1144030: IRS denies section 501(c)(3) recognition to a breed association

Plain-English summary

The IRS finalized its determination that a membership association promoting a particular dairy breed did not qualify for exemption under IRC § 501(c)(3). The association's primary activities were breed promotion, exhibitions, publications, advertising, and member benefits, while scholarships and other charitable activities made up only a small share of its time and funds. The IRS concluded that the association did not meet the organizational or operational tests for § 501(c)(3) and that its activities served the economic and social interests of its members. Its existing exemption under IRC § 501(c)(5) remained in effect.

Ruling snapshot

• Question: Does the association qualify for exemption under IRC § 501(c)(3)?
• Outcome: Denied
• Key authorities: IRC §§ 101(9) of the Revenue Act of 1934, 170, 501(c)(3), 501(c)(5), 6104(c), 6110, and 7428; Treas. Reg. §§ 1.501(c)(3)-1(a)(1), 1.501(c)(3)-1(b)(1)(iv), and 1.501(c)(3)-1(c)(1)

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION

Number: 201144030 Contact Person:
Release Date: 11/4/2011
Identification Number:

Date: 8/10/2011
Contact Number:

Employer Identification Number:
Form Required To Be Filed:

Tax Years:
UIL: 501.03-05; 501.03-22

Dear

This is our final determination that you do not qualify for exemption from Federal income tax as
an organization described in Internal Revenue Code section 501(c)(3). Recently, we sent you a
letter in response to your application that proposed an adverse determination. The letter
explained the facts, law and rationale, and gave you 30 days to file a protest. Since we did not
receive a protest within the requisite 30 days, the proposed adverse determination is now final.

Because you do not qualify for exemption as an organization described in Code section
501(c)(3), donors may not deduct contributions to you under Code section 170. Your
exemption under section 501(c)(5) remains in effect along with your Form 990 filing
requirements.

We will make this letter and our proposed adverse determination letter available for public
inspection under Code section 6110, after deleting certain identifying information. Please read
the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that
show our proposed deletions. If you disagree with our proposed deletions, follow the
instructions in Notice 437. If you agree with our deletions, you do not need to take any further
action.

In accordance with Code section 6104(c), we will notify the appropriate State officials of our
determination by sending them a copy of this final letter and the proposed adverse letter. You
should contact your State officials if you have any questions about how this determination may
affect your State responsibilities and requirements.

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If you have any questions about this letter, please contact the person whose name and
telephone number are shown in the heading of this letter. If you have any questions about your
Federal income tax status and responsibilities, please contact IRS Customer Service at
1-800-829-1040 or the IRS Customer Service number for businesses, 1-800-829-4933. The
IRS Customer Service number for people with hearing impairments is 1-800-829-4059.

Sincerely,

Lois G Lerner
Director, Exempt Organizations

Enclosure
Notice 437
Redacted Proposed Adverse Determination Letter
Redacted Final Adverse Determination Letter

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION
Date: 8/10/2011 Contact Person:
Identification Number:
Contact Number:
FAX Number:
Employer Identification Number:
LEGEND: UIL:
B = Name of State 501.03-05
C = Name of Show 501.03-22
D = Name of Breed
F = Date
G = Name of Association
H = Name of Association
J = Name of Show
K = Name of Show

Dear

We have considered your application for recognition of exemption from federal income tax
under Internal Revenue Code section 501(a). Based on the information provided, we have
concluded that you do not qualify for exemption under Code section 501(c)(3). The basis for
our conclusion with respect to your tax-exempt status is set forth below.

Issue:

Do you qualify for exemption under section 501(c)(3) of the Code? No, for the reasons
explained below.

Facts:

You were incorporated as G under the laws of the state of B on F. You were granted exemption
under section 101(9) of the Revenue Act of 1934 in 1946. Subsequently, this was changed to
exemption under section 501(c)(5) of the Code. You filed an amendment to your Articles of
Incorporation to change your name from G to H, your current name.

Your purposes as stated in your articles of incorporation in pertinent part are to

foster, promote, and extend the use and breeding of, and dealing in, D in the state of B and
elsewhere, by your members and others, and to afford your members social, fraternal, literary
and benevolent aid and assistance in so doing.

Your Bylaws and your response regarding your activities indicate your objectives and purposes
are to provide a sound base from which to direct a program of member education, promotion,
public relations and information. In addition, you maintain general dairy industry acceptance of
registered D as a result of the breed’s genetic and economic contributions through participation
in D breed improvement programs. You encourage each member to adopt effective techniques
in advertising and merchandising and in doing so promote the breed. You also state you
support effective legislation and the enforcement of laws regarding eradication of contagious
bovine diseases. You also encourage club members to actively support their local milk
marketing agencies and effective national programs of dairy marketing and research.

You state your purpose has been in effect since 1928 and has been applied in a consistent
manner since then. You confirm your purpose and activities have never been changed. The
activity has consistently promoted the D Breed since 1928 and the entire breed is equally
promoted throughout the northeast with concentration in B State.

Your mission statement is “to promote the D breed for the economic and social benefit of junior
and senior members.”

You are a membership organization and the membership is open to any individual, firm,
partnership or corporation interested in, or engaged in the D breeding in B. Any individual under
21 years of age as of January 1, of the current year, who is interested in D may become a junior
member. Those who are over 21 years of age are referred to as senior members. Membership
fees are $50 per year. If a member has D as milking animals, they are charged one dollar per
head with a cap of $300. If someone would simply like to subscribe to the magazine, which is
rare, they can pay $25 per year. Junior members pay a discounted membership fee. In
addition you also have Associate members who pay the same fee as regular members but do
not have voting privileges. However they can register and transfer animals at member rates
without joining the association..

In exchange for the dues, a member receives a monthly subscription to your magazine. The
general public may subscribe only for the magazine without becoming a member and just pay
for the magazine. Your magazine is used to promote the breed through articles and directly
related advertising. Members receive discounted subscription to several magazines related to
the D Breed. In addition they have voting rights in the County and State organizations.
Members are eligible to get awards for breeding and also can market cattle through a number of
state sponsored sales as well make use of your private treaty connections. Members can also
advertise and sell their breed through your magazine. The advertising rate card shows the
various sizes and rates charged.

You provide scholarships and financial aid for educational purposes to junior members
attending an accredited college who pursue a career in your industry or an industry related
field. The scholarship program is publicized on your website and through 4-H leaders.

You hold several exhibitions and conventions such as an annual K exhibition, annual senior
and junior D conventions, and an annual all-breeds convention. Your exhibitions follow C’s
Code of Ethics guidelines. You promote the D breed and provide awards to breeders by
sponsoring the annual K exhibition/show and the J. The purpose of the J is to stimulate interest
in the breeding and exhibiting of outstanding registered D’s. Active Master Breeder and Retired
Master Breeder awards are given to the current or retired member who exemplifies the
standards and goals of breeding registered D’s.

The K is an event where members and an exhibitor registers his or her animals for competition,
exhibition, or sale for a fee.

Each April you host four days of all dairy breed shows and sales. Last year 840 animals were
shown and 200 were sold. You are responsible for all costs of the K and the money comes from
entry fees and sponsorships.

Your monthly magazine indicates you aid your membership in promoting and merchandising
registered D, as well as cultivating ideas and participation amongst your members. Editorial
content is focused on supporting the perpetuation of the highest breed standards and reporting
on modern dairy herd management. Regional and national shows, sales and other related D
and dairy industry events are reported. Advertising is usually provided to various customers,
farm related businesses and farmers who want to promote their goods and services. The
advertisers are all related to farm related ventures that promote the D breed.

You conduct a breeder recognition program and present awards to members who exemplify the
standards and goals of breeding registered D’s and to recognize the significant
accomplishments of young registered D breeders.

You participate in farm days, a youth show fair, a showmanship contest, an open show & dairy
day fair, a world dairy expo, a harvest sale, and a national junior show. These fairs or events
are organized by other organizations. You attend the annual state convention and the annual
national convention. Your activities include dairy day; judging; dairy bowl; club sales;
tours/exchanges; movie night; floats; local shows; spring, fall or awards banquets; and summer
picnic.

You maintain a registry of the breed for members and a breeder directory. You maintain a
website to promote the activities and interests of your members and prospective members and
breeders.

You provide scholarships to junior members attending or admitting at an accredited college who
pursue a career in the industry or in an industry related field.

You formed several committees including a membership committee, a breed improvement and
education committee, a sales committee, a publications committee, a show committee, a K
coordinating committee, milk and legislative committee, and an animal health and welfare
committee.

You state that you will support effective legislation and the enforcement of laws regarding
eradication of contagious bovine diseases.

You are also affiliated with the national organization which is exempt under section 501(c)(5) of
the Code. A portion of the dues you collect from your members are paid to the national
organization.

Based on financial data you provided for fiscal year 2007, 34% of your income comes from
advertising revenue and another 21% comes from membership fees. Another 20% comes from
show income and subscriptions to your magazine. Approximately another 10% comes from
commissions. Contributions make up a little over 1% of your total revenue. Breed Promotion,
Breed improvement, magazine publishing and other breed related expenses amount for 38% of
your total expenses and personnel and administrative expenses such as salaries, payroll and
office expenses make up 48% of your total expenses.

You spend 95% of time to promote your activities while five percent of time is spent on
charitable activities. You state 99% of funds promote your activities and one percent of funds
are used for charitable purposes such as scholarships.

Law:

Section 501(a) of the Code provides that organizations described in section 501(c) shall be
exempt under this subtitle.

Section 501(c)(3) of the Code describes corporations organized and operated exclusively for
charitable purposes no part of the net earnings of which inures to the benefit of any private
shareholder or individual.

Section 1.501(c)(3)-1(a)(1) of the Income Tax Regulations provides that, in order for an
organization to be exempt under section 501(c)(3) of the Code, it must be both organized and
operated exclusively for one or more of the purposes specified in such section. If an
organization fails to meet either the organizational or operational test, it is not exempt.

Section 1.501(c)(3)—1(b)(1)(iv) of the regulations provides that in no case shall an organization
be considered to be organized exclusively for one, or more exempt purposes, if, by the terms of
its articles, the purposes for which such organization is created are broader than the purposes
specified in section 501(c)(3).

Section 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will be regarded as
“operated exclusively” for one or more exempt purposes only if it engages primarily in activities
which accomplish one or more such exempt purposes specified in section 501(c)(3). An
organization will not be so regarded if more than an insubstantial part of its activities is not in
furtherance of an exempt purpose.

In Revenue Ruling 66-179 1966-1 C.B. 139 an organization that was incorporated as a
nonprofit organization for the purposes of instructing the public on horticultural subjects and
stimulating interest in the beautification of the geographic area qualified for exemption under

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section 501(c)(3). In furtherance of these purposes, the organization (1) maintains and
operates a free library of materials on horticulture and allied subjects, (2) instructs the public on
correct gardening procedures and conservation of trees and plants by means of radio,
television, and lecture programs, (3) holds public flower shows of a noncommercial nature at
which new varieties of plants and flowers are exhibited, (4) makes awards to children for
achievements in gardening, (5) encourages roadside beautification and civic planting, and (6)
makes awards for civic achievement in conservation and horticulture.

In Better Business Bureau v. United States, 326 U.S. 278 (1945), the court held that an
organization is not operated exclusively for charitable purposes, and thus will not qualify for
exemption under section 501(c)(3), if it has a single non-charitable purpose that is substantial in
nature. This is true regardless of the number or importance of the organization's charitable
purposes.

In First Libertarian Church v. Commissioner of Internal Revenue, 74 T.C. 396 (1980), the court
stated that the church failed to show that it successfully segregated the clearly social and
political aspects of its supper club meetings and its publication from its purpose to further the
doctrine of ethical egoism. As the church operated for social and political purposes to more
than an insubstantial degree, it fails to qualify for exemption under section 501(c)(3) of the
Code. The court stated that an organization will not qualify for exemption if a non-exempt
activity is more than an insubstantial part of its overall activities or if an activity has more than an
insubstantial non-exempt purpose. The court explained that “clearly the regulations and cases
contemplate that a single activity may be carried on for more than one purpose. If a substantial
secondary purpose is not an exempt one, qualification under section 501(c)(3) will be denied.”

In St. Louis Science Fiction Limited v. Commissioner, 49 TCM 1126, 1985-162, the Tax Court
held that a science fiction society failed to qualify for tax-exempt status under section 501(c)(3)
of the Code. Although many of the organization’s functions at its annual conventions (the
organization’s principal activity) were educational, its overall agenda was not exclusively
educational. A substantial portion of convention affairs were social and recreational in nature.

In Manning Association v. Commissioner of Internal Revenue, 93 T.C. 596 (1989) the court
found that an association that was operated for exempt educational activities, based largely
upon a historic Manning homestead and historic artifacts, was not exempt under section
501(c)(3) of the Code because the Association's operations were also conducted for the benefit
of members of the Manning family, a nonexempt purpose that was found to be substantial in
nature. The court stated that “even in the presence of some activities that were truly motivated
by exempt purposes, the concomitant presence of substantial non-exempt purposes destroy[ed]
the exemption.”

Application of Law:

You are not described in section 501(c)(3) of the Code because you are not organized and
operated exclusively for charitable or educational purposes.

Organizational Test

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Your Articles of Incorporation do not contain the requisite purpose and dissolution provisions of
section 501(c)(3) of the Code. Your Articles of Incorporation contain purposes that are broader
than the purposes specified in section 501(c)(3) and section 1.501(c)(3)-1(b)(1)(iv) of the
regulations. Your purposes are to foster, promote, and extend the use and breeding of, and
dealing in, D in the state of B and elsewhere

Operational Test

Although you do conduct some charitable and educational activities, these activities constitute a
very minimal percentage of your operations. Your exclusive activity is the promotion and
improvement of the Breed D for the economic and social benefit of your members. Your
members are all registered Breed D owners and you encourage them to adopt effective
techniques in advertising and merchandising and promoting the breed. Maintaining general
dairy industry acceptance of registered D, encouraging and promoting the breed, and
supporting local milk marketing agencies are not activities that are described in section
501(c)(3) of the Code Therefore, you are not described on section 1.501(c)(3)-(1)(c)(1) of the
Income Tax Regulations.

You are not like the organization in Revenue Ruling 66-179 that qualified under 501(c)(3). Your
exclusive purpose is the promotion of the Breed D. Your charitable or educational activities are
insubstantial in nature.

Like the organization in Better Business Bureau v. United States, supra, you have a substantial
non-exempt purpose of promoting Breed D

You are like the organization in First Libertarian Church v. Commissioner of Internal Revenue,
supra, and St. Louis Science Fiction Limited v. Commissioner, supra, because your exclusive
purpose is the promotion, exhibition, and marketing of breed D, and not exclusively charitable
and educational. In fact, the exhibitions and conventions are for the promotion of the breed and
venues for members to sell their herd. Your magazine provides only information about the
breed of animal and advertisement of members’ businesses. Your website maintains
information about the breeder directory and the registry of the breed.

By allowing your members to advertise and sell their livestock on your magazine, you are also
operating for the private benefit of your members, and therefore similar to the organization in
Manning Association v. Commissioner of Internal Revenue, supra.

Applicant’s Position:

You indicate you are already a 501(c)(5) organization. You are not interested in becoming
anything other than a 501(c)(3) entity for B state purposes. You state B State will not give you
any Sales Tax Relief unless you are a 501(c)(3) organization. Because of the education and
nature of your organization, you feel you have grounds to be considered under 501(c)(3).

You emphasize your purpose has been in effect since 1928 and has been applied in a
consistent manner since then. You also provide that 95 percent of time and other resources of
your organization are devoted to the promotion of D breed and five percent of the time involves

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charitable activities or one percent of the funds are provided to charitable purposes such as a
scholarship program.

You provide that most of your purpose centers on educating your members and the general
public on the D breed by offering information about rearing, feeding and management of
livestock or similar pursuits. You further claim that you promote and educate the general public
through your magazine efforts as the magazine is solely pertaining to the D breed.

Service Response to Applicant’s Position:

Regardless of your claims that your magazine and activities further educational purposes and
your scholarship program furthers charitable purpose of section 501(c)(3), the facts show that
only an insubstantial part of your activities are educational or charitable. Your exhibitions and
conventions are for the promotion of a particular breed namely Breed D. Your magazine
provides an opportunity for your members to advertise and sell their registered D’s. These
activities and purposes are not those that are described in section 501(c)(3) of the Code.

Your magazine was established in 1946 to assist your members in promoting and
merchandising Registered D Breeds, and supporting the perpetuation of highest breed
standards.

You are a membership organization made up of members who own the D Breed for their
economic and social benefit. Your activities are exclusively focused on the breeding, showing,
and sales of the D Breed and each year you conduct breed shows at which members
registered D are shown and sold.

Conclusion:

Organizational

Base on the above, we find that you are not organized and operated for exempt purposes within
the meaning of section 501(c)(3) of the Code. Specifically, you do not meet the organizational
test for exemption because your organizing document does not contain the necessary 501(c)(3)
language.

Operational

You do not meet the operational test for exemption since your activities/purpose is the
promoting, showing and sale of the D breed on behalf of your members, majority of whom are
owners of the D breed. Accordingly we conclude you do not qualify for exemption under
section 501(c)(3) of the Code.

You have the right to file a protest if you believe this determination is incorrect. To protest, you
must submit a statement of your views and fully explain your reasoning. You must submit the
statement, signed by one of your officers, within 30 days from the date of this letter. We will
consider your statement and decide if the information affects our determination. If your

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statement does not provide a basis to reconsider our determination, we will forward your case to
our Appeals Office. You can find more information about the role of the Appeals Office in
Publication 892, Exempt Organization Appeal Procedures for Unagreed Issues.

Types of information that should be included in your appeal can be found on page 2 of
Publication 892, under the heading “Regional Office Appeal”. The statement of facts (item 4)
must be accompanied by the following declaration:

“Under penalties of perjury, I declare that I have examined the statement of facts
presented in this appeal and in any accompanying schedules and statements and, to the
best of my knowledge and belief, they are true, correct, and complete.”

The declaration must be signed by an officer or trustee of the organization who has personal
knowledge of the facts.

Your appeal will be considered incomplete without this statement.

If an organization’s representative submits the appeal, a substitute declaration must be included
stating that the representative prepared the appeal and accompanying documents; and whether
the representative knows personally that the statements of facts contained in the appeal and
accompanying documents are true and correct.

An attorney, certified public accountant, or an individual enrolled to practice before the Internal
Revenue Service may represent you during the appeal process. If you want representation
during the appeal process, you must file a proper power of attorney, Form 2848, Power of
Attorney and Declaration of Representative, if you have not already done so. You can find more
information about representation in Publication 947, Practice Before the IRS and Power of
Attorney. All forms and publications mentioned in this letter can be found at www.irs.gov, Forms
and Publications.

If you do not file a protest within 30 days, you will not be able to file a suit for declaratory
judgment in court because the Internal Revenue Service (IRS) will consider the failure to appeal
as a failure to exhaust available administrative remedies. Code section 7428(b)(2) provides, in
part, that a declaratory judgment or decree shall not be issued in any proceeding unless the Tax
Court, the United States Court of Federal Claims, or the District Court of the United States for
the District of Columbia determines that the organization involved has exhausted all of the
administrative remedies available to it within the IRS.

If you do not intend to protest this determination, you do not need to take any further action. If
we do not hear from you within 30 days, we will issue a final adverse determination letter. That
letter will provide information about filing tax returns and other matters.

Please send your protest statement, Form 2848, and any supporting documents to the
applicable address:

Mail to: Deliver to:
Internal Revenue Service Internal Revenue Service
EO Determinations Quality Assurance EO Determinations Quality Assurance
Room 7-008 550 Main Street, Room 7-008
P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201
You may fax your statement using the fax number shown in the heading of this letter. If you fax
your statement, please call the person identified in the heading of this letter to confirm that he or
she received your fax.

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

Sincerely,

Lois G Lerner
Director, Exempt Organizations

Enclosure, Publication 892