Other 1322053: IRS denies exemption to a commercial truck-and-tractor-pull organization

Plain-English summary

The IRS denied section 501(c)(3) exemption to an organization formed around an annual truck-and-tractor-pull event. The release says the event was the organization's primary activity, with revenue mainly from tickets, gate receipts, concessions, and beer, while charitable contributions and scholarships were incidental. The IRS also concluded that transferring a predecessor's liabilities to the new organization benefited the predecessor's owners and created private benefit or inurement. The organization therefore failed the exclusive-purpose and public-interest requirements, and it was instructed to file Form 1120 for the stated periods and later years.

Ruling snapshot

• Question: Did the organization qualify for exemption under section 501(c)(3)?
• Outcome: Denied
• Key authorities: IRC §§ 501(a), 501(c)(3), and 7428; Treas. Reg. §§ 1.501(c)(3)-1(a), 1.501(c)(3)-1(c)(2), and 1.501(c)(3)-1(d)(1)(ii).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury

Appeals Office
Taxpayer Identification Number:

Person to Contact:
Number: 201322053 Employee ID #:
Release Date: 5/31/2013 he
Contact Hours:
Tax Period(s) Ended:

Date: March 6, 2013 ; UIL:
501.33-00
501.35-00
Dear

We considered your appeal of the adverse action proposed by the Director, Exempt Organizations,
Rulings and Agreements. This is our final determination that you do not qualify for exemption from
Federal income tax under Internal Revenue Code (the “Code”) section 501(a) as an organization
described in section 501(c)(3) of the Code.

Our adverse determination was made for the following reasons:

1. You have not demonstrated that you are operated exclusively for exempt purposes within the
   meaning of Internal Revenue Code § 501(c)(3) and Treasury Regulations § 1.501(c)(3)-1(d). You
   do not engage primarily in activities that accomplish one or more of the exempt purposes
   specified in Internal Revenue Code § 501(c)(3).

2. Your net earnings inure to the benefit of private shareholders and individuals, which is prohibited
   by Internal Revenue Code § 501(c)(3).

3. You are operated for a substantial private purpose rather that a public purpose, which is
   prohibited by Internal Revenue Code § 501(c)(3) and Treasury Regulations § 1.501(c)(3)-

1(d)(1)(ii).

You are required to file Federal income tax returns on Forms 1120 for the tax periods stated in the
heading of this letter and for all tax years thereafter. File your return with the appropriate Internal
Revenue Service Center per the instructions of the return. For further instructions, forms, and information
please visit www.irs.gov.

Please show your employer identification number on all returns you file and in all correspondence with
Internal Revenue Service.

Pursuant to a closing agreement, you have waived your right to contest this determination under the
declaratory judgment provisions of Section 7428 of the Code.

You also 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. If you want
Taxpayer Advocate assistance, please contact the Taxpayer Advocate for the IRS office that issued this

letter. You may call toll-free, 1-877-777-4778, for the Taxpayer Advocate or visit www.irs.gov/advocate
for more information.

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.

Sincerely Yours,

Karen A. Skinder
Appeals Team Manager

Enclosure: Publication 892

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

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION. /
Date: February 22, 2012 Contact Person:

identification Number:
Contact Number:
FAX Number:
Employer Identification .
Number:

Legend: UIL Index:

B = Organization 1 - §01.33-00

C = Chief Executive Officer ~ 501.35-00

D = City

E = Award.

F = Organization 2

G = Date

H = City

J = State

x = Dollar amount

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:

1) Did the transfer of your predecessor's assets and liabilities to you result in inurement
that precludes exemption under section 501(c)(3) of the Code? Yes, for the reasons
described below.

2) Are you operated exclusively for charitable or educational purposes within the
meaning of section 501(c)(3) of the Code. No, for the reasons described below.

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

Facts:

You were incorporated in the state of Jon G. Your Articles of Incorporation list several
general purposes and also includes as a purpose “to financially support, assist,
promote, expand and strengthen institutions affiliated with and under the governance of
the City of H.”

Your application for exemption shows that your primary activity is to plan, organize,
promote and foster a national truck and tractor pulling event and all related activities
annually. The activities promote, advance and enrich the sport of truck and tractor
pulling; expand, upgrade and improve the facilities for the participants’ benefit; and
foster contacts, relationships‘and tourism in H and the surrounding area.

You state, “To the extent that the promotion of travel and tourism constitutes ‘economic
development’ the organization engages in economic development. The general public
and local area businesses benefit.”

You provided a percentage breakdown of your activities as follows:

—- . %- Administrative

— %-Fundraising relating to the planning of the fundraising event

— !%-Determination of improvements of the City’s facilities

• %- Determining distribution of scholarship funds

• %- Determination of distribution of funds to other charitable organizations

You are a member of the B, which sanctions truck and tractor pulling events, and
provides necessary personnel and specialized equipment for the events. You do not
share common officers, directors, trustees or independent contractors with B. However,
you; have as a common goal to promote and organize truck and tractor pulling events.

You entered into a Sanctioning Contract with B that states in part, “.,.We pride
ourselves on the cooperation of our pullers with our promoters. We mail newsletters
periodically. We will send your flyers in our newsletter, if they are provided to us,
promoting your pull...”

You submitted copies of various newspaper articles with your exemption application.
The articles note the large number of spectators your event has drawn. Your chief
executive officer and events coordinator, C, was quoted as saying “We think in two to

' - three years, we could be the D of the west.” This statement referred to the nation’s

largest truck and tractor pull event which attracts 65,000 people annually.

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

3

Your event was voted one year as the “E” out of roughly 50 pulls nationally by the F.
Your pull is one of the largest pulls in the United States.

Another article submitted, which promoted the event, states, “C said the event is
growing faster than he imagined.” His quote states, “It's going to require full-time

employees pretty soon...”

One newspaper article reported that C was planning for next year’s pull, which included
expanding the seating and adding some additional classification in the truck pull. It
indicated that “there has been tremendous community support, which has helped the
pull to become so successful so quickly.”

Your revenue primarily comes from ticket sales, gate sales, concession sales, and beer
sales. Almost all of your expenses go towards paying prize purses and other expenses

| related to your pulling event.

You have indicated that a small percentage of your gross revenue will be given to -
charity and you will also provide student scholarships. |

You are a successor to a for-profit limited liability corporation, which has not yet been
dissolved. The predecessor intends to be administratively dissolved by not filing the

required biennial report.

Your predecessor was formed in.an attempt to bring a national truck and tractor pull

event to H. There were approximately 50 initial members, who made’a capital
contribution of x each. You indicated you were formed because the predecessor “failed
to make a profit and it soon became apparent that in a town of approximately 1300
people, the event simply could not be continued without substantial effort.from
volunteers.” Your directors are identical to the predecessor and your volunteers are
comprised of the predecessor's membership.

Although there is no memorialized date on which the transfer occurred, your
predecessor transferred all of its assets and liabilities to you. At the time of transfer, the
predecessor's liabilities exceeded its assets.

The total value of assets transferred to you was less than$ which consisted of
telephone poles, frisbees, T-shirts and a bank account. The predecessor's only liability
was a bank note due. At the time of transfer, the principal balance that you assumed
“was approximately $ . You provided a payment history from the bank to show
'. that you subsequently paid off the balance. Therefore, your received liabilities.
outweighed your received assets by more than $7

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

Law:

Section 501(c)(3) of the Internal Revenue Code provides, in part, for the exemption from
federal income tax of organizations organized and operated exclusively for charitable,
religious or educational purposes, no part of the net earings of which inures to the
benefit of any private shareholder or individual.

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

Section 1.501(c)(3)-1(d)(1)(ii) of the regulations provides that an exempt organization
must serve a public rather than a private interest. The organization must demonstrate
that it is not organized or operated to benefit 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." Thus, if an organization is
operated to benefit private interests rather than for public purposes, or is operated so
that there is prohibited inurement of earnings to the benefit of private shareholders or

individuals, it may not retain its exempt status.

Revenue Ruling 67-149, 1967-1 CB 133 described an organization that was formed for
the purpose of providing financial assistance to several different types of organizations
which are exempt from federal income tax under section 501(c)(3). It carried on no
operations other than to receive contributions and incidental investment income and to
make distributions of income to such exempt organizations at periodic intervals. The
organization does not accumulate its investment income. This particular organization

qualified for 501(c)(3) exemption.

Revenue Ruling 68-224 granted exemption under section 501(c)(4), not 501(c)(3) to an
organization of which their primary purpose was to conduct an annual festival that depicts
regional customs and traditions. In a typical year, it features a banquet or barbecue, a
parade, various contests, and a rodeo. At the banquet or barbecue the winners of the
various contests are announced. The parade is made up of school bands, local riding
clubs, and floats built by local organizations. Contests relate to dress and costumes:
conceming the traditions of the area. Floats generally depict the community history and
customs. The festival is climaxed on the final day with the rodeo. The ruling stated, “In

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

5

carrying on the activities described, the organization provides recreation for the
community, publicizes the community and attracts persons to it,. promotes community
growth, and provides a means whereby citizens may express their interest in local history,
customs, and traditions. These activities promote the common good and general welfare
of the people of the community and bring about civic betterments and social
improvements. Accordingly, the organization qualifies for exemption from Federal income
tax under section 501(c)(4) of the Code.

Revenue Ruling 76-441, 1976-2 C.B. 147, presents two situations conceming school
operations. In the first scenario a nonprofit school succeeded to the assets of afor- .
profit school. While the former owners were employed in the new school, the board of
directors was completely different. The ruling concludes that the transfer did not serve
private interests. Part of that conclusion was based on the independence of the board.
In the second scenario, the for-profit school converted to a nonprofit school. The former
owners became the new school's directors. The former owners/new directors benefited
financially from the conversion. The ruling concludes that private interests were

served.

_ Better Business Bureau of Washington, D.C., Inc v. United States, 326 U. S. 279
(1945), the Supreme Court of the United States interpreted the requirement in section

501(c)(3) that an organization be “operated exclusively” by indicating that an
organization must be devoted to exempt purposes exclusively. This plainly means that
the presence of a single non-exempt purpose, if substantial in nature, will destroy the
exemption regardless of the number and importance of truly exempt purposes.

In B. S. W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978), it was stated that free or
below cost service is only one of several factors to consider in determining
commerciality. Others include the particular manner in which the organization's activities
are conducted, the commercial hue of those activities, and the existence and amount of
annual or accumulated profits. All of these must be considered, for no single factor
alone is determinative. The Court concluded that the petitioner is not an organization
described in section 501(c)(3) because its primary purpose is neither educational,
scientific, nor charitable, but rather commercial.

In Orange County Agricultural Society, Inc. v. C.I.R., T.C. Memo. 1988-380, 1988 WL
83923, it was held that a petitioner's involvement in a stock car racing enterprise (a
nonexempt purpose) constituted more than an insubstantial part of its activities. The
organization, which was organized to promote agriculture and horticulture, sponsored
an annual fair. Although the organization was not involved in the actual operation of the
automobile races, the Court determined that it was associated in the operation of a
commercial enterprise because it received all the profits derived from the automobile

races.

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

Application of Law:

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

You.do not meet the requirements of section 1.501(c)(3)-1(a)1 of the Regulations
because although you meet the organizational test, you do not meet the operational
test. Although your Articles of Incorporation state that you are organized “to financially
support, assist, promote, expand and strengthen institutions affiliated with and under the
govermance of the city of H,” the facts show that you exist merely to conduct a large
annual pulling event. The only resources you have used to.“support” the local
government have been to upgrade the pulling arena that is owned by the city. This

• further shows your primary purpose is to conduct the annual pulling event and not to
  conduct charitable activities.

You indicated that the pulling event is used as a fundraiser and that you contribute

funds to other charities and provide scholarships. However, the facts show that the
pulling event is not a fundraiser but is actually your primary. purpose. This is evidenced
by the fact that you conduct fundraisers to raise funds to conduct the pulling event. The
overwhelming majority of your expenses are for the conduct of the pulling event anda _
very small percentage of your gross revenue is used for charitable purposes if there are
any funds left after the expenses of the pulling event have been paid. ;

You do not meet the requirements of section 1.501(c)(3)-1(c)(2) of the regulations
because your eamings inure to the benefit of private individuals. More specifically, the
transfer of assets and liabilities from your predecessor LLC to you resulted in private
benefit to the owners of the LLC. The LLC was liable for a loan in which approximately
$,___ was still owed. By transferring this debt and only approximately $ of assets
to you, the burden of the LLC and therefore its owners, was relieved. This shows that
your earnings substantially benefit private individuals.

You do not meet the requirements of section 1.501(c)(3)-1(d)(1)(ii) of the regulations.
By using your funds to pay off the transferred loan, your earnings substantially
benefitted the owners of your predecessor LLC. Since the owners of the LLC are also
“insiders” to you, this private benefit constitutes inurement.

You are not like the organization described in Revenue Ruling 67-149 because your
financial support to other charitable organizations is incidental to your primary purpose
"of conducting a nationally recognized pulling event. Unlike the organization in the ruling
that simply collected contributions and donated them to various charities, the facts show
_ that you entire reason for forming was to conduct the annual pulling event; not to raise

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

money for other charities.

Your conduct of an annual truck and tractor pull is similar to the festival/rodeo activities
_of the organization described in Revenue Ruling 68-224. Like this organization, your
pulling event provides recreation for the community, publicizes the community and
attracts persons to it, and promotes community growth. As the ruling states, these
activities promote the common good and general welfare of the people of the
community and bring about civic betterments and social improvements. These activities
are not exclusively charitable and educational and therefore are not exempt under
section 501(c)(3) of the Code. The organization in the ruling was granted exemption.
under section 501(c)(4), not 501(c)(3) of the Code. However, unlike the organization in
the ruling, the community benefit you provide is incidental to your primary purpose of
promoting, organizing, and operating a truck and tractor pull event. Even if benefitting
the community was your primary purpose, exemption would not be allowed under any
section of the Code due to the fact that you are operating in a commercial manner and
your earnings inure to the benefit of individuals.

You are similar to the second organization described in Revenue Ruling 76-441. By
assuming the liabilities of the predecessor, which exceeded assets transferred, the
predecessor's members who also serve as your volunteers benefitted from the
conversion. Like the organization described in the ruling, this transfer served private

interests.

As explained in Better Business Bureau of Washington, D.C., Inc v. United States, the

presence of a single non-exempt purpose, if substantial in nature, will destroy the
exemption regardless of the number and importance of truly exempt purposes. Even
though you do have some charitable activities consisting of contributing funds to _
charitable organizations and providing scholarships, you are not exclusively charitable.
As explained above, your primary purpose is to conduct an annual truck and tractor pull
for recreational purposes and to bring people to the community. Also, your transfer of -
liabilities created inurement. These facts show that you not only have a single non-
exempt purpose, but you have two non-exempt purposes. —

Similar to the organization in B. S. W. Group, Inc. v. Commissioner you are operating in
a commercial manner. The facts show that the majority of your revenue is derived from
ticket sales, gate sales, concession sales, and beer sales. The conduct of your annual
pulling event is similar to any other commercial event in which tickets and concessions
are sold to the general public at a market rate. Also, the facts show that you advertise
and market the event in the same manner as any other commercial event. There are
many similar entities that conduct the same activities for profit at commercial venues. In
fact, you operated the same activities as a for-profit entity prior to converting to a non-

profit.

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

Orange County Agricultural Society, Inc. v. C.LR is applicable in your situation. Truck —
and tractor pulling is similar to stock car racing being that both are motorsports in which
prize money is awarded. As quoted in an article, “[You] are an elite pull fashioned after
the NASCAR races...” Since your time and funds are devoted almost entirely to
organizing, promoting and conducting the annual tractor pull event, you have not shown
that you are operated exclusively for charitable purposes as described in section
501(c)(3) of the Code. _

Applicant's Position:
‘You ‘contend that your exempt purpose is community betterment for H and that the
pulling event is merely a fundraiser to accomplish this purpose.

You stated, “economic development’ is not a primary function of the organization as
such is only tangential to the extent the fundraising activity showcases H and, to the
extent the event increases traffic and activity, local and area business are benefited by

increased sales.”

You assert that your activities are analogous to charitable golf events and your
fundraising activity “allows the organization to fulfill its charitable purposes” by
dedicating all of the event's profits to be used for charitable purposes. You have
contributed funds to local organizations such as local fire and rescue, youth groups,
public schools, and scholarships. | ;

Besides contributions donated to local organizations and scholarships awarded to
graduating seniors, you note that nearly$! _ . ‘was contributed to H collectively by
you and your predecessor for tax years 20| through 20° . The contributions
consisted of park and track improvements including the construction, improvement
and/or purchase of guard rails, announcer’s stand, track, lighting, roadway, spectator
tent, security barrier, fencing, etc.

You contend that your tractor pull event furthers charitable purposes based on the
following factors: .

— You make substantial improvements to the H’s park,
— Through the substantial improvements, you work cooperatively with the H,
~ You will continue to make improvements to the park as well as provide other benefits
to H,
_-. .Without you, H would be unable to make the improvements, .
— Aside from the annual tractor-pull weekend event, the improvements may be used

by the community year round,

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

9

— You established scholarships and expect to increase scholarship awards after H
improvements are reduced,

~. Your activities are conducted entirely by volunteers,

— By demonstrating that the community is strong and vibrant, the interest of H has
been advanced,

— You encourage and enhance community volunteerism,

— You worked cooperatively with H to gain regional and national recognition,

— The increase in consumer activity during the event generates sales tax revenue,

~ You benefit the local and area economy, and

— You do not accumulate income.

Service Response to Applicant’s Position:

Economically benefitting the community is not your primary purpose. The facts show
that your primary purpose is to organize, promote, and conduct an annual truck and
tractor pull event. Any benefit to the community is an incidental biproduct of conducting
the recreational pulling event in a commercial manner. Even if your primary purpose
were to economically benefit the community, you have not shown that you are located
within an economically depressed area or that your activities target an economically
disadvantaged group. Also, you are not relieving the poor, lessening the burdens of
government, or furthering any other exclusively charitable purpose.

Even though the predecessor and you made improvements on a city-owned park, this is
not your primary purpose. In fact, these improvements were only made so you can
adequately conduct your annual truck and tractor pull event. Also, the overwhelming
majority of the improvements were made by your predecessor, not you.

We do not dispute the charitable aspect of contributing funds to other charitable
organizations.. However, this charitable activity is incidental to your primary purpose of
conducting a nationally-recognized truck and tractor pull.

Based on all of the facts and circumstances, it is obvious your primary purpose is to
conduct a large-scale truck and tractor pull event that will provide recreation. to the
community in a commercial manner. Any benefit to the community or other charitable
activities that you conduct is merely incidental to this primary purpose.

Even if your activities were found to be conducted in a charitable manner, you still would
not qualify for exemption based on the fact that your earnings inure to the benefit of
your members who were the owners of your predecessor.

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

10

Conclusion:

Your activities of organizing, promoting and conducting an annual pulling event are not
exclusively charitable or educational. Also, the manner in which the activity is
conducted is indistinguishable from a commercial business. Therefore, you do not meet
the operational test under section 501(c)(3). Secondly, private benefit and inurement
resulted when your predecessor's assets and liabilities were transferred to you.

Accordingly, you are not exempt 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 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 attomey,
Form 2848, Power of Attomey 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.

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

11

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
P.O. Box 2508 Room 7-008 550 Main Street, Room.7-008
Cincinnati, OH 45201 Cincinnati, OH 45202

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.

e

Sincerely,

Lois G. Lerner .
Director, Exempt Organizations

Enclosure:
Publication 892

Cc: Thomas B. Donner

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