred from advocacy) and civic organizations (barred from candidate advocacy but not issue-based advocacy). The origin of the 501(c)(6) designation is that the US Chamber of Commerce wanted tax-exemption, arguing that since civic advocacy organizations get 501(c)(4) status, commercial advocacy organizations should get one too.2 So Congress created the 501(c)(6) exemption for “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.”3 The IRS in its training docs4 identifies 7 required characteristics but the last three stand out:
Its activities must 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
Its primary activity does not consist of performing particular services for individual persons
Its purpose must not be to engage in a regular business of a kind ordinarily carried on for profit, even if the business is operated on a cooperative basis or produces only sufficient income to be self-sustaining
Your antennae may have stood up as you read these as mine did. If more than half of the ICC’s revenue comes from performing conformity assessments, then isn’t its primary activity “performing particular services for individual persons” and isn’t standards testing “a regular business of a kind ordinarily carried on for profit”?
The private letter ruling
Further digging turned up a private letter ruling from the IRS, which lays out what is likely the IRS’s reasoning behind granting 501(c)(6) status to organizations like the ICC.5 In a PLR process, you write a letter to the IRS explaining your situation and asking them to clarify how you would be taxed. Then, based on the facts presented, they give you a ruling applicable only to you. The ruling is made public but with the organization’s identifying details scrubbed.
The letter describes a fact pattern eerily similar to the ICC’s situation6 and worth quoting at length.
You are a subsidiary of PARENT, which is also exempt under 501(c)(6). PARENT’S main purpose is the creation and maintenance of quality standards applicable to entire industries. PARENT’S members include manufacturing companies that make products for which your standard apply, individual practitioners in the field, and government regulatory officials. PARENT’S standards … are available to the entire industry for which they pertain. PARENT also works with state and local officials concerning the adoption of its standards into law.
You were formed to conduct the testing and listing activities of PARENT. Your main activities include a certification process whereby you review laboratory tests of products wishing to be certified, physically inspect the products and physically inspect the plants where the products are made, among other things. The certification indicates that the product tested meets the standards you created for the industry… Your certification processes allow regulatory officials in the industry to know that these products meet such standards without having to perform on-site testing that may otherwise be necessary to ensure public health and safety.
Sound familiar? The letter describes a corporate structure in which standards setting organization has a subsidiary that does the certifications for its standards. The ICC matches this structure disclosing that it conducts its conformity assessment services through two subsidiaries: ICC Evaluation Services, LLC (ICC-ES) and ICC NTA, LLC. ICC-ES’s primary activity is to “evaluate building products and methods for code compliance“ from which it derived $43M in income in 2024. ICC NTA’s is “building inspections, product testing, plan review, and engineering” from which it derived $26M in income in 2024. Together, this $69M in revenue matches the $65M in conformity assessment revenue of the parent company.
Justification for exemption
The letter agrees with our antennae, saying that the testing activities is a particular service for individual persons and a regular business that is ordinarily carried on for profit. However, it points to other language in the statute which state that it’s ok for 501(c)(6) organizations to engage in such business as long as it furthers the purpose for which it is exempt. The IRS now describes how it thinks the applicant furthers its exempt purpose:
Your purpose is to further the quality and standards found in your industry and your testing and certification activities create confidence in the products of your industry… Your testing and certification, while for individual manufacturers, benefit the entire industry by ensuring a greater consumer experience with the products as well as aiding regulators in maintaining the applicable safety standards. The benefit of your testing then goes to your members and non-members in their capacity as members and not to just the individual manufacturers being tested since the reputation of the industry is raised with the higher standards of more manufacturers.
If challenged, this is likely the language the ICC would use to defend itself. And it’s interesting that this is the IRS’s words, not the ICC’s.
Key difference in situation
However, the IRS ruling relies on one key factor that is different in the ICC’s case, which I want to document.
The ruling relies on the non-exclusivity of the parent organization’s standard in multiple places. “Certification of meeting any set of standards is not required for the sale of a product in fields that Parent creates standards” is not true for the ICC since the local governments use the ICC’s codes to ban non-conforming buildings. “The fact that your lab provides testing for other organization’s standards within the same fields indicates a desire to support the quality of the industry as a whole rather than merely furthering the commercial viability of your own standard.” This is also not true as the ICC’s codes are the only game in town.
The IRS is careful to check this non-exclusivity box due to a 2010 ruling Bluetooth SIG, Inc. v. US7 in which a Bluetooth trade group was denied 501(c)(6) designation because it was privileging its own standard over competitor standards.
Moreover, in its own recent history, the ICC has more weaknesses with respect to non-exclusivity under Bluetooth SIG. It has attempted to block out competitors providing alternate uses of its codes, such as when it sued Upcodes to restrict public access. Having lost that fight, it seeks to receive a copyright on its codes via the PRO Codes Act, the end result of which would be the ICC being able to charge a tax on anyone using the codes for commercial purposes, perhaps including competitor laboratories, consultants, or emerging use cases with AI. Thus, an attack based on Bluetooth SIG may be strengthened if the ICC gets its wish: Can it really be said that the ICC is trying to advance the common interest of the building industry if it restricts the wide use of its codes? Or is it a testing and certification monopoly with a code-writing and membership training arm that acts as a loss leader?
An aggressive tax examiner or someone with standing could attack the ICC’s 501(c)(6) status based on its exclusive dominance of the US market citing Bluetooth SIG. This is a worthwhile question because the 501(c)(6) status is a cornerstone of the ICC, giving it an aura as a non-profit acting in the public interest. We should hold it accountable to live up to that image or else take it away.
Takeaways
Clearly, I am uncomfortable with the ICC’s position as an organization that writes laws on behalf of industry lobby groups and building inspectors and then turns around and gets paid to do the certifications that its laws require. This appears to be a fundamentally conflicting set of roles that should be held more accountable to its outcomes. To my surprise, tax law turned out to be a lens through which to adjudicate this tension.
More broadly, my goal with this series is to open the box that is the ICC and see what is inside. Some threads will be more thrilling than tax law. But regardless, I hope to educate others interested in the workings of this fascinating organization.
Next time…
We looked at the money that comes in and how its taxed. Next we’ll look at where the money goes. In Part 3, we look at executive compensation, and track money movements on ICC's 2024 Form 990, including a mysterious transfer of intangible assets out of the nonprofit.