IRS denies exemption to a fee-based fishing and retreat camp

Plain-English summary

The IRS denied an organization's application for exemption under IRC § 501(c)(3). The organization operated a fishing camp and retreat center that charged fees for lodging, meals, fishing, outdoor activities, cooking classes, and retreats. The IRS found that recreation was a substantial purpose, religious activities occupied only a small part of the schedule, and construction spending on land owned by insiders increased the value of that land. The IRS concluded that the organization operated commercially, served substantial nonexempt purposes, and allowed net earnings to inure to insiders.

Ruling snapshot

• Question: Did a fee-based fishing camp and retreat center qualify for exemption under IRC § 501(c)(3) when recreation was a substantial activity and improvements were made to insiders' property?
• Outcome: Denied.
• Key authorities: IRC §§ 501(a), 501(c)(3), 170, 6110, 6104(c), and 7428; Treas. Reg. §§ 1.501(c)(3)-1(a)(1), 1.501(c)(3)-1(c)(1), 1.501(c)(3)-1(c)(2), and 1.501(c)(3)-1(d)(2); Rev. Rul. 77-366; Rev. Rul. 77-430; Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945); Airlie Foundation v. Commissioner, 283 F. Supp. 2d 58 (D.D.C 2003)

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION

Number: 201222044 Contact Person:
Release Date: 6/1/2012
Identification Number:

Date: March 9, 2012
Contact Number:

Employer Identification Number:
Form Required To Be Filed:

Tax Years:
UIL: 501.35-00; 501.03-30

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.

Since 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. You
must file federal income tax returns on the form and for the years listed above within 30
days of this letter, unless you request an extension of time to file.

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, you should follow the instructions in Notice 437. If you agree with
our deletions, you do not need to take any further action.

Letter 4038(CG) (11-2005)
Catalog Number 4763258

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.

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 Lerner
Director, Exempt Organizations

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

Letter 4038(CG) (11-2005)
Catalog Number 47632S

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

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION

Date: January 20, 2012 Contact Person:
Identification Number:
Contact Number:
FAX Number:
Employer Identification Number:

Legend: UIL:

B = state 501.35-00

C = date 501.03-30

D = individual

F = individual

G = business

H = lodge

J = program

K = state

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 is set forth below.

Issues

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

Facts

More than 20 years ago you began “hosting a group of men on a father and son guided
fishing adventure in tents to (state) K.” Your Executive Director, D, and another
director, F, purchased two acres of land for the purpose of establishing a “ministry for
men on the land.” “The land was bought and developed slowly every summer, with a
Lodge in mind.” D initially operated the “fish camp” as a small business offering week

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long fishing adventures in K. Approximately 16 years after the first father and son fishing
adventure “the non profit concept took place” and you were incorporated in the State of

B on date C. Your name includes the surname of D. Your application for exemption was
filed more than eight years after you incorporated.

Your Articles of Incorporation state, in part, that you are organized exclusively for
charitable purposes within the meaning of section 501(c)(3) of the Internal Revenue
Code of 1986 (“Code”), including, for such purposes, establishing and operating a
fishing camp and retreat center for Christian individuals and church groups as a means
for them to pause from the daily routine, to develop discipleship and mentoring
relationships with other Christian believers and to participate in programs that integrate
outdoor activities with Christian living.

Your governing body consists of nine directors, including D, his son and one of D’s
employees from D’s outside business.

You operate a fishing camp and retreat center during the months of June, July and
August. This includes a “volunteer camp” where individuals help build a new lodge and
maintain the camp. The individuals are asked to “donate” a dollar amount per night to
offset food and transportation costs. Your website states this is a “work emphasized
week with time still found to fish.” You also have a week long camp where men mentor
a fatherless young man were the cost is approximately $2,400 per person. You
describe your couples cooking class as “an educational week long retreat just for
couples that love to cook & eat.” The cost for the couples cooking class is almost
$3,000 per couple “for a full and fun week at the Lodge.” It includes “sightseeing &
shopping time and plenty of R&R.” You also offer private camp retreats for Christian
leaders and ministry groups.

All of your programs focus on outdoor activities. An example of a typical week is as
follows:

Sunday:

Guest arrives in K. You pick them up and give a tour while driving to the lodge. The
guests check in and enjoy a drink or appetizer on the patio before they are taken to their
room. Dinner is served about an hour after arrival. After dinner, an orientation about
your Offerings is given and the staff is introduced. At 8:30pm, a camp fire is offered,
where treats and hot beverages are provided.

Monday through Friday (daily routine):

Most meals are served at the lodge. Between meals the guests partake in their chosen
outdoor excursions. At night, after a campfire, guests are invited to make an ice cream
run to the general store and/or enjoy a road trip to view the area and look for local
wildlife (such as moose spotting).

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Saturday:
Brunch is served. Guests pack up, check out and are transported to the airport.

An example of a typical day is as follows:

8:30am- Breakfast at the lodge

9:00am- Morning devotional — lead by one of your directors

9:30am- Prepare lunches for the day

10:00am — 6:00pm- Construction project and fishing or outdoor adventure: the
construction project would consist of a variety of different outdoor activities, such as
how to build a fire, cut down a tree, basic carpentry skills and similar activities. The
fishing or outdoor excursions are chosen by the guests themselves.

5:30pm- Appetizers are served.

6:30pm- Clean up and prepare for dinner: Campers will be taught how to gut, cut and
cook fish.

7:00pm- Dinner

8:30pm- Campfire and message from camp pastor

10:00pm- Free time: Nature hikes, trips into town or any leisurely activity chosen by the
camper.

Weekly, the participant can book fishing and touring adventures, but some guests
purchase a pre-planned week of adventures. You provide a listing of the available
excursions for which fees are charged. Fees range from $ 75 to $ 400. However, there
are also free excursions such as touring the historical sights of the local village or just
relaxing at the lodge.

D, D’s son and F continue to own the land where you operate. You have a verbal
agreement leasing the land for 99 years at $1 per year. The written Land Lease
agreement you submitted was not executed. It stated in pertinent part: “This letter
serves as our agreement to allow [you] legal authority to build its [your] attached master
plan on stated two acre property owned/managed by D for the purpose of operating its
[your] ministry. The term of this lease is for 99 years from the above date at a rate of
$1.00 per year...Owner shall be responsible for property tax...for 50% usage of original
cabin.. until you build the master lodge in its place. You are responsible for all taxes,
utilities, wells, plans, permits, development, construction, and insurance when it [lodge]
is completed and insurable. Your map of the property shows a new lodge with six
bedrooms and five bathrooms, an original lodge with one bedroom, living room and
kitchen, a bath house with showers and stalls, a bunkhouse for up to four beds and
plans to construct another lodge and a shop/education center.

You advertise your camp and lodge through your website, DVD’s and brochures. The
materials use the terms such as fun, adventure and relaxing to describe your activities.
According to your website, the week camp includes ground transportation (once in K),

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four ‘world class fishing adventures’, six nights lodging, meals, packaging and
processing of the participants’ fishing catch, camp fire speakers throughout the week
and all fishing gear required. The participant has to supply their own transportation to K,
fishing licensing, a few of the off-site meal costs, tips and gratuities and personal items
(like clothes and shoes). Participants are expected to bear their own costs and pay fees
to attend each of your programs.

As you indicate in past meeting minutes regarding the purpose and vision of the fish
camp you aim to find the unique experience, envisioning a full restaurant, spa, fire ring
and set up for people who are going to fish. Stating, “Its all about marketing and
product”. Additional meeting minutes demonstrate what you would need to do to take
the current fish camp from “one star up to two star services”. Lodging, schedules for
guests to stick to, a tour and overview for guests including fishing holes, the camp,
beach and options for their stay such as excursions, uniforms to be worn by staff, better
food service, picture CDs for guests.

A registration form submitted as an exhibit shows a registered and paid participant that
a one week stay with you includes airport transfers, ground transportation, four amazing
world class fishing adventures, six nights lodging, meals all week, processing of any
catches, a camp fire speaker and all fishing gear. The participant is responsible for air
fare, fishing licenses, meals while travelling, tips, personal gear and personal items to
pack provided on a list.

Your income consists of fees charged to volunteers and participants for stays at your
camp, cooking classes and retreats. The fees range from just under $50 per night to
almost $3000 for a week. You have received some donations from related parties.
Expenses include costs of operating and maintaining the camp as well as expenses for
fishing charters, fishing supplies and construction. Minutes of meetings also indicate
you operate with paid staff, however, your financial statements did not show expenses
for wages. Over $19000.00 has been spent in construction costs for buildings built on
the retreat property owned by D and F to be used by you in your operations.

Law

Section 501(c)(3) of the Code provides, in part, for the exemption from federal income
tax to organizations organized and operated exclusively for charitable, religious or
educational purposes, where no part of the net earnings 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 to be
exempt as an organization described in section 501(c)(3), an organization 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 test or the operational

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test, it is not exempt.

Section 1.501(c)(3)-1(c)(1) of the regulations states 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 of such exempt purposes specified
in section 501(c)(3) of the Code. An organization will not be so regarded if more than
an insubstantial part of its activities is not in furtherance of an exempt purpose.

Section 1.501(c)(3)-1(c)(2) of the regulations provides an organization is not operated
exclusively for one or more exempt purposes if its net earnings inure in whole or in part
to the benefit of private shareholders or individuals.

Section 1.501(c)(3)-1(d)(2) of the regulations includes the advancement of religion in its
definition of the term “charitable”.

Revenue Ruling 77-366, 1977-2 CB 192,

A nonprofit organization that arranged and conducted winter-time ocean cruises during
which activities to further religious and educational purposes were provided in addition
to extensive social and recreational activities was not operated exclusively for exempt
purposes and did not qualify for exemption under section 501(c)(3) of the Code.

Revenue Ruling 77-430, 1977-2 CB 194,

An otherwise qualifying nonprofit organization that conducted weekend religious
retreats, open to individuals of diverse Christian denominations, at a rural lakeshore site
at which the participants were able enjoy the recreational facilities in their very limited
amount of free time and that charged no fees qualified for exemption under section
501(c)(3) of the Code as operated exclusively for religious purposes.

In Better Business Bureau of Washington D.C., Inc. v. United States, 326 U.S. 279
(1945), the Supreme Court held that the presence of a single non-exempt purpose, if
substantial in nature, will destroy the exemption regardless of the number or importance
of truly exempt purposes.

Airlie Foundation v. Commissioner, 283 F. Supp. 2d 58 (D.D.C 2003) the District Court
found that the organization was formed principally to organize, host, conduct and
sponsor educational and other charitable functions on its facilities. The organization’s
patrons were not limited to tax exempt entities, but included patrons of a private and
corporate nature. The organization paid significant advertising and promotional
expenses and derived substantial income from weddings and special events held at its
conference center. The court determined that the organization’s activities competed with
a number of commercial, as well as non-commercial entities, which strongly evidenced
a commercial nature and purpose. The court concluded that although the organization
carried out a number of charitable and educational activities, these were incidental to its

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primary activities of operating a for-profit conference center.

Application of Law

You are not described in section 501(c)(3) of the Code because you operate for more
than insubstantial social and recreational purposes.

You are not as described in section 1.501(c)(3)-1(c)(1) of the regulations because more
than an insubstantial part of your activities are recreational. An itinerary of activities that
take place at your retreat shows personal recreation is the main component of your
camps and anyone from the general public can pay your fees and attend.

Section 1.501(c)(3)-1(c)(2) of the regulations provides an organization is not operated
exclusively for one or more exempt purposes if its net earnings inure in whole or in part
to the benefit of private shareholders or individuals. Since you have made substantial
capital improvements to land owned by D in the form of the buildings built on the retreat
land, your earnings have inured to an insider. Those buildings have increased the value
of the land and the lease does not safeguard you from insider benefits. No amount of
inurement can be overcome for qualification of exemption under 501(c)(3).

Even though section 1.501(c)(3)-1(d)(2), of the regulations states that advancement of
religion is a charitable purpose not all of your activities are characterized as religious.
As noted above, a typical week includes a significant amount of time for recreational
activities that the guests choose freely. The morning devotional and the evening
message from the camp pastor account for only a few minutes per day. Accordingly,
you are not as described in the regulations.

You are similar to the organization described in Revenue Ruling 77-366, supra. You
offer a retreat that has religious and educational aspects but also offers extensive social
and recreational activities. Likewise, per your given schedule, you allow for extensive
time for social and recreational activities.

You are not similar to the organization described in Revenue Ruling 77-430 because
you do not limit the amount of recreational time of guests but instead promote and
advertise recreation as your focus. Even though you offer scholarships in a few limited
circumstances the vast majority of your programs are provided for a fee.

Like in Better Business Bureau of Washington D.C., supra, the presence of your
substantial recreational purpose precludes exemption.

You are similar to Airlie, supra. Your patrons are not limited to tax exempt entities. You
offer a variety of activities for a fee. Donations are solicited to cover the costs for some
of your guests, however, most pay the full fee. You advertise your activities through

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your website and the distribution of DVD’s. You compete with other commercial entities
that provide similar fish camp services. Even though you carry out some religious
activities, the facts show these are incidental to your operation commercially.

Applicant’s Position

You maintain that you have four main activities. The first is a fish camp offered to men
and adolescent men to fish and camp offering a spiritual aspect to build bonding
throughout the week. The individuals who participate are normally fathers and sons.

Your second offering is a retreat and rest center for Christian leaders and small groups.
This is aimed at providing relaxation and spiritual revival for men and women in
Christian service. Your third offering, is similar to the second only aimed at Pastoral
staff.

Finally, you offer a “J” mentoring program. This program assists single mothers by
providing fatherless young men a chance to develop positive male relationships and an
understanding of manhood through nature. For this program, you may offer
scholarships to less fortunate participants who could not otherwise afford to attend.

Your indicate that your activities consist of interaction between fellow Christian men in
an outdoor environment (such as fishing and hiking), hearing the Word of God, singing
and fellowship, and rest and relaxation.

You feel that these activities are exclusively exempt in nature.

Service Response to Applicant’s Position

The facts show you provide fishing, camping, lodging and recreation for a fee. Your
daily and weekly schedules reveal substantial free time for participants and very little
time devoted to structured religious activities. By the same token, your website and
promotional materials emphasize recreation. These facts clearly indicate your
operations are not “exclusively” for section 501(c)(3) purposes

Conclusion

Based on the information provided, you do not qualify for exemption under section 501
(c)(3) of the Code. You are not organized and operated exclusively for charitable or
religious purposes within the meaning of section 501 (c)(3) of the Code because you
operate in a commercial manner. Your operations further a substantial nonexempt
purpose and net earnings have inured to organization insiders. Accordingly, you do not
qualify for exemption as an organization described in section 501(c)(3) of the Code..

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8

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 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.

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:

Letter 4036(CG) (11-2005)
Catalog Number 47630W

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 Lerner
Director, Exempt Organizations

Enclosure: Publication 892

Letter 4036 (CG) (11-2005)
Catalog Number 47630W