Public-facing business becomes the organization's primary activity

Plain-English summary

A section 501(c)(4) social welfare organization operated a public-facing business that generated 92.56 percent of its income. Although the organization made grants and provided some social welfare benefits, the IRS found that it devoted most of its time to the business and did not carry out enough of the civic and educational activities listed in its articles. Treasury regulations deny section 501(c)(4) status when an organization's primary activity is running a social club or conducting business with the public in a manner similar to a for-profit organization. The organization and its representative agreed with revocation, explaining that the activity had begun as a fundraiser but became a popular and lucrative business. The IRS therefore revoked exemption effective January 1 of the redacted year and required Form 1120 filings.

Ruling snapshot

• Question: Did the organization continue to qualify under section 501(c)(4) when a public-facing business became its primary activity?
• Outcome: Revoked effective January 1 of the redacted year
• Key authorities: IRC §§ 501(a), 501(c)(4), and 504; Treas. Reg. § 1.501(c)(4)-1

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TEGE EO Examinations Mail Stop 4920 DAL.
1100 Commerce St.
Dallas, Texas 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Number: 201630016 Date: April 11, 2016
Release Date: 7/22/2016
Taxpayer Identification Number:

Person to Contact:

UIL Code: 501.04-00 Employee Identification Number:

Employee Telephone Number:

CERTIFIED MAIL -- RETURN RECEIPT

Dear

This is a final adverse determination regarding your exempt status under section 501(c)(4) of the
Internal Revenue Code. Our favorable determination letter to you dated September 19XX is hereby
revoked and you are no longer exempt under section 501(a) of the Code effective January 1, 20XX.

The revocation of your exempt status was made for the following reason(s):

Organizations described in IRC 501(c)(4) and exempt under section 501(a) must be operated
exclusively for exempt purposes. You have failed to establish that you are operated exclusively
for exempt purposes and that no part of your net earnings inures to the benefit of private
shareholders or individuals.

To be exempt under IRC 501(c)(4) an organization cannot be organized or operated for profit and it
must operate exclusively to promote social welfare, per Treas. Reg. section 1.501(c)(4)-1(a)(2)(i).
The facts stated on the Form 990 and the examination revealed you have a substantial amount of

income (92.56%) from your operation. That amount of income would indicate your
primary purpose is your . Although you do contribute grants and benefits for social
welfare purposes, it is not your exclusive purpose. Because you have devoted most of your time
to the , you have not been able to substantially use your time to fulfill your

purposes listed in the Articles of Incorporation. You have not performed enough of the activities
stated in the Articles of Incorporation such as, “To foster and encourage the training and

education of all citizens regardless of economic station, in order that a true democracy may exist
among all of our citizens.” The IRC Section 501(c)(4) clearly states organizations should not carry

on business with the general public in a manner similar to organizations which are operated for
profit. It is clear your is not operated for an exempt purpose. Therefore, you have not
met the requirements to remain exempt under IRC 501(c)(4).

You are required to file income tax returns on Form 1120. These returns should be filed with the
appropriate Service Center for the tax year beginning January 1, 20XX, and for all tax years
thereafter in accordance with the instructions of the return.

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 Internal Revenue Code.

If you decide to contest this determination under the declaratory judgment provisions of section
7428 of the Code, a petition to the United States Tax Court, the United States Claims Court, or the
district court of the United States for the District of Columbia must be filed before the 91st Day
after the date this determination was mailed to you. Please contact the clerk of the appropriate
court for rules regarding filing petitions for declaratory judgments by referring to the enclosed
Publication 892. You may write to the United States Tax Court at the following address:

United States Tax Court
400 Second Street, NW
Washington, DC 20217

You also have the right to contact the Office of the Taxpayer Advocate. The Taxpayer Advocate
Service (TAS) is an independent organization within the IRS that can help protect your taxpayer
rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but
haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is
always free, TAS will do everything possible to help you. Visit taxpayeradvocate.irs.gov or call 1-
877-777-4778. If you prefer, you may contact your local Taxpayer Advocate at:

Internal Revenue Service
Office of the Taxpayer Advocate

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

Sincerely,

Paul A. Marmolejo
Acting Director, EO Examinations

Enclosures:

Publication 892

Department of the Treasury

Internal Revenue Service

Tax Exempt and Government Entities Division
Exempt Organizations: Examinations

1616 Capitol Av, Suite 450 MS47100MA
Omaha, NE 68102-4923

Date: May 28, 2015

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:

Certified Mail — Return Receipt Requested

Dear

Why you are receiving this letter
Enclosed is a copy of our report of examination explaining why revocation of your organization's
tax-exempt status is necessary.

What you need to do if you agree
If you agree with our findings, please sign the enclosed Form 6018-A, Consent to Proposed

Action, and return it to the contact at the address listed above. We'll send you a final letter
revoking your exempt status.

If we don’t hear from you
If we don’t hear from you within 30 calendar days from the date of this letter, we'll process your
case based on the recommendations shown in the report of examination and this letter will

become final.

Letter 3610-R (10-2012)
Catalog Number 59432G

Effects of revocation
In the event of revocation, you'll be required to file federal income tax returns for the tax year(s)

shown above. File these returns with the contact at the address listed above within 30 calendar
days from the date of this letter, unless a request for an extension of time is granted. File returns
for later tax years with the appropriate service center indicated in the instructions for those
returns.

What you need to do if you disagree with our findings

If you disagree with our position, you may request a meeting or telephone conference with the
supervisor of the 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.

If you and Appeals don’t agree on some or all of the issues after your Appeals conference, or if
you don’t request an Appeals conference, you may file suit in United States Tax Court, the
United States Court of Federal Claims, or United States District Court after satisfying procedural
and jurisdictional requirements.

You may also request that we refer this matter for technical advice as explained in Publication

892. Please contact the person identified in the heading of this letter if you’re considering
     requesting technical advice. If we send a determination letter to you based on a technical advice
     memorandum issued by the Exempt Organizations Rulings and Agreements office, then 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 Service (TAS). TAS is your
voice at the IRS. This service helps taxpayers whose problems with the IRS are causing
financial difficulties; who have tried but haven’t been able to resolve their problems with
the IRS; and those who believe an IRS system or procedure is not working as it should. If
you believe you are eligible for TAS assistance, you can call the toll-free number 1-877-
777-4778 or TTY/TDD 1-800-829-4059. For more information, go to www.irs.gov/advocate.
If you prefer, you may contact your local Taxpayer Advocate at:

Internal Revenue Service
Office of the Taxpayer Advocate

2 Letter 3610-R (10-2012)
Catalog Number 59432G

For additional information
If you have any questions, please call the contact 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,

Margaret Von Lienen
Director, EO Examinations

Enclosures:

Report of Examination
Form 6018-A
Publication 892
Publication 3498

3 Letter 3610-R (10-2012)
Catalog Number 59432G

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
20XX
ISSUE: Should the exempt status of (referred to as the “Organization’) under

Section 501(a) of the Internal Revenue Code (IRC) as an organization described in IRC Section
501(c)(4) be revoked for all years beginning on January 1, 20XX, due to the public operation of a
as the primary activity.

FACTS: The Organization was founded in October in 19XX. The Organization received its ruling
date September 19XX under the Group Exemption Number XXXX from the Internal Revenue
Service. The Organization’s Articles of Incorporation Article III, states the purpose:

“The objects and purposes of the Corporation shall be as follows:

(1) To

(2) To

(3) To ;

(4) To > and

(5) To .
OPERATION
The Organization's website states the operation times of the are from Tuesday to
Saturday from 11:00 a.m. to 9:00 p.m. except Thursday the starts at 10:30 a.m.
Sunday hours are from 8:30 a.m. to 7:30 p.m. The website lists all the closing times are at the
management's discretion. The on Mondays. The website lists the
following Holidays that they are closed are New Year’s Day, Easter Sunday, Mother’s Day,
Thanksgiving and Christmas Day. The days that the generally closes early are
New Year's Eve and Christmas Eve is listed on the website. The contains an
and . These times are also listed at the

FORM 990 and 990-T

The revenue reported on the Form 990, for the is $ . The total revenue
reported on the Form 990 is $ ($ I$ =, }. The Cost of
Goods Sold (COGS) for the and totals $ reported on the Forms
990-T and the 990. In addition, there were other deductions of $ for the
on the Form 990-T. The total of expenses totals $ . The total expenses
listed on the Form 990 are $ ($ I$ = }.
Form 990
Revenue Expenses

Membership Dues $ Grants to Govt & Orgs $

Fundraiser Events $ Grants to Individuals $

Govt Grants $ Benefits $

Form 886-A (1-1994) Catalog Number 20810W Page 1 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
20XX

All Other Contri $ Other Salaries & Wages $

Total $_ Total $

These are revenue & expenses that relate to their Social Welfare Purpose.

ACTIVITIES
Inspected the Scholarship bank Account and it had receipts of $ . The income is

received from various fundraisers:

is usually raffles or pools. Some type of fundraising event while
the plays in the . There were deposits made from the Winter

F/R in February, March, October and December.

of $ in April usually in the spring.

can be done every week. The 20XX year deposited $ for meat
raffles in

comes from the sale of Fireworks of $ in . (This is
new because is now able to sale fireworks in the last few years.)

of $ .The was the original account
for Scholarships. Initially they gave out scholarships for . Now they give

scholarships for all higher education, technical schools included.

The Organization has their scholarship program open to anyone in the area.
The Article III of the AOIs state

LAW

I.R.C. § 501, 26 U.S.C.A. § 501

Exemption from tax on corporations, certain trusts, etc.501(c)(4)(A) Civic leagues or organizations
not organized for profit but operated exclusively for the promotion of social welfare, or local
associations of employees, the membership of which is limited to the employees of a designated
person or persons in a particular municipality, and the net earnings of which are devoted
exclusively to charitable, educational, or recreational purposes.

Form 886-A (1-1994) Catalog Number 20810W Page 2 publish.no.irs.gov | Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

20XX

(B) Subparagraph (A) shall not apply to an entity unless no part of the net earnings of such entity
inures to the benefit of any private shareholder or individual.

1.501(c)(4)—1 Civic organizations and local associations of employees.

(a) Civic organizations—(1) In general. A civic league or organization may be exempt as an
organization described in section 501(c)(4) if—

(i) It is not organized or operated for profit; and
(ii) It is operated exclusively for the promotion of social welfare.

(2) Promotion of social welfare—(i) In general. An organization is operated exclusively for the
promotion of social welfare if it is primarily engaged in promoting in some way the common good
and general welfare of the people of the community. An organization embraced within this section
is one which is operated primarily for the purpose of bringing about civic betterments and social
improvements. A social welfare organization will qualify for exemption as a charitable organization
if it falls within the definition of charitable set forth in paragraph (d)(2) of § 1.501(c)(3)—1 and is not
an action organization as set forth in paragraph (c)(3) of § 1.501(c)(3)-1.

(ii) Political or social activities. The promotion of social welfare does not include direct or
indirect participation or intervention in political campaigns on behalf of or in opposition to any
candidate for public office. Nor is an organization operated primarily for the promotion of social
welfare if its primary activity is operating a social club for the benefit, pleasure, or recreation of its
members, or is carrying on a business with the general public in a manner similar to organizations
which are operated for profit. See, however, section 501(c)(6) and § 1.501(c)(6)—1, relating to
business leagues and similar organizations. A social welfare organization that is not, at any time
after October 4, 1976, exempt from taxation as an organization described in section 501(c)(3) may
qualify under section 501(c)(4) even though it is an action organization described in § 1.501(c)(3)—
1(c)(3)(ii) or (iv), if it otherwise qualifies under this section. For rules relating to an organization
that is, after October 4, 1976, exempt from taxation as an organization described in section

501(c)(3), see section 504 and § 1.504—1.

The Taxpayer and the Taxpayer’s Power of Attorney are in agreement of the recommendation of
revocation. The started as a fundraiser many years ago. The Organization did not
know it would result in a popular and lucrative business.

GOVERNMENT’S POSITION:
The revenue reported on the Form 990, for the is $ . The total revenue
reported on the Form 990 is $ ($ I$ =, ). The total of expenses

Form 886-A (1-1994) Catalog Number 20810W Page 3 publish.no.irs.gov | Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax identification Number - Year/Period ended
20XX
totals $ . The total expenses listed on the Form 990 are $ ($ /$
= ). The conclusion of these figures resulted in % of the revenue not related to the
and % of the expenses are for expenditures other than the

To be exempt under IRC 501(c)(4) an organization cannot be organized or operated for profit and
it must operate exclusively to promote social welfare, per Treas. Reg. section 1.501(c)(4)-
1(a)(2)(i). The facts stated on the Form 990 and the examination revealed the Organization has a
substantial amount of income ( %) from the operation. That amount of
income would indicate the primary purpose of the Organization is the . Although the
Organization does contribute grants and benefits for social welfare purposes, it is not the
Organization's exclusive purpose. Because the Organization has devoted most of its time to the

, it has not been able to substantially use its time to fulfill the purposes listed in the AOIs. The
Organization has not performed enough of the activities stated in the AOIs such as, “

.” The IRC Section 501(c)(4) clearly states organizations should not carry on business with the
general public in a manner similar to organizations which are operated for profit. It is clear the

is not an exempt purpose. Therefore, the Organization has not met the requirements to remain
exempt under IRC 501(c)(4).

Due to the fact that the Organization has conducted activities that are not within the purview of
Internal Revenue Code Section 501(c)(4), the Internal Revenue Service is proposing that the
exempt status of this organization be revoked for all years beginning on or after January 1, 20XX.
Please submit the Form 1120, U.S. Corporation Income Tax Return for the tax periods ending
January 1, 20XX, 20XX and 20XX. You will also be required to file the Form 1120 for the period
ending January 1, 20XX.

Please send the signed returns and report to:

Attn:
Internal Revenue Service

Form 886-A (1-1994) Catalog Number 20810W Page 4 publish.no.irs.gov Department of the Treasury-Internal Revenue Service