Broadband-access organization denied section 501(c)(3) exemption

Plain-English summary

The IRS considered an organization formed to expand broadband internet service in underserved and unserved areas. The organization planned to organize community stakeholders, negotiate access to middle-mile infrastructure for internet service providers, and help providers obtain public resources and customers. The IRS concluded that the organization was not properly organized for exempt purposes, did not serve a charitable class, and would further substantial commercial purposes and private benefits for for-profit providers. It therefore denied exemption under section 501(c)(3).

Ruling snapshot

• Question: Did the broadband-access organization qualify for exemption under IRC § 501(c)(3)?
• Outcome: Denied
• Key authorities: IRC §§ 501(a), 501(c)(3), and 7428; Treas. Reg. §§ 1.501(c)(3)-1(a), (b), (c), and (d); Rev. Ruls. 77-111, 85-1, and 85-2; Rev. Procs. 96-32 and 2012-9

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: 201408029
Release Date: 2/21/2014 Identification Number:

Contact Number:

Date: November 26, 2013 Employer Identification Number:

Form Required To Be Filed:
Tax Years:

UIL: 501.00-00
|

Dear

This is our final determination that you do not qualify for exemption from Federal income tax
under Internal Revenue Code section 501(a) as an organization described in Code section
501(c)(3).

We made this determination for the following reason(s):

You do not operate exclusively for an exempt purpose and your activities appear to provide
more than incidental benefit to private parties.

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.

If you decide to contest this determination under the declaratory judgment provisions of Code
section 7428, you must initiate a suit in the United States Tax Court, the United States Court of
Federal Claims, or the District Court of the United States for the District of Columbia before the
91* day after the date that we mailed this letter to you. Contact the clerk of the appropriate
court for rules for initiating suits for declaratory judgment. Filing a declaratory judgment suit
under Code section 7428 does not stay the requirement to file returns and pay taxes.

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

2

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,

Karen Schiller
Acting Director,
EO 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

Contact Person:

Date: January 23, 2013
Identification Number:

UIL: 501.00-00 Contact Telephone Number:
FAX Number:

Employer Identification Number:

-
@

<o]
@
S
a

OlMIOIzZ

tate

Dear

We have considered your application for recognition of exemption from Federal income
tax under § 501(a) of the Internal Revenue Code (the “Code’”) as an organization
described in § 501(c)(3). Based on the information submitted, we conclude that you do
not qualify for exemption under that section. The basis for our conclusion is set forth
below.

FACTS
You filed your Articles of Incorporation (the “Articles”) with your Secretary of State on

Date 1 and submitted a Form 1023, Application for Recognition of Exemption Under
Section 501(c)(3) to the Internal Revenue Service (IRS) later that year.

Purpose & Activities
Your original Articles of Incorporation state that your purpose is:

to expand and improve internet service to underserved and unserved
areas, improve affordability and access for education, health services
and community institutions and to support economic development
within the 16 county service area of [your state’s] Northeast
Commission...provide a single point of contact for businesses and
community groups interested in improving broadband service in their
area... provide access to technical, financial and physical resources for
developing broadband access...be an advocate for improving broadband
access in our service area....

You submitted an amendment to your articles, dated Date2, adding a statement that you
will operate exclusively for charitable and educational purposes in a manner consistent
with §501(c)(3) of the Code. However, you did not demonstrate that this amendment had
been formally adopted by your Board or filed with your Secretary of State. When we
asked whether you would be willing to amend your Articles to include proper purpose
and dissolution clauses you responded that you would revise your Bylaws.

Your efforts to improve internet service in your region take place in the context of a
national effort to do so. The American Recovery and Reinvestment Act (Recovery Act)
established a program, including large federal grants, to develop and expand broadband
service, named the Broadband Technology Opportunities Program (BTOP). Its purpose
is to stimulate economic growth and job creation, and provide benefits to education,
healthcare, public safety and expand broadband access and adoption. The Assistant
Secretary of the Department of Commerce found it in the public interest to permit for-
profit corporations an non-profit entities (not otherwise encompassed by section
6001(e)(1)(B)) that are willing to promote the goals of the Recovery act and comply with
the statutory requirements of BTOP to be eligible for a grant.

In your state, N, a non-profit research center operates “middle mile” internet lines.
These middle mile lines branch off from a “central backbone” internet line. N was
awarded the state grant through the program authorized under the BTOP. Internet
Service Providers (ISPs), in turn, operate “last mile” internet lines by branching off from
the middle mile lines. AN ISP provides internet service directly to subscribers and users
via these last mile internet lines. You stated that you will not receive any of the BTOP
funds awarded to N.

QO is a regional economic development organization created by your state’s legislature to
further business development and improve the quality of life for residents in the sixteen
counties of the Northeast region. You state that O refers ISPs within your region to you,
which generally are for-profit entities.

You explain your role in expanding broadband coverage as providing a single point of
contact for “stakeholder groups” interested in improving broadband service in your
region in an effort to address the accessibility and affordability of internet coverage.
These stakeholder groups will consist of community groups, local businesses and

business groups, local governments, school boards, community colleges, local internet
users, and commercial internet service providers (“ISPs”), among others.

You will negotiate with N to gain low-cost or no-cost access to N’s middle mile internet
lines for ISPs. You state that you will assist the ISPs on the condition that they intend (at
least in part) to provide last mile internet line services to unserved and underserved
areas of your region. Each project in which you participate will develop its own targets
based on the circumstances in the project area, and that you will not participate in any
project that does not adopt and demonstrate progress toward a specific target for
improving access to broadband service by access to service and/or decreasing cost.

You will engage in “community organizing services” to carry out your purpose. You will
hold “stakeholder meetings” to explain the opportunity that N investment in middle mile
infrastructure represents for your region, and to explain the processes that other
communities have used to expand access to broadband services. Though these
meetings, working groups will be formed that represent a variety of community interests.
These working groups will identify “community resources” that can be aggregated in a
program to expand access to broadband.

You provided examples of the types of community resources that will be identified by the
working groups, which include: free or reduced charge access to public rights of way;
“repurposing” existing grant funds; cost-savings driven by broadband access that could
be “repurposed” into the expansion of broadband access; locations in public buildings
that could house network infrastructure at no cost; and publicly owned towers that could
host wireless network sites for free or at a reduced cost.

You will also advocate for improving broadband access in your service area, and work
with the community groups to provide support with grant writing, technical planning,
market analysis, and to develop a “final plan” for improving service to the targeted areas
of your region. You also will work to gain low cost or no cost access to N-owned fiber
optic cable as a part of the final plan. One example you provide states that “an existing
downtown business group interested in improving service could encourage all its
members to use the community broadband service thereby providing a revenue stream
for expanding broadband service.”

You anticipate that your funding will come from government grants and private sources
and you do not plan to charge for your community organizing services. You may enter
“cost-sharing agreements” with community partners to pay for service-related expenses.
Furthermore, you state that most for-profit entities that benefit from your services will be
charged market rate or a reduced fee for broadband access, and that you anticipate that
the associated revenue will help to fund your operations, although you did not provide
details about such arrangements.

Governance

The region in which you work is split into four four-county “districts,” and each district is
represented by one member of your Board of Directors (referred to individually as the
“Directors,” and collectively as the “Board’). In addition, you have three at-large

Directors. The Chairs of P and of O are non-voting ex officio members of your Board.
You have selected Directors to serve in the positions of Chairperson, Secretary, and
Treasurer (collectively referred to as the “Officers”).

Your Officers and Directors currently work on a volunteer basis. If funding is secured,
these individuals may receive reasonable compensation for services rendered, and you
intend to fix such amounts based on industry standards within the non-profit sector.

You state that other staff currently work on a volunteer basis. If funding is secured, you
plan to hire an Executive Director, a Consultant, and staff familiar with broadband
engineering and marketing. None of your directors or officers fit this

description at the present time, but they may be considered for these positions if they
are qualified, and “after a cooling off period similar to that in place for many federal
agencies.”

You state that no member of your Board owns, in whole or in part, an ISP or other
business entity that will benefit from your services.

LAW

Section 501(a) of the Code exempts from Federal income taxation organizations
described in § 501(c).

Section 501(c)(3) recognizes entities that are organized and operated exclusively for
religious, charitable, scientific, testing for public safety, literary, or educational purposes
no part of the net earnings of which inure to the benefit of any private shareholder or
individual, no substantial part of the activities of which is carrying on propaganda, or
otherwise attempting to influence legislation (except as otherwise provided in § 501(h)),
and which does not participate in, or intervene in any political campaign.

Section 1.501(c)(3)-1(a)(1) of the Income Tax Regulations (the “Regulations”) states that
in order to be exempt as an organization described in § 501(c)(3) of the Code, an
organization must be both organized and operated exclusively for one or more of the
purposes specified in that section.

Section 1.501(c)(3)-1(b)(1)(i) of the Regulations states that an organization is “organized
exclusively” for one or more exempt purposes only if its articles of organization limit the
purposes of the organization to one or more exempt purposes and do not expressly
empower the organization to engage, other than as an insubstantial part of its activities,
in activities which are not in furtherance of one or more exempt purposes. An
organization is not considered organized exclusively for exempt purposes, if its articles,
describe purposes that are broader than the purposes specified in § 501(c)(3).

Section 1.501(c)(3)-1(b)(1)(iii) of the Regulations states that an organization is not
organized exclusively for one or more exempt purposes if its articles of organization
expressly empower it to carry on, as more than an insubstantial part of its activities,
activities which are not in furtherance of one or more exempt purposes, even though its
articles describe a purpose no broader than the purposes specified in § 501(c)(3).

Section 1.501(c)(3)-1(b)(2) defines “articles” to mean the trust instrument, the corporate
charter, the articles of association, or any other written instrument by which an
organization is created.

Section 1.501(c)(3)-1(b)(4) requires that the assets of an exempt organization be
dedicated to an exempt purpose. Upon dissolution, such assets must continue to be so

dedicated, by reason of a provision in the organization's articles or by operation of law
or by a court order, for one or more exempt purposes, to another exempt organization or
to a government, for a public purpose.

Section 1.501(c)(3)-1(c)(1) 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 § 501(c)(3). An
organization will not be regarded as exempt if more than an insubstantial part of its
activities further a non-exempt purpose.

Section 1.501(c)(3)-1(c)(2) 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, who are defined in § 1.501(a)-1(c) as persons having
a personal and private interest in the activities of the organization.

Section 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated
exclusively for exempt purposes unless it serves a public rather than a private interest,
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(d)(2) explains that the term “charitable” is used in § 501(c)(3) of
the Code in its generally accepted legal sense. The term includes: relief of the poor and
distressed or of the underprivileged; advancement of religion; advancement of education
or science; erection or maintenance of public buildings, monuments, or works; lessening
of the burdens of Government; and promotion of social welfare by organizations
designed to accomplish any of the above purposes, or (i) to lessen neighborhood
tensions, (ii) to eliminate prejudice and discrimination, (iii) to defend human and civil
rights secured by law, or (iv) to combat community deterioration and juvenile
delinquency. The Service has long held that poor and distressed beneficiaries must be
needy in the sense that they cannot afford the necessities of life. See Rev. Proc. 96-32,
1996-1 C.B. 717, section 2.01.

Section 1.501(c)(3)-1(d)(3) explains that the term “educational,” as used in § 501(c)(3) of
the Code, relates to the instruction or training of the individual for the purpose of
improving or developing his or her capabilities, or the instruction of the public on subjects
useful to the individual and beneficial to the community. This includes an organization
whose activities consist of presenting public discussion groups, forums, panels, lectures,
or other similar programs. See § 1.501(c)(3)-1(d)(3)(ii), Example (2), of the Regulations.

Rev. Rul. 85-1, 1985-2 C.B. 177, states that to determine whether an organization is
lessening the burdens of government, it must be considered whether a governmental
unit considers such activities to be its burden, and whether the activities actually lessen
such governmental burden. An activity is a burden of the government if there is
objective manifestation by the government unit that it considers the activities of the
organization to be its burden. All relevant facts and circumstances are considered in this
analysis. See also Rev. Rul. 85-2, 1985-2 C.B. 178 (stating that an organization is
lessening the burdens of government if: (1) its activities are activities that a
governmental unit considers to be its burdens; and (2) the activities actually lessen such
government burden).

In Rev. Rul. 77-111, 1977-1 C.B. 144, the Service found that two organizations did not
qualify for tax exemption under § 501(c)(3) because they provided more than incidental
private benefit. The organization in Situation 1 was formed to increase business
patronage in a deteriorated area mainly inhabited by minority groups by providing
information to the public on the area’s shopping opportunities, local transportation, and
accommodations. This assisted businesses operated by minorities and those operating
in depressed areas, as well as businesses not owned by minority groups and not
experiencing difficulty because of their location. The Service concluded that the primary
purpose of the organization was to promote business, which is not an exempt purpose.
The purpose of the organization in Situation 2 was to revive retail sales in an area of
continued economic decline by constructing a shopping center. The organization
purchased land, which it sold to the city at no profit, and the city acquired additional land
for the project. The city required that minorities be employed in both the construction
and the operation of the project, and stores located within the project likewise were
required to employ a certain percentage of minority group employees. The Service
concluded that the organization’s activities resulted in major benefits for the stores that
would locate in the shopping center, and was thus not eligible for exemption.

in Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279
(1945), the Supreme Court held that a trade association did not qualify for exemption,

because it had an “underlying commercial motive” that distinguished its educational
program from the type provided by a university. In so holding, the Court ruled that the
presence of a single non-exempt purpose, if substantial in nature, destroys an
organization's basis for tax exemption, regardless of the number or importance of that
organization’s truly exempt purposes.

“Tax exemptions are matters of legislative grace and taxpayers have the burden of
establishing their entitlement to exemptions.” Christian Echoes National Ministry, Inc. v.
United States, 470 F.2d 849, 857 (10th Cir. 1972), cert. denied, 414 U.S. 864 (1973)
(citing Dickinson v. United States, 346 U.S. 389, 74 S. Ct. 152, 98 L. Ed. 132 (1953)). In
Bubbling Well Church of Universal Love, Inc. v. Commissioner, 74 T.C. 531, 534 (1980),
aff'd, 670 F.2d 104 (9th Cir. 1981), the Tax Court stated that meeting this burden
requires an “open and candid disclosure of all facts bearing upon [the applicant's]
organization, operations, and finances . . . [and if] such disclosure is not made, the
logical inference is that the facts, if disclosed, would show that [the applicant] fails to
meet the requirements [for exemption].”

Rev. Proc. 2012-9, 2012-2 |.R.B. 261, section 4.03, states that exempt status may be
recognized in advance of an organization's operations if the proposed activities are
described in sufficient detail to permit a conclusion that the organization will clearly meet
the particular requirements for exemption pursuant to the section of the Code under
which exemption is claimed. A mere restatement of exempt purposes or a statement
that proposed activities will be in furtherance of such purposes will not satisfy this
requirement. 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 Service that it qualifies for exemption pursuant to the section of the
Code under which exemption is claimed, the Service will generally issue a proposed
adverse determination letter or ruling.

ANALYSIS

An entity must be both organized and operated exclusively for exempt purposes to
qualify for exemption from federal income tax See §§ 501(c)(3) and 1.501(c)(3)-1(a).
You are neither organized nor operated exclusively for exempt purposes and appears
that you will engage in commercial activities which will benefit private interests.

Not Organized Exclusively for Exempt Purposes

An organization is “organized exclusively” for one or more exempt purposes only if its
articles of organization limit its purposes to one or more exempt purposes, and do not
expressly empower it to engage (other than as an insubstantial part of its activities) in
activities which are not in furtherance of one or more exempt purposes. See

§1.501(c)(3)-1(b)(1)(i)-(iv).

You have not submitted adopted and filed articles that contain the required purpose and
dissolution clauses. An amendment to your Articles dated Date 2, states that you will
operate exclusively for charitable and educational purposes and in a manner consistent
with § 501(c)(3) of the Code. Such a broad restatement of the language of the Code can
be acceptable as a purpose. However, your articles continue to include a more specific
purpose: “to expand and improve internet service to underserved and unserved areas.”
Expanding internet service is not among the enumerated exempt purposes. Nor would it
be considered within the “general legal understanding of charity.” Charity has been, and
continues to be understood as, providing the necessities of life to the poor and
distressed. This specific purpose is broader than the purposes specified in the Code,
and empowers you to engage in activities which are not in furtherance of one or more
exempt purposes.

Moreover, you did not explain how this amendment to your Articles was formally adopted
or enacted by your Board, or whether it was filed with the Secretary of State of State.
See Christian Echoes National Ministry, supra; Bubbling Well, supra; Rev. Proc. 2012-9,
section 4.03, supra. Finally, your Articles lack a clause stipulating that your assets will be
irrevocably dedicated to § 501(c)(3) purposes. When asked, you did not represent that
you would amend your Articles as requested. Instead, you stated that you would amend
your bylaws.

Pursuant to section 1.501(c)(3)-1(b)(2), the term “articles” means “the trust instrument,
the corporate charter, the articles of association, or any other written instrument by
which an organization is created.” Accordingly, the organizational test cannot be met by
reference to any document that is not the creating document. In the case of a
corporation, the by-laws cannot remedy a defect in the corporate charter. Subsidiary
documents that are not amendments to the creating document may not be relied on. A
charter must be amended in accordance with State law, which generally requires filing
the amendments with the chartering authority.

Thus, your Articles do not contain a statement of purposes required by §1.501(c)(3)-
1(b)(1) of the Regulations, or a clause stipulating the distribution of assets on dissolution
as described under § 1.501(c)(3)-1(b)(4). Consequently, you do not meet the
organizational test set forth under § 1.501(c)(3)-1(b) of the Regulations.

Not Operated Exclusively for an Exempt Purpose

In order to be recognized as an organization described in § 501(c)(3) of the Code, an
organization must also be operated exclusively for one or more of the purposes specified
in that section. See § 1.501(c)(3)-1(a)(1) of the Regulations. While your activities may
have some indirect charitable and educational effects, you are not exclusively operated
for exempt purposes.

You do not serve a charitable purpose. The term “charitable” is used in its generally
accepted legal sense, and includes: relief of the poor and distressed or of the
underprivileged; advancement of religion; advancement of education or science; erection
or maintenance of public buildings, monuments, or works; lessening of the burdens of
Government. See § 1.501(c)(3)-1(d)(2).

You do not limit your services to a “charitable class” of the poor and distressed, aged,
sick, handicapped or underprivileged. The Service has long held that poor and
distressed beneficiaries must be needy in the sense that they cannot afford the
necessities of life. See Rev. Proc. 96-32, sec. 2.01, supra. Broadband internet access
has yet to be recognized as such a necessity, and individuals without broadband access
are not recognized as a charitable class. Therefore, it follows that expanding and
improving access to broadband internet service does not constitute a charitable purpose
within the meaning of § 501(c)(3). Furthermore, your services are available to and
appear to benefit all members of the community, including commercial entities, and are
not limited to one or more charitable classes. Therefore, you do not serve a charitable
purpose by relieving the poor and distressed or the underprivileged.

Nor do you serve an educational purpose. The term “educational,” as used in
§501(c)(3), relates to the instruction or training of the individual for the purpose of
improving or developing his or her capabilities, or the instruction of the public on subjects
useful to the individual and beneficial to the community. See § 1.501(c)(3)-1(d)(3). Your
activities may ultimately and indirectly assist the educational purposes of other
organizations. For example, you intend to help connect libraries and schools to the high
speed broadband. However, you cannot claim their educational purposes as your own
and it is not your exclusive purpose. Informing the public of the benefits of expanded and
improved broadband internet service is more like promotion than it is education. You
have not established that you serve an educational purpose.

You do not lessen the burdens of government. No governmental entity has accepted as
its burden providing internet to all, nor specifically organizing local businesses and
organizations to bargain for such services. You have not offered any objective
manifestation by a governmental unit that it considers your activities to be its burden.
See Rev. Rul. 85-2, supra. Moreover, you have failed to demonstrate that a
governmental unit considers you to be acting on its behalf. See Rev. Rul. 85-1, supra.
Although you may be organized to assist other entities in carrying out the purposes of
the BTOP, the program is not a manifestation of governmental responsibility. Rather it is
an attempt to motivate businesses and non-profits to expand the broadband system.
Thus, you have not established that you serve a charitable purpose by lessening the
burdens of government.

Non-Exempt Commercial Purpose

You are operating for a substantial non-exempt commercial purpose. You explained that
your role is to promote the advantages of expanded broadband to all members of the
community, convene stakeholder meetings to discuss how to attract ISPs to the
communities at the end of the “last mile,” and negotiate with the middle mile on behalf of
the ISP’s.

You will engage in “community organizing services,” which include holding stakeholder
meetings to explain the processes that other communities have used to expand access
to broadband services, form working groups representing a variety of community
interests, and assisting those groups to identify resources that can be aggregated in a
program to expand access to broadband. You provide examples such as donations of
publicly owned space for wireless network towers, public rights of way that could be
accessed at reduced or no charge, locations in public buildings that could house
infrastructure at no cost. In these examples, the government would essentially subsidize
the commercial internet providers. One of your primary activities is negotiating with N for
low cost or no cost access to the middle mile broadband lines for the ISPs. Thus, a
central part of your activities will be coordinating donations from public entities to reduce
ISPs business-related expenses and increase the demand for their services. This is a
commercial purpose.

Although you expect the ISPs to “repurpose” the amounts they save in expenses toward
more affordable and accessible broadband services for the unserved and underserved
populations of Region, you will not have any control over the future activities of the
ISP’s. Based on the information you provided, it appears that more than an insubstantial
part of your activities are in furtherance of non-exempt commercial purposes. See §
1.501(c)(3)-1(c)(1).

Thus, you cannot argue that you are operated exclusively to promote exempt purposes.
See § 1.501(c)(3)-1(c)(1) of the Regulations; see also Better Business Bureau, supra.

More than incidental Private Benefit

Your “community organizing services’ will bestow measureable and significant benefits
on commercial entities while the benefit to the poor and distressed is indirect and un-
quantified. Your efforts to reduce business expenses and increase revenue of
commercial ISPs, sell broadband access to generate revenue, and expand the customer
bases will benefit privately owned for-profit ISPs.

Your expectation of shared cost savings with “community partners” and possible
revenue from the fees paid by for-profit beneficiaries, show that the commercial
participants recognize the financial benefits and may share them with you.

Furthermore, the unserved and underserved populations will become future customers
for commercial ISPs. In effect, you will be creating a new customer market for ISPs.
Thus, whether you are viewed as directly or indirectly involved in the subsequent
commercial transactions between ISPs and end-users, you intend to create a
marketplace for free, reduced cost, and market rate broadband access that would not
exist without your community organizing services. And under the circumstances, it

10

appears that this serves a private, rather than a public interest. See § 1.501(c)(3)-
1(d)(1)(ii) of the Regulations. Therefore, as a practical matter, you will be engaged in
commercial activity, because you will help facilitate the generation of income, cost-
savings, and the expansion of customer bases for the benefit of commercial ISPs.

Your activities will generate major benefits for commercial ISPs that would experience
lower costs and higher revenue from providing broadband access to businesses, non-
profits, and individuals in your region. You will also provide private benefit to for-profit
businesses that would receive enhanced accessibility to broadband internet due to the
“aggregated community demand’ you aspire to produce. Thus, like the organization in
Situation 2, your activities are directed to benefit commercial entities, rather than to
accomplish exclusively § 501(c)(3) purposes. As such, like the organizations described
in Rev. Rul. 77-111, you do not qualify for exemption under § 501(c)(3) of the Code.

CONCLUSION

In light of the foregoing, we have determined that you do not qualify for exemption from
Federal income tax under § 501(a) of the Code as an organization described in §
501(c)(3), because you are not organized and operated exclusively for one or more
exempt purpose. Your Articles lack sufficient purpose and dissolution clauses. Even if
your Articles contained the required clauses, the purposes for which you are created are
not exempt purposes as specified in § 501(c)(3) of the Code. And even if it is assumed
that you are organized for an exempt purpose, you nevertheless would fail to qualify for
tax exemption because a substantial part of your activities further non-exempt purposes
and benefit commercial entities.

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, | declare that | 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.

This declaration must be signed by an elected officer, a member of the board of
directors, or a trustee rather than an attorney or accountant.

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.

11

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. Section 7428(b)(2) of the
Code 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
Attn:

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,

Karen Schiller,
Acting Director
EO Rulings and Agreements