Determination 1040036: IRS revokes exemption from a social and recreational organization

Plain-English summary

The IRS revoked an organization's federal income tax exemption under IRC § 501(c)(3), effective August 9, 20XX. The organization had been formed to promote minority family travel and camping activities, and its articles described social exchange, recreational-vehicle discussions, and communication among owners as its purposes. The IRS found that its primary activities were social and recreational, even though members volunteered for charitable organizations and the organization made donations. Contributions were no longer deductible under IRC § 170, and the organization was required to file Form 1120.

Ruling snapshot

• Question: Did the organization continue to meet the requirements for exemption under IRC § 501(c)(3)?
• Outcome: Revocation
• Key authorities: IRC §§ 170, 501(c)(3), 502, 503, 6104(c), and 7428; Treas. Reg. §§ 1.501(c)(3)-1(a)(1), 1.501(c)(3)-1(c)(1), and 1.501(c)(3)-1(d)(ii)

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TE/GE – EO Mandatory Review
1100 Commerce Street, MC 4920-DAL

Dallas, TX 75242 501.03-00

GOVERNMENT ENTITIES
DIVISION

Employer Identification Number:

Date: June 24, 2010

Number: 201040036
Release Date: 10/8/2010

Person to Contact:
Identification Number:
Contact Telephone Number:
In Reply Refer To:

TE/GE Review Staff

LEGEND
ORG = Organization name
XX = Date Address = address

ORG
ADDRESS

CERTIFIED MAIL – Return receipt requested

Dear

This is a Final Adverse Determination revoking your exempt status under section
501(c)(3) of the Internal Revenue Code.

Our adverse determination was made for the following reasons:

ORG has failed to provide evidence that it is currently operated exclusively for an
exempt purpose within the meaning of Internal Revenue Code section 501(c)(3). It is
not a charitable organization within the meaning of Treasury Regulations 1.501(c)(3)-
1(d) in that you failed to establish that you were operated exclusively for an exempt
purpose. We determined that your activities fail to accomplish one or more of the
exempt purposes specified in IRC 501(c)(3), as they are primarily social and
recreational in nature; therefore, you do not operate exclusively for exempt purposes.

Based upon the above, we are revoking your organization’s exemption from Federal
income tax under section 501(c)(3) of the Internal Revenue Code effective August 9,
20XX.

Contributions to your organization are no longer deductible under section 170 of the
Internal Revenue Code.

You are required to file Federal income tax return Form 1120. These returns should be
filed with the appropriate Internal Revenue Campus for the year ending December 31,
20XX and for all years thereafter.

• 2 -

Processing of income tax returns and assessment of any taxes due will not be delayed
should a petition for declaratory judgment be filed under section 7428 of the Internal
Revenue Code.

If you decide to contest this determination in court, you must initiate a suit for
declaratory judgment in the United States Tax Court, the United States Claim Court or
the District Court of the United States for the District of Columbia before the 91st day
after the date this determination was mailed to you. Contact the clerk of the appropriate
court for the rules for initiating suits for declaratory judgment.

You also have the right to contact the office of the Taxpayer Advocate. However, you
should first contact the person whose name and telephone number are shown above
since this person can access your tax information and can help you get answers. You
can call 1-877-777-4778 and ask for Taxpayer Advocate assistance. Or you can
contact the Taxpayer Advocate from the site where the tax exempt status was
determined by calling (404) 338-8099, faxing (404) 338-8096, or writing to: Internal
Revenue Service, Taxpayer Advocates Office, 401 W Peachtree Street NW, Summit
Bldg., Room 510, Stop 202-D, Atlanta, GA 30308.

Taxpayer Advocate assistance cannot be used as a substitute for established IRS
procedures, formal appeals process, etc. The Taxpayer Advocate is not able to reverse
legal or technically correct tax determinations, nor extend the time fixed by law that you
have to file a petition in the United States Tax Court. The Taxpayer Advocate can,
however, see that a tax matter that may not have been resolved through normal
channels gets prompt and proper handling.

We will notify the appropriate State Officials of this action, as required by section
6104(c) of the Internal Revenue Code.

If you have any questions, please contact the person whose name and telephone
number are shown in the heading of this letter.

Sincerely,

Nanette M Downing
Director, EO Examinations

DEPARTMENT OF THE TREASURY
Internal Revenue Service
TE/GE, Exempt Organizations
401 W. Peachtree St., Stop 504-D
Atlanta, GA 30308

June 25, 2009

Taxpayer Identification Number:

ORG
ADDRESS Form:

Tax Year(s) Ended:
Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

CERTIFIED MAIL – RETURN RECEIPT REQUESTED

Dear ,

We have enclosed a copy of our report of examination explaining why we believe an
adjustment of your organization's exempt status is necessary.

If you do not agree with our position you may appeal your case. The enclosed
Publication 3498, The Examination Process, explains how to appeal an Internal
Revenue Service (IRS) decision. Publication 3498 also includes information on your
rights as a taxpayer and the IRS collection process.

If you request a conference, we will forward your written statement of protest to the
Appeals Office and they will contact you. For your convenience, an envelope is
enclosed.

If you and Appeals do not agree on some or all of the issues after your Appeals
conference, or if you do not request an Appeals conference, you may file suit in United
States Tax Court, the United States Court of Federal Claims, or United States District
Court, after satisfying procedural and jurisdictional requirements as described in
Publication 3498.

Letter 3610 (04-2002)
Catalog Number 34801V

You may also request that we refer this matter for technical advice as explained in
Publication 892, Exempt Organization Appeal Procedures for Unagreed Issues. If a
determination letter is issued to you based on technical advice, no further administrative
appeal is available to you within the IRS on the issue that was the subject of the
technical advice.

If you accept our findings, please sign and return the enclosed Form 6018, Consent to
Proposed Adverse Action. We will then send you a final letter modifying or revoking
exempt status. If we do not hear from you within 30 days from the date of this letter, we
will process your case on the basis of the recommendations shown in the report of
examination and this letter will become final. In that event, you will be required to file
Federal income tax returns for the tax period(s) shown above. File these returns with
the Ogden Service Center within 60 days from the date of this letter, unless a request
for an extension of time is granted. File returns for later tax years with the appropriate
service center indicated in the instructions for those returns.

You have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate
assistance is not a substitute for established IRS procedures, such as the formal
appeals process. The Taxpayer Advocate cannot reverse a legally correct tax
determination, or extend the time fixed by law that you have to file a petition in a United
States court. The Taxpayer Advocate can, however, see that a tax matter that may not
have been resolved through normal channels gets prompt and proper handling. You
may call toll-free 1-877-777-4778 and ask for Taxpayer Advocate Assistance. If you
prefer, you may contact your local Taxpayer Advocate at:

If you have any questions, please call the contact person at the telephone number
shown in the heading of this letter. If you write, please provide a telephone number and
the most convenient time to call if we need to contact you.

Letter 3610 (04-2002)
Catalog Number 34801V

Thank you for your cooperation.

Sincerely,

Beverly Martin
Revenue Agent, Exempt Organizations

Enclosures:
Publication 892
Publication 3498
Form 6018

Report of Examination
Envelope

Letter 3610 (04-2002)
Catalog Number 34801V

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX
LEGEND
ORG = Organization name XX = Date State

This report supersedes report issued on 6/16/20XX.

Issue:
Whether ORG meets the requirements of Section 501(c)(3) of the Code?

Facts:

In July, 20XX, ORG (hereinafter “ORG”) applied for recognition as a tax-exempt
organization under section 501(c)(3) of the Code. On December 1, 20XX, based on the
information that ORG provided in its application for exemption and on the assumption that
ORG would operate in the manner represented in its application, ORG was recognized as a
tax-exempt organization as described in section 501(c)(3) of the Code.

An examination was conducted of ORG for tax year ended December 31, 20XX. A review of
ORG’s activities revealed that the organization was formed to promote minority family travel
and opportunities for camping activities.

ORG’s Articles of Incorporation, Article III, #1 describes its purposes as follows:

a. To provide an opportunity for social interchange among ORG owners;

b. To provide a forum for members to exchange experiences, problems and solutions as
they pertain to ORG recreational vehicles, and

c. To promote communication among owners of ORG recreational vehicles and among
these owners.

Article III, #3 further provides that ORG was formed as a regional independent group of ORG
recreational vehicle owners.

ORG provides opportunities, on a monthly basis, for recreational vehicle owners to meet,
camp and socialize. Members of ORG also volunteer their time to the Sickle Cell Foundation
of STATE and the National Multiple Sclerosis Society. ORG also made donations to each of
these organizations in the amount of $ each in 20XX.

ORG is primarily supported by membership dues. In 20XX, ORG’s income from membership
dues totaled $ or 84% of its total support. ORG received donations in the amount of $ (16%).

Law:

Section 501(c)(3) provides that corporations, and any community chest, fund, or foundation,
organized and operated exclusively for religious, charitable, scientific, testing for public safety,
literary, or education purposes, or to foster national or international amateur sports competition

Form 886-A(rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -1-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX

(but only if no part of its activities involve the provisions of athletic facilities or equipment), or
for the prevention of cruelty to children or animals, no part of the net earnings of which inures to
the benefit of any private shareholder or individual, no substantial part of the activities of which
is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise
provided in subsection (h)), and which does not participate in, or intervene in (including the
publishing or distributing of statements), any political campaign on behalf of ( or in opposition
to) any candidate for public office, shall be exempt from taxation unless such exemption is
denied under Section 502 or 503.

Section 1.501(c)(3)-1(a)(1) of the regulations provides that in order to be exempt as an
organization described in section 501(c)(3) of the Code, the organization must be one that is
both organized and operated exclusively for one or more of the purposes specified in that section.

Section 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will not be regarded
as operated exclusively for exempt purposes if more than an insubstantial part of its activities is
not in furtherance of exempt purposes.

Section 1.501(c)(3)-1(d)(ii) of the regulations provides that an organization is not organized or
operated exclusively for one or more exempt purposes unless it serves a public rather than a
private interest. Thus, it is necessary for an organization to establish that it is not organized or
operated for the benefit of private interests such as designated individuals, the creator or his
family, shareholders of the organization, or persons controlled, directly or indirectly, by such
private interests.

The presence of a single substantial nonexempt purpose can destroy the exemption regardless of
the number or importance of exempt purposes. Better Bus. Bureau v. United States, 326 U.S.
279, 283, 90 L. Ed. 67, 66 S. Ct. 112 (1945); Am. Campaign Acad. v. Commissioner, 92 T.C.
1053, 1065 (1989); see also Old Dominion Box Co., Inc. v. United States, 477 F.2d 340 (4th Cir.
1973), cert. denied, 413 U.S. 910 (1973) (“operating for the benefit of private parties who are not
members of a charitable class constitutes a substantial nonexempt purpose”). When an
organization operates for the benefit of private interests, such as designated individuals, the
creator or his family, or persons directly or indirectly controlled by such private interests, the
organization by definition does not operate exclusively for exempt purposes. Am. Campaign
Acad. v. Commissioner, supra at 1065-1066.

Conclusion:

In order to qualify as a charitable organization under section 501(c)(3) of the Code, an
organization must be both organized and operated to achieve a purpose that is described under
that Code section. The facts show that in 20XX, ORG’s activities were, primarily social and
recreational in nature. Although members of ORG did volunteer and participate in assisting
other charitable organizations to achieve their goals, this was not their primary purpose. ORG is

Form 886A rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -2-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX

primarily a social/recreational club in that its major function is to provide opportunities for its
members to meet, socialize and camp out.

Government’s Position
ORG is not exempt under Section 501(c)(3) of the Code. ORG does not operate exclusively for
exempt purposes and their primary purpose is to facilitate and promote camping activities among
minorities. Therefore, ORG’s exempt status should be revoked, effective August 9, 20XX. In
view of this fact, it follows that contributions to ORG are not deductible under Section 170(a) of
the Code.

Taxpayer’s Position:
ORG’s position as it relates to the facts, law and conclusion as stated in this report are unknown.
ORG will be given 30 days to review this report and provide a response.

Form 886-A (rev.4-68) Department of the Treasury - Internal Revenue Service

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