IRS finalizes adverse determination denying a group ruling for subordinates

Plain-English summary

The IRS finalized an adverse determination denying a parent organization’s request for a group ruling covering its subordinate organizations. The package explains that the subordinates’ activities were not clearly separated from the parent’s fundraising programs, which included specialty license plates and popcorn sales. The IRS found that the organization had not established that the subordinates operated primarily for exempt purposes or avoided private inurement and private benefit. The final letter states that donors may not deduct contributions to the subordinates under § 170, and that each subordinate may apply for exemption individually.

Ruling snapshot

• Question: Does the parent organization qualify for a group ruling covering its subordinate organizations?
• Outcome: Denied, the IRS finalized the adverse determination.
• Key authorities: IRC §§ 501(c)(3), 170, 512(a)(1), 6104(c), and 6110; Treas. Reg. §§ 1.501(c)(3)-1 and 1.513-1.

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Contact Person:

Number: 201330043
Release Date: 7/26/2013 Identification Number:

Contact Number:

Date: May 1, 2013
Employer Identification Number:

Form Required To Be Filed:

Tax Years:
UIL: 501.32-00; 501.32-01; 501.33-00; 512.06-00

Dear

This is our final determination that you do not qualify for a group ruling for your subordinates.
Recently, we sent you a letter in response to your application. The letter explained the facts,
law and rationale, and gave you 30 days to file a protest. Since we did not receive a protest
within the requisite 30 days, the proposed adverse determination is now final.

Since you do not qualify for a group ruling for your subordinates, donors may not deduct
contributions to your subordinates under Code section 170. Your subordinates must file federal
income tax returns on the form and for the years listed above within 30 days of this letter, unless
your subordinates request an extension of time to file. Or, your subordinates may individually
apply for exemption.

We will make this letter and our proposed adverse determination letter available for public
inspection under Code section 6110, after deleting certain identifying information. Please read
the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that
show our proposed deletions. If you disagree with our proposed deletions, you should follow
the instructions in Notice 437. If you agree with our deletions, you do not need to take any
further action.

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.

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

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

Letter 4038(CG) (11-2005)
Catalog Number 476325

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: March 8, 2013 Contact Person:

Identification Number:
Contact Number:
FAX Number:

Employer Identification Number:

UIL:

501.32-00
501.32-01

LEGEND 501.33-00
512.06-00

B = Non-Profit Organization

C = For-Profit Business

D = Program Activity

E = Subordinate A

F = Program Activity

J = Date 1

K = Date 2

L= Date 3

M = Date 4

N = Date 5

P = President.

$x = $dollar amount

$y = $dollar amount

$z = $dollar amount

Dear

We have considered your request for a group ruling for your subordinates pursuant to the provisions of
Revenue Procedure 80-27, 1980-1 C.B. 677. Based on the information provided, we have concluded that
you do not qualify for a group ruling under section 501(c)(3) of the Internal Revenue Code. The basis for
our conclusion is set forth below.

Issues

• Is it in the interest of sound tax administration to approve your request for a group ruling? No,
for the reasons described below.

Letter 4036(CG) (11-2011)
Catalog Number 47630W

Facts

You received recognition of exemption under section 501(c)(3). You were organized to “promote support
for and provide assistance to active duty U.S. troops and their families post September 11th”. Your
amended articles of incorporation state that you were organized:

“exclusively for the charitable purposes of (a) obtaining authorization from any state
official, agency, or department of any state within the United States of America, its
territories or possessions for the purpose of procuring the issuance of a specialty motor
vehicle license plate for which an annual fee is charged or to be charged, (b) general
solicitation of contributions from the public, and (c) conducting all business in the
administration of the aforesaid and the management and distribution of the funds and
proceeds generated therefrom, with all of the aforesaid being for the ultimate benefit of
the spouse, children and dependents of (1) members of the armed forces...”

You requested a group exemption ruling letter for your subordinates on J. You were issued a declination
letter on K. The IRS declined to rule on your group ruling request noting that you appeared to have
substantial legislative activities, as well as a large professional fundraising program, involving royalty
type donations. The declination further noted that professional fundraising programs have shown to be
problematic with consistency and compliance when organizations have activities with high compliance
issues. They are not good candidates for group exemptions. These organizations are better qualified for
individual rulings so proper consistency and compliance is attainable. Your individual exemption under
section 501(c)(3) remained in effect. You requested another group ruling determination on L. The facts
presented here are from the L request.

Your group exemption request included 26 subordinate organizations with each subordinate, except for
one, representing a state within the United States. You stated that you and the subordinates “form an
integrated network of organizations to provide efficient and effective assistance to active U.S. troops and
their families”. You maintain the five programs summarized below.

• License Plate Program: provides for the issuance of official state-issued specialty license plates
bearing a specific slogan in each of the 50 states. You describe these as official state-issued
license plates for motor vehicles and you have obtained approval for the sale of the license plates
in 26 states as of the group ruling request date. Each state creates the license plates which include
your slogan and makes the plates available for an additional fee through its Department of Motor
Vehicles for its customers to purchase. The state DMV collects the fee, and part of the purchase
price goes to your subordinate organization in that state as the designated recipient of your share
of the funds collected from the sale of license plates bearing your slogan. You consider it a
fundraiser and say “it enables the central organization and subordinates to raise financial support
to fund their programs.” You give an example of a state where each license plate costs an
individual in that state $60, of which $45 goes to the subordinate organization and $15 goes to
that state’s Department of Motor Vehicles. In the materials you submitted, the license plate
program is described as your “flagship” program.

• Popcorn Sales Program: carried out through you as the central organization, B, a non-profit
organization and C, a for-profit enterprise. The purpose of this program is to collect popcorn,
purchased from B, for donation to the military. B asks individuals to purchase C popcorn during
its annual popcorn fundraiser. You manage the relationship involving B, C, the military, and the

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shipping of the popcorn. You stated that your subordinates provide information to you about
local needs and events where popcorn can be sold or distributed. You provided a press release
describing the popcorn sales program. The press release stated that you transported popcorn from
C’s facilities to another location where it was loaded onto a Navy ship. Therefore, it appears that
your role was limited to arranging for transportation of the popcorn. You do not actually deliver
the popcorn to troops abroad. Your subordinates merely provide information regarding local
popcorn sales opportunities.

• D2: a database that provides a way for donors to connect with charities that provide support to
troops. The database is maintained by you, and your subordinates provide information about
charitable organizations at the state level and names of organizations they feel should go into the
database from their state.

• F: a platform or program within your website that provides interpersonal connections and
interactions on your website among individuals regarding the troops and their families. You, and
one of your subordinate organizations, which developed this platform, maintain the website.
Everyone who purchases a license plate is automatically a non-voting member. Members can set
up their own web pages to promote a rally or post and exchange news about the troops, and
advertise fundraising events.

• Care goods program: this program ships individual boxes to individual soldiers and larger boxes
for entire units. You collect donated goods such as personal care items, candy, and sunscreen and
ship them in cargo containers with the popcorn donation. You state that the subordinates are
responsible for obtaining shipping addresses for troops deployed from their states and organizing
local events where individuals can bring donated care goods and put together care boxes to be
shipped to the soldiers.

Article VI of your Articles of Incorporation states the directors shall be elected by the members and that
the corporation will be managed by officers under the direction of the board of directors. The number of
directors may be increased or decreased by the members as provided in the By-Laws.

You identify four individuals as your initial directors. The initial directors of each subordinate include P,
your president, and one other of your directors.

Your By-laws state that any or all of the directors may be removed with or without cause by a unanimous
vote of the membership or by a vote of [illegible] of the directors at a special meeting called for
that purpose. However, P, your president, may not be removed and shall have a lifetime seat as Chairman
of the Board until his death or voluntary resignation.

Article XI of your Articles of Incorporation contains an acknowledgement that the corporation recognizes
that:

[ the] corporation, the charitable purposes and business concept behind it, were ideas of
President. Without him this corporation would not have come into existence and without
him what comes out of it would not be. As Founder, he is the man principally
undertaking the creation and organization of all aspects of the building of this charitable
enterprise, and the primary thought and labor in its creation and the launching of its
enterprises and structures will in large part come from him and be driven by his
thoughts, labor, and ingenuity.

Letter 4036(CG) (11-2011)
Catalog Number 47630W

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In response to a request to explain the number of members in the subordinate organizations and how
someone may become a member, you stated that the subordinates do not have members and that
volunteers are used to carry out the activities.

You state that subordinate organizations are required to adopt uniform Articles of Incorporation and By-
Laws which have been developed and approved by you. Each subordinate also is required to follow a
subordinate organization operating guideline. The uniform By-laws of the subordinates state that
“membership shall comprise of only one member which is [you], which shall exclusively, irrevocably and
forever hold all voting rights and power”.

You provided information for each subordinate including name, address, EIN, filed articles of
incorporation and any amendments, and the names and positions of the officers. Each subordinate has
three officers, two of which are typically P and his attorney (one subordinate has four officers, but is still
at least controlled by P and his attorney).

In correspondence dated M, you were asked to explain the activities of the subordinates in more detail.
You stated that the subordinates carry out their charitable purposes by boosting morale from distributing
in-kind donations from the public and providing financial assistance to needy U.S. troops and their
families. You described the in-kind donation program as consisting of the subordinates working with
local stores to collect in-kind donations from customers at the checkout registers that your subordinates
will inspect, repackage, and ship to the troops. You described in-kind donations as food products and
personal items, including hygiene products and CDs. You also explained that subordinates have made
monetary grants to other tax-exempt charities that operate emergency relief funds for the troops and their
families. Another activity you described as carried out by your subordinates is organizing events for the
troops and their families to address their mental well-being. You gave as an example a soldiers’ night
event at a baseball game. The activity consisted of arranging for the troops and their families to attend a
baseball game for free and to receive free popcorn. This activity appears to have occurred just one time.

You supplied the sections and the law of three different state codes outlining the requirements under each
code. The code you provided describes the specialty license plate and the fee that is charged to the
individual, the fee that is retained by the Department of Motor Vehicles, and the fee that would be given
to the subordinate. Each state collects the total fee and deposits the part of the fee that is given to the
subordinate in special funds established in the subordinate’s name. The subordinates are an integral part
of the license plate program and participate in implementing the program at the state level. The state
programs require the subordinates to be tax-exempt organizations. You also explained that many
subordinates have been approved to participate in their states’ state employees charitable campaigns once
the group exemption is approved.

Additionally, you were asked to provide the amount of monetary assistance that each subordinate has
received and to explain where the material and funds were obtained. You replied that the subordinates
have received very little monetary contributions, and you provided a chart that has an overview of the
donors who make in-kind contributions to the subordinates. You also stated that because the
subordinate’s tax-exempt status is pending, the central organization receives contributions on behalf of
the subordinates.

When questioned about how the subordinates pay for their expenses since contributions are in the form of
non-monetary assistance, you stated that the central organization provides the monetary support to the

Letter 4036(CG) (11-2011)
Catalog Number 47630W

5

subordinates and that some subordinates receive funding from the central organization through the license
plate program.

There also was a question about the activities of one of the subordinates, E. The activities consisted of
maintaining a database program of the individuals who had purchased your specialty license plate. The
subordinate also carries on the activity that is explained above as the F, an internet platform providing
opportunities for interpersonal connection and communication through your website. You called the
contributors to F automatic non-voting members of the organization. Only expenses were shown for this
subordinate; no revenue. You explained the central organization absorbed the expenses of the
subordinate. You have subsequently removed this subordinate from the group ruling request and stated
that the central organization would conduct the activity.

In a later correspondence dated N, you were asked about the chart that you supplied in your previous
response that showed an overview of in-kind donations that had been received by each of the
subordinates. The chart showed very few donations received by a number of the subordinates. You were
asked to provide a breakdown of the donations received, whether monetary or in-kind donations. In your
response, you provided the breakdown and stated that the subordinates may appear to be receiving
contributions from a few donors but they are actually receiving contributions from a large base of donors.
You stated that the popcorn is donated by individuals who purchase it from B, who acquires it from the
for-profit company, C.

In addition, you provided a Form 990 as part of the group ruling request. Information gleaned from this
Form 990 supplements the description of your activities and operations. Form 990 data shows that
approximately % of your revenues are in the form of donated popcorn. Based on the information in
your Form 990, you had an inventory of popcorn valued at more than $ , but shipped less than $

worth of popcorn to overseas military bases that year. In other words, only a fraction of the
donated popcorn, acquired from C, was actually shipped to troops, while most of your popcorn inventory
remained indefinitely in storage.

The Form 990 identifies three individuals as your directors, two of whom are related. These two are your
president, P, who has life tenure on the governing body, and P’s father-in-law.

Schedule C of Form 990 indicates you had direct contact with legislators, their staffs, government
officials, or a legislative body.

Schedule J shows P as President/Director with compensation of $w for the business use of personal
residence and deferred compensation of $x. You awarded P a bonus payment of $y for prior year
results. You also awarded P an annual contract compensation of $z. P may defer receipt of payment
until the organization is in a position to provide payment without affecting the growth of the organization.

Schedule O explains the loans from interested persons. You entered into private loan agreements with
directors, trustees, and other individuals with ties to the organization. The loans had interest rates ranging
from %to %, The payable balance is not scheduled to be repaid during the following fiscal year
and is listed in long term liabilities.

Schedule R-1 lists the subordinate organizations and indicates the exempt foundation code section
requested is 509(a)(3).

Letter 4036(CG) (11-2011)
Catalog Number 47630W

Law

Section 501(c)(3) of the Internal Revenue Code exempts from federal income tax corporations organized
and operated exclusively for charitable, educational, and other purposes, provided that no part of its net
earnings inures to the benefit of any private shareholder or individual and no substantial part of the
activities of which are attempting to influence legislation.

Section 1.501(c)(3)-1(a)(1) of the Income Tax Regulations (“regulations”) provides that, in order to be
exempt as an organization described in section 501(c)(3), an organization must be both organized and
operated exclusively for one or more of the purposes specified in such section. If an organization fails to
meet either the organizational test or the operational test, it is not exempt.

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 that accomplish
one or more of such 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 that 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) defines the words “private shareholder or individual” in
section 501 to refer to persons having a personal and private interest in the activities of the organization.

Section 1.501(c)(3)-1(d)(1)(ii) of the regulations requires an applicant organization to establish that it
serves a public rather than a private interest and specifically 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 512(a)(1) defines the term “unrelated business taxable income” as the gross income derived by
any organization from any unrelated trade or business regularly carried on by it, less the allowable
deductions which are directly connected with the carrying on of such trade or business, both computed
with the modifications provided in section 512(b).

Section 1.513-1(d)(3) of the regulations provides that in determining whether activities contribute
importantly to the accomplishment of an exempt purpose, the size and extent of the activities involved
must be considered in relation to the nature and extent of the exempt function which they purport to serve.
Thus, where income is realized by an exempt organization from activities which are in part related to the
performance of its exempt functions, but which are conducted on a larger scale than is reasonably
necessary for performance of such functions, the gross income attributable to that portion of the activities
in excess of the needs of exempt functions constitutes gross income from the conduct of unrelated trade or
business. Such income is not derived from the production or distribution of goods or the performance of
services which contribute importantly to the accomplishment of any exempt purpose of the organization.

Rev. Rul. 78-84, 1978-1 C.B. 150, describes a color guard formed by community citizens to promote
civic pride, the state, and the country by conducting flag-raising and other ceremonies at patriotic and
community functions. The ruling held that the organization promoted patriotism and qualified for
exemption under section 501(c)(3) of the Code.

Letter 4036(CG) (11-2011)
Catalog Number 47630W

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Rev. Proc. 80-27, 1980-1 C.B. 677, provides the procedures for requesting a group ruling. Detailed
descriptions of the subordinate organizations should include among information submitted:

(a) information verifying the existence of the relationships required by section 4.02; (b) a sample copy of
a uniform governing instrument (charter, trust indenture, articles of association, etc.) adopted by the
subordinates; or, in the absence of a uniform governing instrument, copies of representative instruments,
(c) a detailed description of the purposes and activities of the subordinates including the sources of
receipts and the nature of expenditures; (d) an affirmation that, to the best of the officer's knowledge, the
purposes and activities of the subordinates are as set forth in (b) and (c) above; (e) a statement that each
subordinate to be included in the group exemption letter has furnished written authorization to the central
organization as described in section 4.03; (f) a list of subordinates to be included in the group exemption
letter to which the Service has issued an outstanding ruling or determination letter relating to exemption;

Rev. Proc. 2013-9, 2013-2 LR.B., sect. 4.03(2),(3), requires an applicant to submit sufficient information
during the application process for the IRS to conclude that the organization is in compliance with the
organizational and operational requirements of section 501(c)(3) before it issues a ruling. The
organization must fully describe all of the activities in which it expects to engage, including the standards,
criteria, procedures, or other means adopted or planned for carrying out the activities, the anticipated
sources of receipts, and the nature of contemplated expenditures. Where the organization cannot
demonstrate to the satisfaction of the IRS that it qualifies for exemption pursuant to the section of the
Code under which exemption is claimed, the IRS will generally issue a proposed adverse determination
letter or ruling.

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.

In Mabee Petroleum Corporation v. U.S., 203 F. 2d 872 (5th Cir. 1953), the court held that a $100,000
salary paid to the founder of the charitable organization was unreasonable compensation and therefore
inurement. In deciding that the salary was unreasonable, the court noted that he devoted only a small part
of his time to the organization, that he had previously served as president of the predecessor organization
without salary, that the gift of his stock was encumbered by the obligation to pay the annual salary for 15
years, that comparable services from an outside source through an arms-length transaction would
probably have been available at a lower cost, and that the long term of the contract without consideration
of changes in the business or in economic conditions indicated that it was unrelated to services performed.
The underlying premise (reasonable salaries do not constitute inurement, while excessive or unreasonable
salaries do constitute inurement of corporate net earnings) was thought to be “too well settled to require
citation of authority.”

In Birmingham Business College v. Commissioner, 276 F.2d 476 (5th Cir. 1960), the court affirmed
revocation of exempt status of the school, based in part on the inurement of its earnings through salaries,
loans and draws against future earnings to the three shareholders who were also employees.

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

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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) organization. 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.

The petitioner in est of Hawaii v. Commissioner, 71 T.C. 1067 (1979), conducted training, seminars and
lectures in the area of intrapersonal awareness. Such activities were conducted under licensing
arrangements with various for-profit corporations. The licensing agreements were conditioned on the
petitioner maintaining tax exempt status. The petitioner argued that it had no commercial purpose of its
own and that its payments to the for-profits were just ordinary and necessary business expenses. The
Court did not agree with the petitioner citing that the operational test (see section 1.501(c)(3)-1(c)(1) of
the regulations) focuses on the purpose rather than nature of an organization's activities. An organization
that serves a private interest other than incidentally is not entitled to exemption under section 501(c)(3).
Thus, although an organization's operations may be deemed to be beneficial to the public, if it also serves
private interests other than incidentally it is not entitled to exemption. The Court concluded that the
petitioner is not exempt under section 501(c)(3) of the Code because the petitioner served a substantial
private and commercial purpose rather than an exempt purpose.

Analysis

Based on the information you submitted, and for the reasons explained below, it is not in the interest of
sound tax administration to approve your request for a group ruling because you have failed to clearly
establish qualification for exemption for your subordinates, as required in Rev. Proc. 2013-9.

Failure to Establish

You have failed to show subordinates meet the operational test and failed to show operations of the
subordinates will not result in inurement to P or other insiders or more than insubstantial private benefit
to C or similar for-profit companies. The information you submitted does not clearly delineate the
activities you perform and the activities that are performed by your subordinates. You have not clearly
stated whether you perform all the state license plate activities and popcorn fundraising and distribution,
or the extent to which your subordinates have some part in these activities, other than creating a state
presence. The activities that you attribute to your subordinates could just as easily be attributed to you.
See est of Hawaii v. Commissioner, 71 T.C. 1067 (1979). In your responses to questions about your
operations, as well as in the Form 990 you provided, your subordinates are treated as disregarded entities
when convenient. Your primary activity appears to be fundraising through the popcorn sales program and
the state license plate program, which also provide your main source of income. It is not clear your
subordinates are operated exclusively for one or more tax exempt purposes as required by section
501(c)(3) of the Code and section 1.501(c)(3)-1(c)(1) of the regulations.

The description of the purposes and activities of your subordinates does not meet the requirements of
Rev. Proc. 80-27. Although you claim that popcorn donations were made to the subordinates, the online
order form for popcorn lists you as the sponsoring organization, and includes your Combined Federal
Campaign number. There is no indication that a popcorn donation might be processed through a state
subordinate or even that a donor would be aware of any involvement by a subordinate. Your website

Letter 4036(CG) (11-2011)
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states that you are but makes no mention
of a state subordinate’s involvement in this transaction. There is no indication that the subordinates
maintain corporate formalities, such as Board meetings. Unlike the organization described in Rev. Rul.
78-84, supra, which performed activities that promoted patriotism; your subordinates were formed only to
permit you to conduct your license plate program in various states. Based on the foregoing, the license
plate and popcorn activities are all your activities and the subordinates exist only to give you a state
presence to conduct these fundraising activities. Accordingly, you have failed to clearly establish
qualification of exemption for your subordinates.

Operational Test

Organizations described in section 501(c)(3) of the Code must be organized and operated exclusively for
one or more exempt purposes specified in the regulations, which include charitable or educational
purposes. See section 1.501(c)(3)-1(a)(1) of the regulations.

To be operated exclusively for one or more exempt purposes, an organization must engage primarily in
activities that accomplish one or more exempt purposes. However, if more than an insubstantial part of
the organization's activities is not in furtherance of an exempt purpose, it is not engaged primarily in
activities that accomplish an exempt purpose. See section 1.501(c)(3)-1(c)(1) of the regulations.

You describe your license plate program as your “flagship” program, indicating that it is the primary
activity of your organization. Your subordinates’ role in the license plate program is limited to providing
a state presence and a possible recipient of funds from you. The individual state presence also facilitates
lobbying individual state legislatures. This is a fundraising activity and does not constitute an exempt
activity in itself. You also sell popcorn from C, a for-profit company through sales by the non-profit
organization, B and through B’s website. The reason you sell the popcorn is ostensibly so that members
of the public can purchase popcorn for deployed troops. However, this is yet another fundraising activity
that does not constitute an exempt activity in itself. Your subordinates merely provide to you information
regarding local popcorn sales. No clearly defined exempt activity has been described as the subordinate
organizations’ primary activity.

Even if your subordinates fundraise as a primary activity, that alone will not satisfy the operational test.
As in B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978), we must conclude that the activities of
your subordinates are of the sort ordinarily carried on by commercial ventures organized for profit
because you have failed to show otherwise. You have failed to show subordinates meet the operational
test.

Inurement and Private Benefit

In addition to the fact that the subordinates do not appear to have exempt activities, several facts suggest
that there may be inurement of the net earnings of the subordinates to P, the founder and President, and to
various other insiders. Inurement to such individuals is prohibited under section 1.501(c)(3)-1(c)(2) of
the regulations. For example, P is entitled to deferred compensation that is disproportionate. You also
awarded him a large bonus in a year for that year’s results, as well as a large compensation contract. Such
extraordinary compensation that is not dependent on performance suggests inurement of income as
illustrated by the formal opinions in the court decisions in Mabee Petroleum Corporation v. U.S., 203 F.
2d 872 (5th Cir. 1953); and Birmingham Business College v. Commissioner, 276 F.2d 476 (5th Cir. 1960).
The provision in your subordinates’ respective articles of incorporation that acknowledges P’s “thoughts,
labor and ingenuity,” as well as the composition of your subordinates’ boards, lack of Members, and rules

Letter 4036(CG) (11-2011)
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for changing board control, suggests that the subordinates are structurally under his control. They appear
to be operated for his benefit. He, unlike other directors, cannot be removed and has a lifetime seat as
Chairman. He also is related to at least one other member of your governing body. Each subordinate has
three officers, two of which are typically P and his attorney. One subordinate has four officers, but is still
at least controlled by P and his attorney. There are also private loan agreements between the
organization and various insiders for significant amounts. You and your subordinates are controlled by
the same small group of individuals, including your President and a small number of other individuals.
You listed salaries for employees of each state subordinate. However, since these subordinates are
controlled by the same small group of individuals, these salaries are being paid primarily or exclusively to
those individuals, including P.

Also, you, through your subordinates appear to provide private benefit to C, the for-profit business. The
popcorn is purchased exclusively from C. There is no indication that the popcorn company sells the
popcorn at or below cost. The significant popcorn purchases provide the company with substantial
private benefit. This is inconsistent with section 1.501(c)(3)-1(d)(1)(ii) of the regulations.

Although your subordinates are organized to promote support for and provide assistance to active duty
U.S. troops and their families, your subordinates’ activities in this regard are minimal, at best. As noted
in est of Hawaii v. Commissioner, 71 T.C. 1067 (1979) even when an organization's operations may be
deemed to be beneficial to the public, if it also serves private interests other than incidentally it is not
entitled to exemption. Your subordinates are primarily performing fundraising activities, the funds of
which do not exclusively benefit the troops, but rather also benefit your founder, a small group of
insiders, and a for-profit company. The role of your subordinates in your various programs is not clear
but appears to merely provide you with a presence in several states or venues to expand sales.

More than Insubstantial Non-Exempt Purpose

The state license plate program in which your subordinates expect to participate as a fundraising activity
cannot be regarded as exempt activities, because “fundraising” is not itself a charitable activity or an
exempt purpose. Better Business Bureau of Washington D.C., Inc. v. United States, 326 U.S. 279 (1945)
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. Furthermore, once the subordinates
participate in the state license plate programs, they will generally receive income from a regularly carried
on trade or business. Even if proceeds from this activity are ultimately not taxable as unrelated business
income, (as defined in IRC section 512(a)(1), it remains a non-charitable activity. Additionally, in order
to participate in state license plate programs, the subordinates must lobby state legislatures. You have
indicated (schedule C of Form 990) you have had direct contact with legislators, their staffs, government
officials or a legislative body. Your subordinates will perform the lobbying. Because the license plate
programs would likely be the subordinates’ primary activity, it is possible that just the lobbying activity,
itself, would be a substantial part of the subordinates’ activities.

Even if the popcorn donations are processed through the state subordinates, this activity is not an
inherently charitable activity. The only charitable part of this activity is if popcorn is distributed to the
troops. However, there is no evidence to establish that the popcorn donations are actually being
distributed by those subordinates to the troops. While it appears that individuals are purchasing
significant amounts of popcorn for the troops, it is not clear that a corresponding amount of popcorn is
being distributed to the troops. You cited only one instance where families of troops were given popcorn
during a baseball game. Instead, the information submitted suggests that significant stockpiles of popcorn

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are warehoused, and it is unclear how much of it is actually distributed to troops If a charitable activity is
conducted on a scale that is larger than necessary, then the portion that is in excess of what is necessary is
not charitable as indicated in section 1.513-1(d)(3) of the regulations. In fact, the information on your
Form 990 as well as other facts suggest that most of the popcorn is wasted. Additionally, in the few
instances that popcorn is actually distributed to troops, your involvement is rather limited. You may
transport popcorn from a warehouse to a carrier within the U.S., but the bulk of the transport and delivery
is conducted by others. Accordingly, it stands to reason any involvement of your subordinates in the
distribution of popcorn will likewise be limited. In addition, you were unable to clearly show insiders,
such as P, or for-profit companies, such as C, will not benefit.

Conclusion

You have failed to establish that your subordinates’ activities are primarily "charitable" within the
meaning of section 1.501(c)(3)-1(d)(1)(ii) of the regulations, and have failed to establish that your
subordinates are not organized or operated for the benefit of private interests.

Accordingly, it is not in the interest of sound tax administration to approve your request for a group
ruling.

Each subordinate may, however, file for tax-exempt status on its own by filing Form 1023, Application
for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, or Form 1024,
Application for Recognition of Exemption Under Section 501(a), and paying the appropriate user fee.

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.

Types of information that should be included in your appeal can be found on page 2 of Publication 892.
These items include:

1. The organization’s name, address, and employer identification number;

2. A statement that the organization wants to appeal the determination;

3. The date and symbols on the determination letter;

4. A statement of facts supporting the organization’s position in any contested factual issue;

5. A statement outlining the law or other authority the organization is relying on; and

6. A statement as to whether a hearing is desired.

The statement of facts (item 4) must be declared true under penalties of perjury. This may be done by
adding to the appeal the following signed declaration:

“Under penalties of perjury, I declare that I have examined the statement of facts presented in this appeal
and in any accompanying schedules and statements and, to the best of my knowledge and belief, they are

Letter 4036(CG) (11-2011)
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12
true, correct, and complete.”
Your appeal will be considered incomplete without this statement.

If an organization’s representative submits the appeal, a substitute declaration must be included stating
that the representative prepared the appeal and accompanying documents; and whether the representative
knows personally that the statements of facts contained in the appeal and accompanying documents are
true and correct.

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 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

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.

We sent a copy of this letter to your representative as indicated in your power of attorney.

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 and Agreements
Enclosure, Publication 892

Letter 4036(CG) (11-2011)
Catalog Number 47630W