IRS determination 1324020: IRS denies section 501(c)(3) exemption to a rural broadband organization

Plain-English summary

The IRS issued a final adverse determination after an organization seeking section 501(c)(3) status did not protest a proposed denial within 30 days. The organization said it would represent rural mobile broadband providers and suppliers, seek grants, and help develop broadband services in underserved areas. The IRS concluded that the organization had not shown it would operate exclusively for exempt purposes, served the private business interests of its members, and had a substantial commercial purpose. The final letter also states that donors may not deduct contributions under section 170 and that the organization must file the required federal income tax returns.

Ruling snapshot

• Question: Did the organization qualify for exemption under IRC section 501(c)(3)?
• Outcome: Revocation, final adverse determination
• Key authorities: IRC §§ 501(a), 501(c)(3), 170, 6110, and 7428(b)(2); Treas. Reg. §§ 1.501(c)(3)-1(a)(1), (c)(1), (c)(2), (d)(2), (d)(3)(i), (d)(3)(ii), and (e)(1)

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION Date: March 21, 2013

Contact Person:

Number: 201324020
Release Date: 6/14/2013 Identification Number:

Contact Number:

Employer Identification Number:

Form Required To Be Filed:

UIL: 501.03-00 Tax Years:

Dear

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

Because you do not qualify for exemption as an organization described in Code section
501(c)(3), donors may not deduct contributions to you under Code section 170. 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.

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, 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 18, 2013 Contact Person:
Identification Number:
UIL: 501.03-00
Contact Number:
FAX Number:
Employer Identification Number:
Legend :
Date 1:
State
Date 2
Date 3
A:
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.

FACTS:

information presented discloses that you were incorporated on Date 1 under State nonprofit
corporation law. Article 5 of your Certificate of Incorporation states, among other things, that
you are organized exclusively for charitable, religious, educational and scientific purposes
including, the making of distributions to organizations that qualify as exempt organizations under
section 501(c)(3).

The Purpose clause of your Bylaws states that you were launched to create a single entity
representing the common interest of the diverse community of rural mobile broadband providers
and their suppliers. You further state that your purpose is to help Americans get the best of the
best for rural areas, leading to a ubiquitous, safe, mobile, affordable and sustainable broadband
service environment.

You represent that you are committed to providing a single, clear, and significant voice to
government agencies that will be involved in choosing grant recipients from the recently enacted
A. You state that you are committed to the vision of the Next Generation Wireless Network Grid

and that you will serve as a focal point for the discussion and advancement of technical and
business issues of the rural mobile broadband industry in the United States. You further stated
that you plan to serve as a catalyst for providing broadband services to underserved, rural
communities and hope to expand your reach beyond State to other nations and perhaps
worldwide. Through your members you plan to cooperate to obtain government grants, and
then within the parameters of the government grants, develop and implement broadband
services in the underserved areas.

On Date 2 we sent you letter requesting specific information regarding your activities including
what qualifications a person must meet to become a member, what benefits members receive,
what membership classifications you have, the amount of your membership dues, whether you
have a website, whether you have pamphlets or brochures and what activities you have
engaged in since your inception. You were also asked how your activities or services qualify
you as an organization described in section 501(c)(3).

On Date 3 you responded to our letter listing the names of your current officers and directors
and the cities in which they reside. Currently, you have 450 plus members consisting of
persons belonging to high-tech internet industries, consumers and rural residents. You state
that you plan to serve as a catalyst for providing broadband services to underserved, rural
communities in the hopes to expand your reach nationwide and perhaps worldwide. You are
not an internet provider but you and your members plan to obtain government grants to develop
and implement broadband services in underserved areas. No timeline exists for network
construction; and development depends on funding ability.

You state that membership in your organization is now free, but you seek out donations or
sponsorships to support your activities at three levels. These three levels are Gold-$1,000,
Silver-$500.00 and General-$200.00. You represent that you recognize sponsors on your
website in compliance with Internal Revenue Service qualified sponsorship rules. You state that
sponsors are recognized on your website by name and logo.

You further state that members no longer receive services or benefits and the collaboration of
members who work in the mobile broadband industry is necessary to bring broadband to rural
areas of the country. In response to our letter of Date 1 in which we asked you to explain how
you advertise your organization to the public in order for potential members to know about your
services and activities, and to submit copies of your advertisements, you replied by stating that
no advertisements have been made and you have conducted no activities nor provided any
services pending completion of your tax-exemption application by the Internal Revenue Service.

You state that you have developed a website intended only to keep the founding members in
contact with each other but have conducted no major activities or provided any services.
With regard to your sources of financial support, you state that essentially your President and
Secretary have donated funds to you to date.

Law:
Section 501(c)(3) of the Code exempts from federal Income tax corporations organized and

operated exclusively for religious, charitable, scientific, testing for public safety, literary or
educational purposes.

Section 1.501(c)(3)-1(a)(1) of the Income Tax Regulations (the 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.

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

Section 1.501(c)(3)-1(c)(2) of the Regulations provides than 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(a)-1(c) of the Regulations defines
the words “private shareholder or individual” in section 501 of the Code to refer to persons
having a personal and private interest in the activities of the organization.

Section 1.501(c)(3)-1(d)(2) of the Regulations in defining the term charitable provides the term
“charitable” is used in section 501(c)(3) in its generally accepted legal sense and is, therefore,
not to be construed as limited by the separate enumeration in section 501(c)(3) of other exempt
purposes which may fall within the broad outlines of “charity” as developed by judicial decisions.
Such term includes: advancement of education.

Section 1.501(c)(3)-1(d)(3)(i) of the Regulations in defining the term educational provides, in
general, the term “educational” as used in section 501(c)(3) relates to the instruction or training of
the individual for the purpose of improving or developing his capabilities or, the instruction of
the public on subjects useful to the individual and beneficial to the community.

Section 1.501(c)(3)-1(d)(ii) of the Regulations provides that an organization is not organized or
operated exclusively for one or more exempt purposes unless it serves a public rather than a
private interest. Thus, to meet this requirement, the organization must establish that it is not
organized or operated for the benefit of 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.

Section 1.501(c)(3)-1(e)(1) of the Regulations provides that an organization may meet the
requirements of section 501(c)(3) of the Code although it operates a trade or business as a
substantial part of its activities, if the operation of such trade or business is in furtherance of the
organization’s exempt purpose or purposes and if the organization is not organized or operated
for the primary purpose of carrying on an unrelated trade or business.

Rev. Rul. 69-528, 1969-2 C.B. 127, holds that providing investment services on a regular basis
for a fee is a trade or business ordinarily carried on fro profit even if that service were regularly
provided to exempt organizations. Therefore, any organization recognized as exempt under
section 501(c)(3) of the Code providing such services would be carrying on an unrelated trade
or business.

Rev. Rul. 72-124, 1972-1 C.B. 145, holds that the aged are a charitable class and that an
organization that operates to address the needs of the aged by providing for the “primary needs”

of such individuals for housing, health care, and financial security in conformity with the criteria
specified in this Rev. Rul. is exempt under section 501(c)(c) of the Code.

Rev. Rul. 72-369, 1972-2 C.B. 245, holds that 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) of the Code. According to the Internal Revenue Service (the Service),
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 are provided at cost and solely for
exempt organizations is not sufficient to qualify the activity as charitable within the meaning of
section 501(c)(3) of the Code. Therefore, the Service held that the organization's activities were
not charitable.

Better Business Bureau of Washington, D.C., Inc. _v. U.S., 326 U.S. 279 (1945) holds that the
presence of a single non-exempt purpose, if substantial in nature, will preclude exemption,
regardless of the number or importance of statutorily exempt purposes.

In B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352, 352-55, 360 (1978), the Tax Court
determined that an organization formed to provide consulting services on the topic of rural-
related policy and program development to tax-exempt organizations at, or close to cost, did not
qualify for exemption under section 501(c)(3) of the Code as an educational, scientific, or
charitable organization. In examining the organization's activities, the court noted that an
organization may operate a trade or business and still qualify under section 501(c)(3) of the
Code. “Rather, the critical inquiry is whether [the organization’s] primary purpose for engaging
in its sole activity is an exempt purpose, or whether its primary purpose is the nonexempt one of
operating a commercial business producing net profits for [the organization].” This
determination “is a question of fact to be resolved on the basis of all the evidence presented by
the administrative record.” Factors to be considered include “the particular manner in which an
organization's activities are conducted, the commercial hue of those activities, and the existence
and amount of annual or accumulated profits.” Furthermore, “[clompetition with commercial
firms is strong evidence of the predominance of nonexempt commercial purposes.” Applying
this analysis, the court determined that the organization's services obviated the need for non-
profits to employ full-time staff for that function, that the organization's fee was based on the
cost of providing services rather than the tax-exempt organization's ability to pay, that the
organization realized profit, that the organization's financing was not typical of section 501(c)(3)
organizations, and that, in practice, the organization did not limit its services to section 501(c)(3)
organizations. Therefore, the court concluded that the organization did not qualify for tax-
exempt status under section 501(c)(3) of the Code because it served a substantial commercial
purpose.

In American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989), the Tax Court
determined that the American Campaign Academy, a training program for political campaign
professionals, operated for the private benefit of the Republican party because its curriculum
was tailored to Republican interests, its graduates worked for Republican candidates and
incumbents, and it was financed by Republican sources. The Tax Court defined private benefit
as “nonincidental benefits conferred on disinterested persons that serve private interests.”
Private benefits included “advantage; profit; fruit; privilege; gain; [or] interest.”

Rationale:

An organization seeking tax-exempt status under section 501(c)(3) of the Code must be
organized and operated exclusively for one or more of the exempt purposes enumerated in
section 501(c)(3) of the Code with no part of its net earnings inuring to the benefit of any private
shareholder or individual. See also Section 1.501(c)(3)-1(a)(1) of the Regulations. Such
organization also has the burden of establishing to the satisfaction of the Service that it qualifies
for exemption under section 501(c)(3).

You state that you seeking tax-exempt status under section 501(c)(3) of the Code to further
charitable, religious, educational and scientific purposes. You also represent that you were
formed to create a single entity representing the common interest of the diverse community of
rural mobile broadband providers and their suppliers. Additionally, you state that your purpose
is to help Americans get the best of the best for rural areas, leading to a ubiquitous, safe,
mobile, affordable and sustainable broadband service environment. Based on a review of your
activities, you have failed to establish that you are described in Section 501(c)(3) of the Code
as explained below:

1. Exempt Purposes

An organization satisfies the operational test if it operates exclusively for one or more exempt
purpose. An organization is “operated exclusively” for one or more exempt purpose only if it
engages primarily in activities that accomplish one or more of such exempt purposes specified
in section 501(c)(3) of the Code. The presence of a single, substantial non-exempt purpose will
destroy the exemption regardless of the number or importance of any truly exempt purposes.
Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279 (1945). You fail the
operational test because you are not operated exclusively for one or more exempt purposes.

The term “charitable” is used in Section 501(c)(3) of the Code in its generally accepted legal
sense and is not to be construed as limited by the separate enumeration in that section. See
Section 1.501(c)(3)-1(d)(2). The term “charitable” includes the following: relief of the poor and
distressed or of the underprivileged; advancement of education of education or science;
lessening the burdens of Government; and promotion of social welfare by organizations
designed to accomplish any of the above. Additionally, a purported charitable activity must
benefit a sufficiently large and indefinite class. The service has recognized charitable classes to
include the poor, distressed and underprivileged, the aged, and the sick or handicapped.

While you state that you seek to get the best of the best in broadband services in rural areas
throughout the country, you have failed to demonstrate how you will achieve this endeavor. You
have not presented a business plan or proposals to show how you intend to achieve your
purposes other than you are launched to create a single entity representing the common
interest of the diverse community of rural mobile broadband providers and their suppliers.
Despite several conversations with your legal representative and requests for detailed
information explaining exactly how you intend to operate and achieve some exempt purpose,
you have not established that you are organized and operated exclusively for one or more
exempt purpose.

2.

Private Benefit

Information provided in your application shows that you serve substantial private interests in
violation of section 501(c)(3) of the Code. An organization is not organized or operated
exclusively for one or more exempt purpose unless it serves a public rather than private interest.
Thus, it is necessary for an organization to establish that it is not organized or operated for the
benefit of private interests such as a designated individual, the creator or his family,
shareholders of the organization, or persons controlled, directly or indirectly, by such private
interests. Applicants must show that no more than an insubstantial part of its activities benefit
private interests or any other nonexempt purpose.

When your application was initially filed you had various classes of members, high membership
fees and some members received substantial benefits. You now represent that membership in
your organization is free and that members no longer receive services or benefits. While you
state that the collaboration of members who work in the mobile broadband industry is necessary
to bring broadband to rural areas of the country, it appears that your activities are directed
towards promoting the private business interests of your members working in the broadband
industry. This is confirmed by your stated purpose which is to crate a single entity representing
the common interests of the diverse community of rural mobile broadband providers and their
suppliers. Therefore, you are still operated for the private benefit of your officers, directors and
members.

3. Substantial Commercial Purpose

You are operated for a substantial commercial purpose because your primary activity, the
operation of a broadband network, is generally, considered a trade or business ordinarily carried
on for profit. An organization may meet the requirements of section 501(c)(3) of the Code
although it operates a trade or business as a substantial part of its activities if the operation of
such trade or business is in furtherance of the organization’s exempt purpose or purposes and if
the organization is not organized or operated for the primary purpose of carrying out an
unrelated trade or business. An “unrelated trade or business’ is any trade or business the
conduct of which is not substantially related (aside from the need of such organization for
income or funds or the use it makes of the profit derived) to the exercise or performance by such
organization of its charitable, educational, or other purpose or function constituting the basis for
its exemption under section 501(a) of the Code.

In determining the existence, or nonexistence, of such primary purpose, all the facts and
circumstances must be considered, including the size and extent of such trade or business and
the size and extent of the activities which are in furtherance of one or more exempt purposes.
“{The} critical inquiry is whether petitioner's primary purpose for engaging in its sole activity is an
exempt purpose, or whether its primary purpose is the nonexempt one of operating a
commercial business producing net profits for {the) organization.” B.S.W. Group, Inc. v.
Comm’r, 70 T.C. 352, 357 (1978). Factors to be considered include “the particular manner in
which an organization's activities are conducted, the commercial hue of those activities, and the
existence and amount of annual or accumulated profits.” Competition with commercial firms is
strong evidence of the predominance of nonexempt commercial purposes.

For example, Rev. Rul. 69-528, 1969-1 C.B. 279, involves an organization that regularly carried
on an investment service business. The organization was formed to provide investment
services on a fee basis exclusively to exempt organizations. The Service determined that

providing investment services on a regular basis for a fee is a trade or business ordinarily
carried on for profit. Therefore, the organization did not qualify for exemption under section
501(c)(3) of the Code because it regularly carried on the business of providing investment
services which would be an unrelated trade or business if carried on by any tax-exempt
organization on whose behalf it operated. Furthermore, Rev. Rul. 72-369, 1972-2 C.B. 245,
determined that providing managerial and consulting services on a regular basis for a fee is a
trade or business ordinarily carried on for profit. Providing services at cost and solely to exempt
organizations is not sufficient to make the activity charitable. Finally, in B.S.W. Group, Inc, v.
Commissioner, 70 T.C. 352 (1975), the Tax Court determined that an organization formed for
the purpose of providing consulting services “primarily in the area of rural-related policy and
program development’ did not qualify for exemption under section 501(c)(3) of the Code
because providing consulting services is a business “ordinarily carried on by commercial
ventures organized for profit.”

Like the organizations described in Rev. Rul. 69-528, Rev. Rul. 72-369, and B.S.W. Group,
access to your broadband services ( if and when you begin to operate) will generally be
provided for a fee. You state in your Bylaws that you were formed to create a single entity
representing the common interests of the community of rural mobile broadband providers and
their suppliers. While you state that you intend to expand mobile broadband services in rural
areas throughout the country, your main focus seems to be developing the business interests of
your members and suppliers and expanding mobile broadband services to rural areas is
incidental to your overall business purposes.

Accordingly, your primary purpose is to engage in a nonexempt activity and therefore, you do
not qualify for exemption under section 501(c)(3) of the Code.

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

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 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 protest
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 this address:

Internal Revenue Service
TE/GE SE:T:EO:RA:T:3

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,

Holly O. Paz
Director, Exempt Organizations