Determination 1323037: IRS finalizes denial of exemption for a fee-based charity website

Plain-English summary

The IRS issued a final adverse determination that an organization did not qualify for exemption under IRC § 501(c)(3). The organization operated a website connecting people who offered goods or services with people seeking them, with payments directed to charities and a fee retained to cover operating costs. The IRS concluded that this was a commercial activity and that donations used to support the website did not make the operation exclusively charitable. The determination became final after the organization did not file a protest within 30 days. Donors could no longer deduct contributions under IRC § 170, and the organization was instructed to file federal income tax returns.

Ruling snapshot

• Question: Did the organization qualify for exemption under IRC § 501(c)(3) despite operating a fee-based website that facilitated transactions for charitable donations?
• Outcome: Revocation, the proposed adverse determination became final.
• Key authorities: IRC §§ 170, 501(c)(3), 6104(c), 6110, and 7428(b)(2); Treas. Reg. §§ 1.501(c)(3)-1(a)(1), (c)(1), and (e)(1); Rev. Rul. 69-528, Rev. Rul. 72-369, Rev. Rul. 76-442, and Rev. Rul. 78-132.

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Release Number: 201323037 Contact Person:
Release Date: 6/7/2013
Date: 3/11/13 Identification Number:
UIL Code: 501.03-30
501.36-04 Contact Number:
Employer Identification Number:
Form Required To Be Filed:
Tax Years:

Dear [illegible]:

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. 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 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.

2

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,

Holly O. Paz
Director, Exempt Organizations
Rulings and Agreements

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: January 17, 2013 Contact Person:
Identification Number:
Contact Number:
FAX Number:
Employer Identification Number:

LEGEND
B = State
C = Date

UIL
501.03-30
501.36-04

Dear [illegible]:

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 operate in a commercial manner? Yes, for the reasons set forth below;
• Do you operate exclusively for a 501(c)(3) purpose? No, for the reasons set forth
below;

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Facts

You incorporated in B on C for charitable purposes.

Your Bylaws state your mission is “to help those in need by empowering people to
support charities through simple transactions and unselfish acts.”

Your purpose is to build, maintain and market a website, which provides a service to
charities giving them a new way to raise funds, as well as service to individuals wishing
to support nonprofits that connects them with each other and facilitates communication
and financial giving.

Your website helps raise funds for charity through simple transactions. Individuals can
post on your site details of goods or services they are willing to perform in exchange for
a donation to a charity. Your clients can search through the proposals looking for those
willing to perform a service they need in exchange for a donation to a charity they would
like to support.

Anyone can create an account on your website and offer goods or services. Your site
works like other similar websites that match vendors and buyers except that when
individuals have concluded their business the funds are given to a charity, instead of
being given to the seller or provider of the service.

When a client finds the right proposal they can contact the seller or provider through the
site, conduct the transaction, and eventually make a donation to the charity of their
choice. The charities approved by the board of directors will be listed on the website.

You will use a payment service. When clients make donations they do so through the
payment service. The charity will also have to set up an account to receive these
payments.

You will charge a fee for every donation made by your clients through the site to help
cover your costs. You will raise additional funds through individual and corporate
donations.

In a typical transaction % is the value of the item (goods or services) and % is your
fee which you will use for operational expenses. Both you and the charity will pay the
respective fees charged by the payment service.

You provided an example of how your program works. Your example described an
individual posting an offer on your website offering to wash a car in exchange for a
donation of $ to a charity. An individual needing a car wash locates the offer on your
website, agrees to the terms, schedules and receives the car wash and makes the

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$ payment through the payment service. Of the $ payment you receive %
or $ . Of the $ you pay $ to your payment service. Likewise the charity
receiving the payment also pays an equal percentage of the amount it receives to the
payment service.

Donors of physical items donated in exchange for payments to a charity will be able to
deduct the fair market value of the item. You do not expect that individuals volunteering
their time or services will be able to deduct the value of their efforts.

You will build, maintain and market your website. Your directors will serve as
moderators. You will market your website through email campaigns, social media and
online ads. You will primarily raise funds in B and will welcome donations and
contributions from all over the country.

You allocate % of your time and resources to maintaining your website, 5% to
fundraising activities, % to administrative activities and % to marketing and public
relations.

You plan to hire a web developer and an executive director who has experience in
systems administration and web development. Your president and vice president are
individuals with degrees in computer science and have several years experience in the
areas of web development and as a programmer/server administrator. You are
currently governed by 3 individuals who serve as your president, Vice-president and
secretary.

You provided budgets showing your income coming from gifts, grants and donations
and from fees for services. You report contributions paid out, salaries, accounting fees,
marketing and website related fees as expenses.

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 states that in order to qualify
under section 501(c)(3) of the Code, an organization must be both organized and
operated exclusively for one or more exempt purposes. If an organization fails to meet
either the organizational or operational test, it is not exempt.

Section 1.501(c)(3)-1(c)(1) of the Regulations provides that an organization operates
exclusively for exempt purposes only if it engages primarily in activities that accomplish
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.

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Section 1.501(c)(3)-1(e)(1) of the Regulations provides that an organization may meet
the requirements of section 501(c)(3) if it operates a trade or business that is in
furtherance of its exempt purpose but not if it is operated for the primary purpose of
carrying on an unrelated trade or business as defined in section 513 of the Code.

Revenue Ruling 69-528, 1969-2 C.B. 127, held that an organization regularly carrying out
an investment service business that would be an unrelated trade or business if carried on
by any exempt organization on whose behalf the organization operates, is not exempt
under section 501(c)(3).

Revenue Ruling 72-369, 1972-2 C.B. 245, held an organization formed to provide
managerial and consulting services at cost to unrelated exempt organizations did not
qualify for exemption under section 501(c)(3). Providing managerial and consulting
services on a regular basis for a fee is a trade or business ordinarily carried on for profit.
The fact that the services in this case were provided at cost and solely for exempt
organizations was not sufficient to characterize this activity as charitable within the
meaning of section 501(c)(3) of the Code.

Revenue Ruling 76-442, 1976-2 C.B. 148 held that a nonprofit organization whose
primary activity is the offering of free legal services for personal tax and estate planning
to individuals who wish to make current and deferred gifts to charity as part of their
overall tax and estate planning does not qualify for exemption under section 501(c)(3) of
the Code. The organization is providing commercially available services to individuals
who can afford them. The fact that gifts to charity are contemplated does not convert the
organization's assistance into a charitable activity or one that promotes social welfare
within the meaning of the regulations.

Revenue Ruling 78-132, 1978-1 C.B. 157 held that a community cooperative
organization formed to facilitate the exchange of personal services among members
was operating primarily for the private benefit of its members and was not exempt from
tax as a social welfare organization.

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 the trade association had an “underlying
commercial motive” that distinguished its educational program from that carried out by a
university.

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In B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978), the court found that a
corporation formed to provide consulting services was not exempt under section
501(c)(3) because its activities constituted the conduct of a trade or business that is
ordinarily carried on by commercial ventures organized for profit. Its primary purpose
was not charitable, educational, nor scientific, but rather commercial. In addition, the
court found that the organization's financing did not resemble that of the typical
501(c)(3) organizations. It had not solicited, nor had it received, voluntary contributions
from the public. Its only source of income was from fees from services, and those fees
were set high enough to recoup all projected costs and to produce a profit. Moreover, it
did not appear that the corporation ever planned to charge a fee less than “cost.” And
finally, the corporation did not limit its clientele to organizations that were section
501(c)(3) exempt organizations.

In Airlie v. I.R.S., 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 primary
activities of operating a for-profit conference center.

Application of Law

You are not described in section 501(c)(3) of the Code or Section 1.501(c)(3)-1(a)(1) of
the Income Tax Regulations because you are not operated exclusively for charitable,
educational or other exempt purposes. You act as a facilitator of commerce between
service/goods providers and recipients. As facilitator you receive 15% as a fee for your
service.

You are not described in section 1.501(c)(3)-1(c)(1) of the regulations because more
than an insubstantial part of your activities is devoted to non-exempt purposes. Your
primary purpose is to provide a website to connect vendors of goods and services with
their recipients for a fee. The fact that recipients make payments to charity in exchange
for the services or goods received does not overcome your non-exempt purposes.

You are not described in Section 1.501(c)(3)-1(e)(1) of the regulations because your
primary purpose is the carrying on of the business of operating a website where you
provide opportunities for vendors of goods and services to advertise their services and
match clients who are in need of such goods and services. Your primary source of

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income is from the fees you earn from each transaction that takes place through your
website. Like a commercial business your expenses include salaries, marketing and
website related fees.

You are similar to the organization described in Revenue Ruling 69-528 because you
are regularly carrying on a business for a fee.

You are similar to the organization described in Revenue Ruling 72-369 because you
are providing a web based service of linking service/goods providers with clients. In
exchange for your services you receive a % fee. Providing such services on a regular
basis for a fee is a trade or business ordinarily carried on for profit. The fact that
clients remit a payment of the value of the goods or service received to charity is not
sufficient to characterize your activity as charitable.

You are similar to the organization described in Revenue Ruling 78-132 because you
too are formed to facilitate the exchange of services among individuals.

You are similar to the organization described in Revenue Ruling 76-442 because your
primary activity is the operation of a trade or business ordinarily carried on by for-profit
businesses.

Like the organization in Airlie, your activity evidences a commercial nature and purpose
and involves the operation of a commercial web site where any one can place their
products and services for sale. You will advertise and market the website and keep a
percentage of each transaction as your fee. Like B.S.W. Group, your activities of
providing a website where vendors and their clients can match their needs for goods
and services constitutes the conduct of a trade or business ordinarily carried on by
commercial ventures for a profit. The fact that a portion of the proceeds is donated to
charity does not change the inherent commercial nature of the transactions.

Like Better Business Bureau, supra, you too have a substantial non-exempt purpose of
operating in a commercial manner.

Applicant's Position

You applied for exemption because you will be soliciting traditional monetary donations
from individuals to help cover your costs and the costs of running your website. These
costs will supplement the receipts generated on the website itself, which is the
percentage of each transaction that you earn.

Service's response to Applicant's Position

Providing a website service where your vendors and clients can exchange goods and
services is not charitable within the meaning of section 501(c)(3) of the Code. In

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addition, the operation of such a website offering goods and services, the marketing of
the website to the general public and the payment of a percentage of each transaction
to meet your operating expenses indicate that your operations are not different from a
commercial venture. Further, using donations to cover your operating costs and the
costs of your website reduces the burden on your commercial operations. Therefore
the donations are not intended exclusively for charitable purposes.

Conclusion

Based on the facts, we conclude that you are not operated exclusively for charitable
purposes and are not described in 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 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.

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

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,

Holly O. Paz

Director, Exempt Organizations
Rulings & Agreements

Enclosure: Publication 892

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