IRS denies social-welfare exemption to founder-controlled advocacy group

Plain-English summary

The IRS denied a founder-controlled advocacy organization's application for exemption under IRC § 501(c)(4). The organization described programs involving environmental action, law-enforcement policy, education, public services, and research, but its founder was its only director and officer and supplied its funding. The IRS concluded that the organization primarily served the founder's private interests and political agenda rather than the community's general welfare. The determination also discusses the organization's website blog and its activities related to political campaigns.

Ruling snapshot

• Question: Did the advocacy organization qualify for exemption under IRC § 501(c)(4)?
• Outcome: Denied, exemption not recognized
• Key authorities: IRC §§ 501(a), 501(c)(4), and 6110; Treas. Reg. §§ 1.501(c)(4)-1(a)(1), (a)(2)(i), and (a)(2)(ii); Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945); Commissioner v. Lake Forest, Inc., 305 F.2d 814 (4th Cir. 1962); Erie Endowment v. United States, 316 F.2d 151 (3d Cir. 1963); Contracting Plumbers Cooperative Restoration Corp. v. United States, 488 F.2d 684 (2d Cir. 1973)

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION
Number: 201224034 Contact Person:
Release Date: 6/15/2012 *
Identification Number:
Date: March 21, 2012 *
Contact Number:
Employer Identification Number:
Form Required To Be Filed:
UIL: 501.04-00 *
501.30-00 Tax Years:
501.33-00 *
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 § 501(c)(4). 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.

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. File the returns in accordance
with their instructions, and do not send them to this office. Failure to file the returns timely may
result in a penalty.

We will make this letter and our proposed adverse determination letter available for public
inspection under § 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.

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: February 15, 2012

501.04-00
501.30-00
501.33-00

Legend:

State
Founder
Schools
Office
County
Program 1
Program 2
Program 3
Program 4
Program 5
Program 6
Program 7

Dear

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

Contact Person:

Identification Number:

Contact Number:

FAX Number:

Employer Identification Number:

We have considered your application for recognition of exemption from Federal income tax

under Internal Revenue Code § 501(a). Based on the information provided, we have concluded
that you do not qualify for exemption under § 501(c)(4). The basis for our conclusion is set forth

below.

Facts:

You were incorporated under the laws of State. You transitioned from a series of for-profit

successors with the following purposes:

• Promoting political change through articles, columns, books, and other media Founder

was planning to create.
• Producing and selling prepared foods to consumers.

Promoting solutions to the state’s challenging problems through grassroots advocacy

and publicity.

Your latest Articles of Incorporation provide that you are organized to promote solutions to

State’s challenging problems through grassroots advocacy and publicity. Your Articles also
state that you will have a board of directors with one member and that member will be Founder.
Founder is also your president. Upon dissolution, your remaining assets shall be distributed for
one or more exempt purposes within the meaning of § 501(c)(3) or § 501(c)(4) of the Code.

Your Bylaws provide that you shall have one director and that person alone shall be known as
the Board of Directors. Your Bylaws further provide that directors shall not be compensated for
their duties as directors. Salaries of your officers shall be fixed by resolution of your board of
directors. Founder is also your treasurer and secretary. You stated that as you grow, you will
add an appropriate oversight mechanism but in your current state, you find this unnecessary.
Your Bylaws contain a Conflict of Interest and Compensation Approval Policies. However, as
Founder is your only director and officer, these Policies are immaterial.

You state that you are a citizen’s advocacy group focused on solving some of the critical
problems facing the citizens of State. At the time of application, you were engaged in the
following activities:

• Program 1: this program allowed citizens to learn about and commit to specific action to
save the marine environment through a website program. This program attempts to
motivate citizens to substantially reduce the amount they pollute. Individuals who visit
the website are presented with a list of actions they can take to reduce the amount they
pollute, and then are asked to commit to taking specific actions. The website calculates
how many pounds of pollution would not reach the marine environment as the result of
each step taken. You worked with other organizations to develop the predictor model on
the website.

• Program 2: this program attempted to help protect citizens from inappropriate law
enforcement raids. You worked with public officials to pass legislation requiring
jurisdictions using law enforcement tactical teams to report periodically on the number of
tactical deployments and outcomes. State’s governor signed the legislation into law.

• Program 3: this program allowed you to work with the leadership of Schools to design
and implement a system where organizations can partner with schools to provide
improved education opportunities to students. Founder worked with the Office to
develop a program where individuals, businesses, and churches could partner with a
specific school to provide additional educational opportunities to students or resources to
the school.

At the time of application, you anticipated that your activities would change to the following:

• Program 1

• Program 4: this program would allow you to work with representatives of State’s
governor’s office to implement one or more pilot programs showing how state agencies
can restructure their systems to cut costs while providing better customer service.

• Program 5: this program would allow you to work with local business organizations to
create programs to help entrepreneurial companies start and expand in State, creating
high-quality jobs.

You state that for most of the time from submission of your application you were on hiatus while
Founder, ran for elective office. After losing the election, Founder's attention turned back to
your operations. You are currently focusing on the following:

• Program 1: you are working with residents in a few of the most critical communities to
determine the cost structure and other criteria necessary to build community support to
invest in sewer systems.

• Program 6: Founder was just elected chair of County's state-mandated organization
whose mission is to represent the interests of parents and citizens to County’s board of
education. Founder's chairmanship started by fielding a comprehensive survey to
determine residents’ biggest concerns. You will participate in this research and report
the results so the organization can use the results to choose a number of issues to
research further and help solve.

• Program 7: you have almost completed a research project which will report how
ambulance response rates in County compare with the national standard. You plan to
report the results of this research mid-2011 and set up a task force of several high-level
fire department personnel as well as representatives from two major hospitals in County.
The task force will determine how to get ambulances back on the street more quickly.

Your website contains a description of all of your programs. Your website also contains a blog
written and maintained by Founder. The blog started around the time of your incorporation and
most recent amended Articles of Incorporation. Most blog posts center around current or
pending legislation, as well as the agendas of elected political officials. Of the 17 blog posts,
five of these criticize Founder's former opponent in a race for elected office. These critical blog
posts occurred both before and after the election.

The blog page on your website contains links to Founder’s campaign website.

You have been primarily funded through donations from Founder. You hope to recruit additional
sources of support in the future. In the year that you were incorporated, income was generated
from Founder’s donations and Program 2. Expenses for that year primarily included those for
disbursements to Program 2, software, personal property taxes, and your website. For the
following tax year, you only incurred expenses for bank fees, depreciation, and merchant
account fees.

At the time of application, you indicated you may spend money attempting to influence the
selection, nomination, election, or appointment of individuals to public office or office in a
political organization. Upon further development, you indicated you have not spent any money

doing so, nor do you ever intend to do so. Your webpage that seeks donations from individuals
states that because donations are “used for lobbying and promoting political change, it is not
tax-deductible under U.S. law.”

You stated that because Founder is a political figure who ran for elective office in 2004 and
2010, you wish to seek exemption as a § 501(c)(4) organization to avoid the appearance of any
impropriety.

Law:
Section 501(a) exempts from federal income tax organizations described in § 501(c)(4).

Section 501(c)(4)(A) describes civic leagues or organizations not organized for profit but
operated exclusively for the promotion of social welfare. Section 501(c)(4)(B) indicates that
subparagraph (A) shall not apply to an entity unless no part of the net earnings of such entity
inures to the benefit of any private shareholder or individual.

Section 1.501(c)(4)-1(a)(1) of the Income Tax Regulations (“regulations”) states that an
organization may be exempt as an organization described in § 501(c)(4) if it is not organized or
operated for profit and is operated exclusively for the promotion of social welfare.

Section 1.501(c)(4)-1(a)(2)(i) states that an organization is operated exclusively for the
promotion of social welfare if it is primarily engaged in promoting in some way the common
good and general welfare of the people of the community, such as bringing about civic
betterments and social improvements.

Section 1.501(c)(4)-1(a)(2)(ii) provides that the promotion of social welfare does not include
direct or indirect participation or intervention in political campaigns on behalf of or in opposition
to any candidate for public office. Nor is an organization operated primarily for the promotion of
social welfare if its primary activity is operating a social club for the benefit, pleasure, or
recreation of its members, or is carrying on a business with the general public in a manner
similar to organizations which are operated for profit.

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.
The Court found that a trade association had an “underlying commercial motive” that
distinguished its educational program from that carried out by a university, and therefore, the
association did not qualify for exemption.

In Commissioner v. Lake Forest, Inc., 305 F.2d 814 (4th Cir. 1962), a corporation was organized
for the purpose of purchasing a government housing project and converting it to cooperative,
nonprofit housing for its members. Individuals became members in the corporation by
purchasing an apartment unit. The court held that the organization was not described in

§ 501(c)(4) because it was “a public-spirited but privately-devoted endeavor’ with only incidental
benefit to the community. Id. at 814. Although anyone was eligible to join the organization, the
court determined that it provided benefits only to its members and not the community as a
whole.

In Erie Endowment v. United States, 316 F.2d 151, 156 (3d Cir. 1963), the court held that to
qualify for exemption within the meaning of § 501(c)(4), “the organization must be a community
movement designed to accomplish community ends.”

In Contracting Plumbers Cooperative Restoration Corp. v. United States, 488 F.2d 684 (2d Cir.
1973), the court ruled that an organization benefitting only its members did not meet the

requirements of § 501(c)(4) because the benefits flowed directly to members of the
organization. The court followed “the rule that the presence of a single substantial non-exempt
purpose precludes exempt status regardless of the number or importance of the exempt
purposes.” Id. at 686. The organization's primary activity benefited its members rather than the
public, and therefore it was not “‘primarily’ devoted to the common good as required by even the
most liberal reading of 501(c)(4).” Id. at 687.

Rev. Rul. 74-361, 1974-2 C.B. 159, held that an organization that was organized as a nonprofit
volunteer fire company to provide fire protection and ambulance services for a community could
be held as exempt from Federal income tax as a social welfare organization described in

§ 501(c)(4) because its activities promote the common good and general welfare of the
community.

Rev. Rul. 68-45, 1968-1 C.B. 259, held that a war veterans’ post which was primarily engaged
in social welfare activities could qualify for exemption from Federal income tax under § 501(c)(4)
even though a substantial portion of its revenue came from bingo games open to the general
public.

Rev. Rul. 81-95, 1981-1 C.B. 332, held that an organization primarily engaged in the promotion
of social welfare within the meaning of § 501(c)(4) may participate in lawful political campaign
activities involving the nomination or election of public officials without adversely affecting its
exempt status.

Analysis:

Based on our analysis of the information you submitted with your application and in subsequent
correspondence, we have determined that you are not operated primarily for the promotion of
social welfare within the meaning of § 501(c)(4), and therefore do not qualify as an organization
described in § 501(c)(4).

To be described in § 501(c)(4), an organization must be operated exclusively for the promotion
of social welfare. An organization will be operated exclusively for the promotion of social
welfare, and therefore exempt, if it is primarily engaged in promoting the common good and

general welfare of the community. See § 1.501(c)(4)-1(a)(2)(i). Exempt purposes include
bringing about civic betterments and social improvements. See § 1.501(c)(4)-1(a)(2)(i).

Whether an organization is “primarily engaged” in promoting social welfare is a facts and
circumstances determination. Relevant factors include the manner in which the organization's
activities are conducted; resources used in conducting such activities, such as buildings and
equipment; the time devoted to activities (by volunteers as well as employees); the purposes
furthered by various activities; and the amount of funds received from and devoted to particular
activities. See e.g., Rev. Rul. 74-361, supra (volunteer fire company that provides recreational
facilities for members is primarily engaged in promoting social welfare where providing facilities
primarily furthers exempt purposes); Rev. Rul. 68-45, supra (organization’s principal source of
income is not sole factor in determining whether it is “primarily engaged” in promoting social
welfare).

Based on Contracting Plumbers Cooperative Restoration Corp., an organization will not meet
the requirements of § 501(c)(4) if it is operated primarily to benefit a private group rather than

the community as a whole, even if it provides some benefit to the community. 488 F.2d at 687.
Your activities serve to primarily benefit Founder. You solely serve to promote Founder and
Founder’s agenda and platforms. As provided in your Articles and Bylaws, Founder is the only
member and officer on your Board of Directors. There is no community input or oversight, or
independent members of the community on your Board of Directors. This is demonstrated from
the fact that while Founder sought elected office your operations seized until the election was
over. Furthermore, the selection, operation, and oversight of your programs and activities are
made at the sole discretion of Founder, and are solely funded by Founder.

Founder also plans to use you to conduct activities in connection with Founder’s election as the
chair of County's state-mandated organization. The holding of Erie Endowment, requires that a
§ 501(c)(4) organization be a community movement designed to accomplish community ends.
316 F.2d at 156. Your programs, however, are designed strictly to promote Founder and that
individual’s pursuits.

Additionally, you have not established that your primary activity is not to engage in direct or
indirect political intervention. The promotion of social welfare does not include direct or indirect
participation or intervention in political campaigns on behalf of or in opposition to any candidate
for public office. § 1.501(c)(4)-1(a)(2)(ii). In Rev. Rul. 81-95, supra, we concluded that “an
organization may carry on lawful political activities and remain exempt under section 501(c)(4)
... as long as it is primarily engaged in activities that promote social welfare.” The corollary to
this is that if an organization’s primary activities do not promote social welfare but are direct or
indirect political intervention, the organization is not exempt under § 501(c)(4). The key is to
determine the character of the organization's primary activities by looking at all of the facts and
circumstances. Founder used you to prepare studies that coincide with Founder's political
interests, to lobby for things that Founder believes in, and to follow political opponents through
the blog on your website. Your website contains a blog written and maintained by Founder that
criticizes Founder's former opponent in a race for elected office. The blog also contains
information on the political agendas of elected political officials. There are no procedures in
place to bar using the website as platform development

Conclusion:

You have not established that you meet the requirements of § 501(c)(4) because you are not
operated exclusively for the promotion of social welfare. Your primary activities do not serve the
general welfare of the people or the community as required by § 1.501(c)(4)-1(a)(2).

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.

Your protest statement should be accompanied by the following declaration:

Under penalties of perjury, I declare that I have examined this protest statement, including
accompanying documents, and, to the best of my knowledge and belief, the statement
contains all the relevant facts, and such facts are true, correct, and complete.

You also have a right to request a conference to discuss your protest. This request should be
made when you file your protest statement. An attorney, certified public accountant, or an
individual enrolled to practice before the Internal Revenue Service may represent you. If you
want representation during the conference procedures, you must file a proper power of attorney,
Form 2848, Power of Attorney and Declaration of Representative, if you have not already done
so. For more information about representation, see 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 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 this address:

Internal Revenue Service
TE/GE ****

1111 Constitution Ave, N.W.
Washington, DC 20224

You may also 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