Historic-preservation spending on a private club building will not end exemption

Plain-English summary

A public charity proposed to fund restoration of historically significant interior spaces in a building owned and primarily used by a tax-exempt private social club. The preservation agreement requires public tours twice each month, unlimited tours for relevant professional and academic groups, online virtual tours, and no club-member sponsorship for visitors. It also creates a recorded covenant that binds future owners. The IRS concluded that these safeguards provide substantial public access, making the club's private benefit incidental to the charity's preservation and educational purposes. The spending and the club's acceptance of the contributions therefore will not adversely affect the charity's IRC § 501(c)(3) exemption, although the IRS expressed no view on qualifying-distribution treatment under § 4942(g)(3).

Ruling snapshot

• Question: Will funding restoration of historic spaces owned by a private social club jeopardize the preservation charity's exemption when the agreement guarantees substantial public access?
• Outcome: Approved
• Key authorities: IRC § 501(c)(3); Treas. Reg. §§ 1.501(c)(3)-1 and 1.170A-14(d)(5)(iv); Rev. Rul. 75-470; Rev. Rul. 86-49

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: 201442066
Release Date: 10/17/2014 Identification Number:

Telephone Number:

Date: 7/24/2014 Employer Identification Number:
UIL: 501.03-00

Legend:

Club
Building

Dear

This is in response to your letter dated December 6, 2013 in which you requested certain rulings
with respect to I.R.C. § 501(c)(3).

Background:

You have been recognized as a publicly supported charitable organization exempt under §
501(c)(3) of the Code and classified within the meaning of §§ 509(a)(1) and 170(b)(1)(A)(vi).
Your Articles of Incorporation list your specific charitable and educational purposes as dedicated
to preserving and memorializing the history and architecture of the city in which you are located;
to research, restore and insure the preservation of buildings, land, homes or other articles which
may relate to the history and architecture of the city.

The Club is a private social club that has been recognized as an organization exempt under §
501(c)(7). The Club currently owns and occupies the Building, which is located within the city,
which has been recognized as a historic building, and which has been listed on the National
Register of historic buildings and landmarks. The Building is over 150 years old and occupies
one square block. You executed a written Preservation Agreement with the Club, under which
you raised public funds to be used for the restoration of the Building in accordance with the
Secretary of the Interior's Standards for the Treatment of Historic Properties and the Secretary
of the Interior's Guidelines for Preserving, Rehabilitating, Restoring and Restructuring Historic
Buildings (hereinafter, “The Secretary of the Interior's Standards and Guidelines.”). Any
restoration or projects using your funds on the Building would require your prior approval before
such projects could be started.

You represent that currently the interior of the Building, including the Designated Interior Historic
Spaces, are primarily accessible only to Club members, with the Building primarily used by the
Club. Scholars and other educational or architectural groups interested in the Building's historic
character have access to the interior portions of the Building only when sponsored by a Club

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member or holders of privilege cards (spouses and widows/widowers of deceased members).
However, persons who attend seminars, meetings, receptions and cultural events in the
Building, which are scheduled pursuant to approval by the Club, have access to the interior
portions of the Building during these events.

You represent that the Preservation Agreement would increase public access to the Designated
Interior Historic Spaces. Specifically, the Amended Agreement as modified by your submission
provides for increased public access in the following manner:

• The general public will be given the opportunity to tour the Designated Historic Spaces
on a given day twice every month throughout the year;

• Organizations of architects, engineers, historians or others whose professional or
academic pursuits are concerned with the creation, preservation or restoration of historic
buildings may arrange to tour the Designated Historic Spaces at a time mutually agreed
to by the Club and the organizations.

• No member sponsorship will be required to participate in the tours described above. The
Club will accept reservations for such tours by telephone or on the Internet.

• In addition, the Club agrees to make virtual tours available through the Internet via video
and photographs. These tours will consist of interactive tours, whereby viewers will have
full control of the viewing of a majority of the rooms and the rooms will contain a voice
over tour to accompany the images.

This availability of these viewings will be displayed prominently on your web site, along with the
ability for the public to make reservations for tours either via your web site or via telephone. Also
in your submission, you make it clear that there will be an unlimited number of tours for
professional groups interested in historic preservation and restoration.

Finally, your Agreement with Club constitutes a Covenant on this property that will run with the
land for any future purchasers of the Building. You have recorded this Covenant in the local
property Register.

Ruling Requested:

Your agreement to the terms of the Preservation Agreement, your performance of those
terms, and the Club’s acceptance of contributions to be utilized to defray the costs of
the preservation and restoration in a manner consistent with the Preservation
Agreement will not adversely affect your tax exemption under § 501(c)(3).

Law:

I.R.C. § 501(c)(3) provides, in part, for the exemption from Federal income tax of organizations
that are organized and operated exclusively for charitable purposes, provided no part of the net
earnings of the organization inures to the benefit of any private individual or shareholder.

Treas. Reg. § 1.501(c)(3)-1(c)(1) provides, in part, 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 purposes described in § 501(c)(3), but will not be so
regarded if more than an insubstantial part of its activities is not in furtherance of an exempt

purpose.

Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii) provides, in part, that an organization is not operated
exclusively for exempt purposes “unless it serves a public, rather than a private, interest.” Thus,
it is necessary for an organization to establish that “it is not 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.”

Treas. Reg. § 1.501(c)(3)-1(d)(2) provides that the term charity includes, but is not limited to,
“erection or maintenance of public buildings, monuments or works.”

Rev. Rul. 75-470, 1975-2 C.B. 207, describes a nonprofit organization that was formed to
promote an appreciation of history through the acquisition, restoration, and preservation of
buildings having special historical or architectural significance. After restoration was completed,
the buildings were open to the general public for viewing. The organization was financed with
admission fees to the restored buildings. The Service held that “[t]he organization is carrying on
activities similar to those of a museum and is educational and charitable within the meaning of §
501(c)(3).”

Rev. Rul. 86-49, 1986-14 I.R.B. 7, describes an organization that was formed for the purpose of
preserving the historical and/or architectural character of a community through the acquisition,
restoration, and subsequent sale of historically and/or architecturally significant properties,
subject to restrictive covenants. The Service held that the organization would qualify as an
organization that is organized and operated exclusively for charitable or educational purposes
under § 501(c)(3). The organization sold the properties to private parties in arms-length
transactions subject to restrictive covenants designed to ensure public access to the properties,
thereby, preserving the properties for the public's benefit. Where the properties were not visible
from the public right of way “the organization provides in the restrictive covenants that visual
access to the property will be made available to the public on a regular basis and the terms of
the restrictive covenants contain prescribed conditions for such access, under the requirements
set forth in Treas. Reg. § 1.170A-14(d)(5)(iv).”

In Better Business Bureau v. United States, 326 U.S. 279, 66 S.Ct. 112, (1945), the Supreme
Court ruled that an organization that is tax-exempt as an educational institution must be devoted
to educational purposes exclusively, and the presence of a single noneducational purpose, if
substantial in nature, will destroy the exemption regardless of the number or importance of truly
educational purposes.

In Columbia Park and Recreation Association v. Commissioner, 88 T.C. 1 (1987), an
organization that was organized to develop and operate utilities, systems, services and facilities
for the common good and the social welfare of the homeowner's association within the planned
community, sought tax-exempt status under § 501(c)(3) of the Code. The Tax Court found that
the majority of services and facilities the organization provided were only offered to association
members, with only a small fraction of those services actually offered to the general public, with
the public paying higher rates than association members for the same services. The Tax Court
held that the organization was not organized or operated as charitable within the meaning of §
501 (c)(3).

Analysis:

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You intend to engage in the activities outlined in your Preservation Agreement and expend
public funds for the repair, restoration and preservation of certain interior spaces of the Club's
Building that have been labeled as “Designated Historic Interior Spaces.” The issue therefore
arises whether the public is given substantial access to the Designated Interior Historic Spaces
to justify your expenditures of public monies to restore these spaces, which are currently owned
and utilized by a private social club, so as not to violate your tax-exempt status under §
501(c)(3) of the Code. If the public does not have substantial access to these areas for viewing,
then you would have expended public funds for the private benefit of the Club and its members,
in violation of your tax-exempt status under § 501(c)(3).

Under § 501(c)(3), an organization that is exempt from Federal income tax must be both
organized and operated exclusively for charitable or educational purposes, and must provide
that no part of the net earnings of the organization inures to the benefit of any private
shareholder or individual. The term charity includes, but is not limited to, “erection or
maintenance of public buildings, monuments or works.” Section 1.501(c)(3)-1(d)(2).

An organization is not organized and operated exclusively for charity “unless it serves a public
rather than a private interest” Section 1.501(c)(3)-1(d)(1)(ii). The presence of private benefit, if
substantial in nature, will destroy the organization's tax-exempt status regardless of whether the
organization has other charitable purposes or activities; however, where private benefit is
incidental to the accomplishment of an organization's charitable or educational purposes, it will
not prevent the organization from being described in § 501(c)(3) of the Code. See Section
1.501(c)(3)-1(c)(1); Better Business Bureau, 326 U.S. 279.

Several court cases and revenue rulings have focused on the issue of whether the public's
access to an organization's facilities is substantial. In Columbia Park and Recreation, 88 T.C. 1,
the Tax Court denied an organization's 501(c)(3) status on the grounds that the public's access
to the organization's facilities were not substantial. The Court found that only a small percentage
of the organization's total assets, and a rather limited percentage of the organization's total
budget, were actually spent on facilities and services that were open to the public, with the
remainder of the organization's assets and budget spent on facilities only open to the
organization's members. This is contrasted with Rev. Rul. 75-470, supra, in which the
organization's facilities were deemed to be substantially open to the public. In Rev. Rul. 75-470,
an organization qualified for tax-exemption under § 501(c)(3) for its activities of acquiring and
restoring buildings having historical and/or architectural significance. After restoration was
completed, the buildings were open to the public for viewing. The Service found that the public's
access to the interiors of the buildings was substantial because the organization was operating
the buildings as museum exhibits, which were open regularly for public viewing. Furthermore, in
Rev. Rul. 86-49, supra, the Service held that an organization that was formed for the purpose of
restoring historical and/or architecturally significant buildings and subsequently selling the same
buildings was sufficient to qualify the organization under § 501(c)(3) because the buildings were
sold with restrictive covenants that permitted substantial public access to the buildings.

In Rev. Rul. 86-49, supra, the charitable organization sold properties subject to restrictive
covenants designed exclusively to preserve and to allow for public viewing of the historical
and/or architecturally significant properties. Where the properties were not visible from the
public right of way “the organization provides in the restrictive covenants that visual access to
the property will be made available to the public on a regular basis and the terms of the
restrictive covenants contain prescribed conditions for such access, under the requirements set

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forth in section 1.170A-14(d)(5)(iv).” Id. Specifically, § 1.170A-14(d)(5)(iv) provides the following:

Where the historic land area or certified historic structure which is the subject of the donation is
not visible from a public way (e.g., the structure is hidden from view by a wall or shrubbery, the
structure is too far from the public way, or interior characteristics and features of the structure are
the subject of the easement), the terms of the easement must be such that the general public is
given the opportunity on a regular basis to view the characteristics and features of the property
which are preserved by the easement to the extent consistent with the nature and condition of the
property.

Factors to be considered in determining the type and amount of public access required under
paragraph (d)(5)(iv)(A) of this section include the historical significance of the donated property,
the nature of the features that are the subject of the easement, the remoteness or accessibility of
the site of the donated property, the possibility of physical hazards to the public visiting the
property (for example, an unoccupied structure in a dilapidated condition), the extent to which
public access would be an unreasonable intrusion on any privacy interests of individuals living on
the property, the degree to which public access would impair the preservation interests which are
the subject of the donation, and the availability of opportunities for the public to view the property
by means other than visits to the site.

As a result of these restrictive covenants, the Service held in Rev. Rul. 86-46, supra, that the
public was ensured substantial access to the historical and/or architecturally significant
buildings, resulting in the organization's purpose qualifying for tax-exemption under § 501(c)(3).

Rev. Rul. 86-49, supra, references § 1.170A-14(d)(5)(iv) to determine whether the public's
access to the property is substantial, given the nature and condition of the property. Although §
1.170A-14(d)(5)(iv) pertains to the issue of public benefit from the standpoint of whether the
donor of a constructive easement in a historic and/or architecturally significant building has
permitted substantial public access to the building to allow the donor a charitable deduction,
these same factors, according to Rev. Rul. 86-49, are germane to the evaluation of public
benefit from the standpoint of a tax-exempt organization that receives the donated conservation
easement and is required to expend public funds to repair, restore, and maintain the historical
and/or architecturally significant buildings comprising the conservation easement. In Rev. Rul.
86-49, the buildings were sold to private owners with restrictive covenants, consistent with §
1.170A-14(d)(5)(iv), to guarantee substantial public access. Absent these restrictive covenants
guaranteeing public access, it would be difficult for the organization to claim that it was fulfilling
a charitable purpose if public funds were used to restore historical and/or architecturally
significant buildings primarily for the private benefit of the property owners.

Section 1.170A-14(d)(5)(iv) references Example (1) as an example of what facts constitute
substantial public access to the exterior and interior facade of a building. Example (1) describes
a donation by A of an easement to the exterior and interior of his Victorian period home that he
and his family live in. The view of A's home is obscured by a high stone wall. The easement
provides that the house may be opened to the general public from 10:00 a.m. to 4:00 p.m. on
one Sunday in May and one Sunday in November each year for house and garden tours. The
donee organization is given the right to photograph the exterior and interior of the house for use
in publications and to permit persons affiliated with educational organizations, professional
architectural associations, and historical societies to make appointments to study the property.
In this example, the regulations concluded that the two opportunities for public visits per year,
when combined with both the ability of the general public to view the subject of the easement

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through photography and the opportunity for scholarly study of the property on a reasonable
basis, coupled with the fact that the house is used as a family residence, enabled the donation
to satisfy the requirement of public access.

The transaction you wish to engage in pursuant to the Preservation Agreement is similar to
Example (1) in § 1.170A-14(d)(5)(iv). The subject of your Preservation Agreement is the
“Designated Interior Historic Spaces” of the Building. As in Example (1), your Preservation
Agreement provides that persons affiliated with educational organizations, professional
architectural associations, and historical societies have unlimited opportunities to make
appointments to study the Building's interior. Furthermore, as in Example (1), your Preservation
Agreement provides the public the opportunity to view images of the Building's interior via a
virtual tour available on the Club's internet website. However, in several respects, your
Preservation Agreement goes beyond the public access described in Example (1). Expanding
on Example (1), which provided public access to the historic building twice a year as part of
house and gardens tours, your Preservation Agreement provides the public with the opportunity
to view the interior of the Building twice a month throughout the year. Furthermore, your
Preservation Agreement establishes both a telephone and an internet reservation system,
expediting the public's ability to schedule visits to gain access to the interior of the Building.
Furthermore, as in Rev. Rul. 86-49, supra, you also provide that the provision of funds by you is
subject to a restrictive covenant that will be recorded in the local registry. As such, these
conditions create sufficient public access to the Designated Interior Historic Spaces of the
Building, with any private benefit to the Club and its members being incidental.

Ruling:

Your agreement to the terms of the Preservation Agreement, your performance of those

terms, and the Club’s acceptance of contributions to be utilized to defray the costs of the
preservation and restoration in a manner consistent with the Preservation Agreement will
not adversely affect your tax exemption under § 501(c)(3).

This ruling will be made available for public inspection under section 6110 of the Code after
certain deletions of identifying information are made. For details, see enclosed Notice 437,
Notice of Intention to Disclose. A copy of this ruling with deletions that we intend to make
available for public inspection is attached to Notice 437. If you disagree with our proposed
deletions, you should follow the instructions in Notice 437.

This ruling is directed only to the organization that requested it. Section 6110(k)(3) of the Code
provides that it may not be used or cited by others as precedent.

This ruling is based on the facts as they were presented and on the understanding that there will
be no material changes in these facts. This ruling does not address the applicability of any
section of the Code or regulations to the facts submitted other than with respect to the sections
described. Specifically, this ruling does not reach any conclusion as to the qualifying distribution
status of your proposed transfer under § 4942(g)(3). Because it could help resolve questions
concerning your federal income tax status, this ruling should be kept in your permanent records.

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

In accordance with the Power of Attorney currently on file with the Internal Revenue Service, we
are sending a copy of this letter to your authorized representative.

Sincerely,

Michael Seto
Manager, Exempt Organizations
Technical

Enclosure
Notice 437