IRS revokes an association's tax-exempt status after finding its activities were substantially social

Plain-English summary

The IRS issued a final adverse determination that an association did not qualify for exemption under IRC § 501(c)(3), effective January 1, 20XX. The IRS found that a substantial part of the association's activities was social and that a substantial part of its assets was used for social purposes outside § 501(c)(3). The examination report described activities including festivals, senior events, language classes, scholarships, and proposed charitable assistance, and concluded that the charitable activities were not substantial compared with the social activities. Contributions to the association were therefore not deductible, and the association was directed to file federal income tax returns as stated in the letter.

Ruling snapshot

• Question: Does the association continue to qualify for exemption under IRC § 501(c)(3)?
• Outcome: Revocation
• Key authorities: IRC §§ 170, 501(c)(3), 507, 7428; Treas. Reg. §§ 1.501(c)(3)-1(a), 1.501(c)(3)-1(b)(4), 1.501(c)(3)-1(c)(1), 1.501(c)(3)-1(d)(3)

Full text (IRS public release)

Internal Revenue Service
Appeals Office
San Jose Appeals, HQ-7100
55 S. Market St.
San Jose, CA 95113

Department of the Treasury

Release Number: 201411042
Release Date: 3/14/2014
Date: December 20, 2013

Taxpayer Identification Number:
Person to Contact:
Tax Period(s) Ended:
UIL:
501.03-30

Certified Mail

Dear :

This is a final adverse determination regarding your exempt status under section 501(c)(3) of the Internal
Revenue Code (the “Code”). It is determined that you do not qualify as exempt from Federal income tax
under section 501(c)(3) of the Code effective January 1, 20xx.

Our adverse determination was made for the following reason(s):

• You are not operated exclusively for exempt purposes described in section 501(c)(3) of the Code
because a substantial part of your activities is social in nature and a substantial part of your
assets are used for social purposes that fall outside the purview of section 501(c)(3) of the Code.

Contributions to your organization are not deductible under section 170 of the Code.

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

If you were a private foundation as of the effective date of the adverse determination, you are considered
to be taxable private foundation until you terminate your private foundation status under section 507 of
the Code. In addition to your income tax return, you must also continue to file Form 990-PF by the 15th
Day of the fifth month after the end of your annual accounting period.

Processing of income tax returns and assessments of any taxes due will not be delayed should a petition
for declaratory judgment be filed under section 7428 of the Code.

If you decide to contest this determination, you may file an action for declaratory judgment under the
provisions of section 7428 of the Code in one of the following three venues: 1) United States Tax Court,
2) the United States Court of Federal Claims, or 3) the United States District Court for the District of
Columbia. A petition or complaint in one of these three courts must be filed within 90 days from the date
this determination letter was mailed to you. Please contact the clerk of the appropriate court for rules for
filing petitions for declaratory judgment. To secure a petition form from the United States Tax Court, write
to the United States Tax Court, 400 Second Street, N.W., Washington, D.C. 20217. See also Publication
892.

You also have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate assistance is
not a substitute for established IRS procedures, such as the formal appeals process. The Taxpayer
Advocate cannot reverse a legally correct tax determination, or extend the time fixed by law that you have
to file a petition in a United States Court. The Taxpayer Advocate can however, see that a tax matters
that may not have been resolved through normal channels get prompt and proper handling. If you want
Taxpayer Advocate assistance, please contact the Taxpayer Advocate for the IRS office that issued this
letter. You may call toll-free, 1-877-777-4778, for the Taxpayer Advocate or visit www.irs.gov/advocate
for more information.

If you have any questions, please contact the person whose name and telephone number are shown in
the heading of this letter.

Sincerely Yours,

Acting Appeals Team Manager

Enclosure: Publication 892

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities Division
IRS 2525 Capitol Street #217
Fresno, CA 93721-2227

Date: AUG 21 20XX
Taxpayer Identification Number:
Form:
Tax year(s) ended:
Person to contact / ID number:
Contact numbers:
Manager's name / ID number:
Manager's contact number:
Response due date:

ORG
ADDRESS

Certified Mail - Return Receipt Requested

Dear :

Why you are receiving this letter

We propose to revoke your status as an organization described in section 501(c)(3) of the Internal Revenue
Code (Code). Enclosed is our report of examination explaining the proposed action.

What you need to do if you agree

If you agree with our proposal, please sign the enclosed Form 6018, Consent to Proposed Action — Section
7428, and return it to the contact person at the address listed above (unless you have already provided us a
signed Form 6018). We'll issue a final revocation letter determining that you aren't an organization described in
section 501(c)(3).

After we issue the final revocation letter, we’ll announce that your organization is no longer eligible for
contributions deductible under section 170 of the Code.

If we don't hear from you

If you don't respond to this proposal within 30 calendar days from the date of this letter, we’ll issue a final
revocation letter. Failing to respond to this proposal will adversely impact your legal standing to seek a
declaratory judgment because you failed to exhaust your administrative remedies.

Effect of revocation status

If you receive a final revocation letter, you'll be required to file federal income tax returns for the tax year(s)
shown above as well as for subsequent tax years.

What you need to do if you disagree with the proposed revocation

If you disagree with our proposed revocation, you may request a meeting or telephone conference with the
supervisor of the IRS contact identified in the heading of this letter. You also may file a protest with the

IRS Appeals office by submitting a written request to the contact person at the address listed above within 30
calendar days from the date of this letter. The Appeals office is independent of the Exempt Organizations
division and resolves most disputes informally.

For your protest to be valid, it must contain certain specific information including a statement of the facts, the
applicable law, and arguments in support of your position. For specific information needed for a valid protest,
please refer to page one of the enclosed Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status,
and page six of the enclosed Publication 3498, The Examination Process. Publication 3498 also includes
information on your rights as a taxpayer and the IRS collection process. Please note that Fast Track Mediation
referred to in Publication 3498 generally doesn’t apply after we issue this letter.

You also may request that we refer this matter for technical advice as explained in Publication 892. Please
contact the individual identified on the first page of this letter if you are considering requesting technical
advice. If we issue a determination letter to you based on a technical advice memorandum issued by the Exempt
Organizations Rulings and Agreements office, no further IRS administrative appeal will be available to you.

Contacting the Taxpayer Advocate Office is a taxpayer right

You have the right to contact the office of the Taxpayer Advocate. Their assistance isn’t a substitute for
established IRS procedures, such as the formal appeals process. The Taxpayer Advocate can’t reverse a legally
correct tax determination or extend the time you have (fixed by law) to file a petition in a United States court.
They can, however, see that a tax matter that hasn't been resolved through normal channels gets prompt and
proper handling. You may call toll-free 1-877-777-4778 and ask for Taxpayer Advocate assistance. If you
prefer, you may contact your local Taxpayer Advocate at:

Internal Revenue Service
Office of the Taxpayer Advocate

For additional information

If you have any questions, please call the contact person at the telephone number shown in the heading of this
letter. If you write, please provide a telephone number and the most convenient time to call if we need to
contact you.

Thank you for your cooperation.

Sincerely,

Nanette M. Downing
Director, EO Examinations

Enclosures:
Report of Examination
Form 6018
Publication 892
Publication 3498

Form 886A
Department of the Treasury - Internal Revenue Service
Explanation of Items
Schedule No. or Exhibit

Name of Taxpayer:
ORG
Year/Period Ended:
December 31, 20XX

LEGEND
ORG - Organization name XX - Date City - city State - state
Event - event Country - country Motto - motto President - president
Secretary - secretary Treasurer - treasurer CO-1 & CO-2 - 1st & 2nd

Issues:

Does the ORG continue to qualify for exemption under Internal Revenue Code section
501(c)(3)?

Facts:

The ORG (Association) incorporated on April 18, 20XX. The Articles of Incorporation
show President as the Association’s initial agent. The Association submitted Form 1023,
Application for Recognition of Exemption Under Section 501(c)(3) of the Internal
Revenue Code, to the IRS on February 10, 20XX. Form 1023 shows President as the
Association’s President.

The Articles of Incorporation state that the Association’s specific purpose is to participate
in charitable causes, to raise funds for support of the Motto Community of State,
education and to promote friendship and Motto culture.

Part IV of Form 1023 instructs the applicant to prepare an attachment and provide a
narrative description of the applicant’s past, present, and planned activities. An
attachment was not found in the Determination File.

In subsequent correspondence with the IRS, the Association provided a letter, dated
April 25, 20XX, with a narrative description of the Association’s past, present, and future
activities. The letter stated the Association’s past activities consisted of a food fair to
raise funds. The present activities consisted of publishing a weekly newspaper,
organizing a membership drive, and raising funds for a scholarship program. The
Association provided six future activities and a corresponding percentage of time the
Association would devote to each activity:

1. Provide Scholarships 20%
2. Disaster Relief 15%
3. Provide Surviving Benefits 15%
4. Publish a Motto Newspaper 20%
5. Provide Assistance in Country 15%
6. Medical Donations 15%

The granting of scholarships was to begin as soon as funds were raised. The
Association provided a selection process and the grants were going to be awarded to
deserving and needy applicants.

The disaster relief was to consist of providing financial help to natural disaster victims in
the United States or the Far East, including Country. The Association was to raise funds
following a natural disaster. The Association would provide the funds to the CO-1 for
domestic disasters. In the event that a natural disaster struck Country, the Association’s
Board of directors would arrange to make trips, at their own expense, and personally
provide the assistance to the victims.

The surviving benefits were to consist of providing comfort and a token amount of
financial support to member’s families should a hospitalization or death in the family
occur. A selected board member would visit a hospitalized member and give words of
encouragement. In the event of the member’s death the Association would provide $300
to the family.

The newspaper publishing was to consist of publishing a weekly Motto newspaper
intended for the Motto community. The newspaper would be in the Motto language and
would provide local, international, and Motto news. The newspaper would be circulated
in the City State area, City, City, City, and City.

The assistance in Country would consist of organizing donations of books, school
supplies, and multivitamins for needy school children in Country. The efforts would begin
as soon as possible and the Board members were to travel to Country, at their own
expense, and deliver the donations to Country personally.

The medical donations would consist of soliciting donations of pre owned medical
equipment. The Association would prepare a list of needy hospitals located in Country.
The Association would consider the need, population, accessibility, feasibility, and cost to
create a list of hospitals. The list of hospitals along with their respective needs would be
provided to substantial donors, Motto-American doctors, members, families, and the
newspaper readers.

In a subsequent letter to the IRS, dated May 17, 20XX, the Association provided more
details regarding its Death Benefits Awarding Process, Food Fair, and Newspaper.

The letter provided details of the process the Association would implement to verify that
the deceased was a member or related to a member of the Association. The letter
stated that a check would be provided to the family, but did not provide an amount.

The timing of the Food Fair coincided with an annual Motto New Year “Event”. The
Event consists of a water throwing festival, a ceremony honoring approximately 80 senior
citizens, and Motto song and dance. The Association would not charge an admission fee.

The letter stated that the Association did not print a newspaper. The letter stated the
Association publicized itself in the CO-2, which was partly owned by the Association’s
President.

In a subsequent letter to the IRS, dated June 8, 20XX, the Association provided details
about its Beauty Contest & Fashion Show (Show). The Show is a combined effort by the
Association and a local Motto clothing and beauty accessories store (Store). The
Association would invite Motto contestants to participate. The Store was to provide
Motto attire to the contestants. The Association would not provide prizes to the
contestants, but the Store may provide token prizes. A winner would not be declared
and the participants were not subject to future commitments to the Store or to the
Association.

In a subsequent letter to the IRS, dated July 9, 20XX, the Association stated it would not
provide monetary death benefits.

Ultimately the IRS issued a Determination Letter dated July 5, 20XX. The Determination
Letter recognized the Association as an organization exempt from Federal income tax as
an organization described under Internal Revenue Code (Code) section 501(c)(3) and
recognized the Association as a public charity as described in Code Section
107(b)(1)(A)(vi).

In an interview conducted with President, President, and Secretary, Secretary, and
Treasurer, Treasurer on May 22, 20XX they stated that the Association’s primary exempt
purpose was to preserve and celebrate the Motto culture.

The officers stated the Association hosts two annual events: the Motto New Year in April
and the Senior Day in October.

The New Year Festival, also known as the Event Water Festival, is structured similar to
the festival in Country. According to the officers it is a time to celebrate the New Year by
throwing water at each other.

During the Event Water Festival, the Association conducts its Outstanding Students
Awards recognition. In 20XX five students were recognized; one student received $,
three students received $, and one student received $.

The Senior Day event honors seniors above the age of 75 of Motto descent. The seniors
are honored in a dinner, dance, music, and are awarded donated prizes.

The Association began hosting Motto language classes on Sundays in 20XX. The
teachers are volunteers and teach the children the Motto language.

The Income Statement for the year ended December 31, 20XX attached to the
Association’s 20XX Form 990EZ, Short Form Return of Organization Exempt From
Income Tax, does not show any contributions earmarked for disaster relief or assistance
to Country. The Income Statement does not show any disaster relief or assistance
expenses.

An examination of the Association’s books and records for the period ending
December 31, 20XX showed that the Association received $ in donations. The
examination revealed that $ in expenses were incurred and paid in the course of hosting
the Event Festival, $ was paid related to student awards, and $ in expenses were
incurred and paid related to hosting Senior Day.

Law:

Code section 501(c)(3) exempts from federal income tax organizations organized and
operated exclusively for charitable, educational, and other exempt purposes, provided
that no part of the organization's net earnings inures to the benefit of any private
shareholder or individual.

Federal Tax Regulations (Regulations) section 1.501(c)(3)-1(a) states in part that in order
to be exempt as an organization described in Code section 501(c)(3), the 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. The term “exempt purpose or purposes”, as used in
this section, means any purpose or purposes specified in section 501(c)(3).

Regulations section 1.501(c)(3)-1(b)(4) states in part that an organization is not
organized exclusively for one or more exempt purposes unless its assets will be considered dedicated to
an exempt purpose. An organization's assets will be considered dedicated to an
exempt purpose, for example, if, upon dissolution, such assets would, by reason of a
provision in the organization's articles or by operation of law, be distributed for one or
more exempt purposes, or to the Federal government, or to a State or local government,
for a public purpose, or would be distributed by a court to another organization to be
used in such manner as in the judgment of the court will best accomplish the general
purposes for which the dissolved organization was organized. However, an organization

does not meet the organizational test if its articles or the law of the State in which it was
created provide that its assets would, upon dissolution, be distributed to its members or
shareholders.

Regulations section 1.501(c)(3)-1(c)(1) provides that an organization will not be regarded
as operated exclusively for exempt purposes if more than an insubstantial part of its
activities is not in furtherance of exempt purposes.

Regulations section 1.501(c)(3)-1(d)(3) defines the term educational as 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. Examples of educational organizations are primary or secondary school, a
college, or a professional or trade school, which has a regularly scheduled curriculum, a
regular faculty, and a regularly enrolled body of students in attendance at a place where
the educational activities are regularly carried on.

In Spanish American Cultural Association of Bergenfield v. Commissioner,
T.C.Memo.1994-510, 1994 WL555882, the U.S. Tax Court held that the Spanish
American Cultural Association of Bergenfield did not qualify as an organization described
in Code section 501(c)(3) because its charitable activities were insubstantial compared
to its social activities.

Taxpayer’s Position:

The Taxpayer conceded that the Association did not have a charitable activity since
20XX when the Association raised funds to help the victims of Cyclone that struck
Country in May of 20XX. However, they did not provide a definitive position regarding
the proposed revocation.

The Taxpayer stated that Senior Day has a charitable quality because it provides senior
citizens an opportunity to be recognized, a meal, and some gifts.

The Taxpayer stated that it began to provide Motto language classes to children in 20XX.
The language classes are educational in nature because they teach the Motto language
to children.

Government’s Position:

The Association does not continue to qualify for exemption under Code section 501(c)(3)
because it did not demonstrate that its charitable activities are substantial in comparison
to its social activities. The Taxpayer was afforded an opportunity to provide support to
demonstrate that its activities were charitable in subsequent years, but stated that the
Association did not carry on any charitable activities in the subsequent years.

The books and records for the period ending December 31, 20XX showed that the
Association dedicated $ (%) of its expenses to the Event Festival, $ (%) to Senior Day,
and $ (%) was awarded to students for academic achievements.

The Event Festival is an annual social event and does not have a charitable quality.

The Senior Day may recognize seniors, provide a meal, and some gifts but it does not
have a charitable aspect. According to the Taxpayer the event honors seniors of Motto
descent with a dinner, dance, music, and gifts. The Association did not demonstrate that
a senior of Motto descent is necessarily a charitable class. The annual frequency of the
event is indicative of social gathering and not an effort to alleviate the seniors from
distress.

The Motto language classes may have an educational aspect because they provide
instruction to children to learn a skill, but they are not provided in such a manner to be
regarded as educational per the Regulations.

Conclusion:

The Association does not continue to qualify for exemption under Code section 501(c)(3)
because it did not demonstrate that its charitable activities are substantial in comparison
to its social activities.