Military morale club was denied charitable exemption

Plain-English summary

An unincorporated association limited membership to military personnel at a particular location who held a specified rank. It organized picnics, paintball trips, gaming and sports tournaments, and other events for member morale, while conducting only occasional community service or charitable fundraising. Its bylaws emphasized member welfare and recreation and directed remaining assets on dissolution to a recreation committee that was not shown to be tax-exempt. The IRS concluded that the association failed both the organizational and operational tests because it had substantial social and recreational purposes and provided minimal public benefit. It denied exemption under section 501(c)(3), and the decision became final after the association did not protest.

Ruling snapshot

• Question: Did the military morale and recreation association qualify as a charitable organization under section 501(c)(3)?
• Outcome: denied because it failed the organizational and operational tests
• Key authorities: IRC § 501(c)(3); Treas. Reg. §§ 1.501(c)(3)-1(a), 1.501(c)(3)-1(b), 1.501(c)(3)-1(c); Rev. Rul. 77-366; Rev. Rul. 78-84

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201
Date: May 10, 2017

Employer ID number:

Number: 201731016 Contact person/ID number:
Release Date: 8/4/2017 Contact telephone number:

Form you must file:

Tax years:

UIL: 501.00-00, 501.03-04, 501.03-30

Dear

This letter is our final determination that you don’t qualify for tax-exempt status under Section 501(c)(3) of the
Internal Revenue Code (the Code). Recently, we sent you a proposed adverse determination in response to your
application. The proposed adverse determination explained the facts, law, and basis for our conclusion, and it
gave you 30 days to file a protest. Because we didn’t receive a protest within the required 30 days, the proposed
determination is now final.

Because you don’t qualify as a tax-exempt organization under Section 501(c)(3) of the Code, donors can't
deduct contributions to you under Section 170 of the Code. You must file federal income tax returns for the tax
years listed at the top of this letter using the required form (also listed at the top of this letter) within 30 days of
this letter unless you request an extension of time to file.

We'll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection (as required under Section 6110 of the Code) 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, follow the instructions in the Notice
437 on how to notify us. If you agree with our deletions, you don’t need to take any further action.

We'll also notify the appropriate state officials of our determination by sending them a copy of this final letter
and the proposed determination letter (under Section 6104(c) of the Code). You should contact your state
officials if you have questions about how this determination will affect your state responsibilities and
requirements.

Letter 4038 (Rev. 7-2014)
Catalog Number 47632S

If you have questions about this letter, you can contact the person listed at the top of this letter. If you have
questions about your federal income tax status and responsibilities, call our customer service number at
1-800-829-1040 (TTY 1-800-829-4933 for deaf or hard of hearing) or customer service for businesses at
1-800-829-4933.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Notice 437

Redacted Letter 4036, Proposed Adverse Determination Under IRC Section 501(c)(3)
Redacted Letter 4038, Final Adverse Determination Under IRC Section 501(c)(3) - No Protest

Letter 4038 (Rev. 7-2014)
Catalog Number 47632S


Department of the Treasury

Internal Revenue Service

Cincinnati, OH 45201
Date: May 2, 2017
Employer ID number:
Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend: UIL:

B = Formation date 501.00-00
C = Rank 501.03-04
D = Location 501.03-30

E = Branch of the military

Dear

We considered your application for recognition of exemption from federal income tax under Section 501(a) of
the Internal Revenue Code (the Code). Based on the information provided, we determined that you don’t qualify
for exemption under Section 501(c)(3) of the Code. This letter explains the basis for our conclusion. Please

keep it for your records.

Issues
Do you qualify for exemption under Section 501(c)(3) of the Code? No, for the reasons stated below.

Facts
You formed as an unincorporated association on B. You host events for military members stationed at D for

morale purposes. Your members are limited to individuals at D who have been promoted to the rank of C.

Your formation document, your Bylaws, in part, state your purpose and objectives are:

• To strengthen cohesiveness within the community of C and raise spirit de corps of the C, by working for
the good of the Command, the E, and community

• To provide a medium for the exchange of ideas, information, and professional knowledge to the
individuals with the rank of C at D

• To reinforce the responsibilities, leadership, and privileges of C
• To support the Commanding Officer in promoting the morale and well-being of specifically ranked
personnel and their family members in both official and social capacities

• To support the morale, welfare, and recreation of the C in good standing; to include, but not limited to,
picnics, lunches, and seasonal parties.

In furtherance of your purposes, you host various events, which have included a command wide picnic to boost
morale, paintball trips, and various gaming and sports tournaments. On one occasion you donated funds to a
specific public charity and assisted them with a community service project.


2

In order to be in good standing, a member must participate in a minimum of two fundraising, social, or training
events per quarter outside of the regularly scheduled meetings by assisting with the set-up, coordination, and
on-the-job requirements of events. A member in good standing may be eligible to hold office, chair a
committee, vote, and receive a farewell/retirement gift.

Your Bylaws also state that any residual funds or assets left over after paying all liabilities will be donated to
the D Recreation Committee.

You sell food to personnel, such as hot dogs and burgers, to raise money for the events you host.

Law

Section 501(c)(3) of the Code provides for the exemption from federal income tax to organizations organized
and operated exclusively for charitable or educational purposes, provided no part of the net earnings inures to
the benefit of any private shareholder or individual.

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

Treas. Reg. Section 1.501(c)(3)-1(b)(1) provides that an organization is organized exclusively for one or more
exempt purposes only it its articles of organization limit its purposes to one or more exempt purposes and do not
expressly empower it to engage, otherwise than as an insubstantial part of its activities, in activities which
themselves are not in furtherance of one or more exempt purposes.

Treas. Reg. Section 1.501(c)(3)-1(b)(4) provides that an organization is organized exclusively for one or more
exempt purposes only it its articles of organization dedicates its assets to an exempt purpose.

Treas. Reg. Section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as operating exclusively
for exempt purposes if it engages primarily in activities that accomplish exempt purposes specified in section
501(c)(3) of the Code. An organization will not be so regarded if more than an insubstantial part of its activities
is not in furtherance of an exempt purpose.

Rev. Rul. 77-366, 1977-2 C.B. 192, states that a nonprofit organization that arranges and conducts winter-time
ocean cruises during which activities to further religious and educational purposes are provided in addition to
extensive social and recreational activities is not operated exclusively for exempt purposes and does not qualify for
exemption under Section 501(c)(3) of the Code.

Rev. Rul. 78-84, 1978-1 C.B. 150, states that an organization formed by citizens of a community to promote civic
pride in the community, the state, and the country by providing a color guard and conducting flag-raising and other
ceremonies at patriotic and community functions is promoting patriotism, a recognized charitable objective, and
qualifies for exemption under Section 501(c)(3) of the Code.

In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945), the Supreme Court
held that the presence of a single non-exempt purpose, if substantial in nature, will destroy a claim for
exemption regardless of the number or importance of truly exempt purposes.

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W


3

Syrang Aero Club Inc. v. Commissioner, 73 T.C. 717 (1980), describes an organization that owned one airplane
which it rented to club members at a low cost. They restricted membership to all members of the Syracuse Air
National Guard and civilian employees, active and retired members of all reserve military units, FAA personnel,
and dependents of all of the above and their civilian employees. In this case, the United States Tax Court held
that this organization was organized and operated for the benefit and recreation of its members and did not
qualify for exemption under Section 501(c)(3) of the Code.

Application of law

You are not described under Section 501(c)(3) of the Code or Treas. Reg. Section 1.501 (c)(3)-1(a)(1) because
you do not meet the organizational or operational tests. If an organization fails either the organizational or
operational test, it cannot qualify as an exempt organization under Section 501(c)(3).

Your organizing document, your Bylaws, states that your purpose is to strengthen, and boost the morale of your
members and support their welfare by engaging in various social activities. You fail the organizational test
because your formation document does not limit your purposes to one or more exempt purposes as required in
Treas. Reg. Section 1.501(c)(3)-1(b)(1).

Also, your Bylaws state that your assets will go to the D Recreational Committee upon dissolution. It does not
appear that the D Recreational Committee is a qualifying organization described in Section 501(c)(3) of the
Code. Therefore, you also fail the organizational test because your formation document does not dedicate your
assets to an exempt purpose under Section 501(c)(3) as required in Treas. Reg. Section 1.501(c)(3)-1(b)(4).

The majority of your activities are social and recreational in nature. Social and recreational events are not
considered activities which further exempt purposes under Treas. Reg. Section 1.501(c)(3)-1(c)(1). As indicated
in Rev. Rul. 77-366, extensive social and recreational activities precludes exemption under Section 501(c)(3) of
the Code.

Your activities are not like those described in Rev. Rul. 78-84 where an organization promoted patriotism by
conducting ceremonies in their community. You conduct minimal activities in your community. Your activities
almost exclusively promote the social and recreational purposes of your members. Similar to Syrang Aero Club,
Inc., you are organized and operated for the recreation of your members, precluding you from qualifying for
exempt status under Section 501(c)(3) of the Code.

Like the organization in Better Business Bureau, you have a substantial non-exempt purpose. Even if some of
your activities further exempt purposes under Section 501(c)(3) of the Code, such as an occasional fundraising
event for charity, a single non-exempt purpose, if substantial in nature, will destroy a claim for exemption
regardless of the number or importance of truly exempt purposes. Your recreational activities are substantial
and prevent you from qualifying for exemption under Section 501(c)(3).

Conclusion

You are operated for substantial non-exempt, social and recreational purposes, with minimal benefit to the
general public. You fail both the organizational and operational tests. Therefore, you do not qualify for
exemption as an organization described in Section 501(c)(3) of the Code.

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W


If you don’t agree
You have a right to file a protest if you don’t agree with our proposed adverse determination. To do so, you
must send a statement to us within 30 days of the date of this letter. The statement must include:

• Your name, address, employer identification number (EIN), and a daytime phone
number

• A copy of this letter highlighting the findings you disagree with
• An explanation of why you disagree, including any supporting documents
• The law or authority, if any, you are relying on

• The signature of an officer, director, trustee, or other official who is authorized to sign for the
organization, or your authorized representative

• One of the following declarations:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I examined this protest statement, including

accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts and such facts are true, correct, and complete.

For authorized representatives:

Under penalties of perjury, I declare that I prepared this protest statement, including
accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts and such facts are true, correct, and complete.

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if he or she hasn't
already done so. You can find more information about representation in Publication 947, Practice Before the
IRS and Power of Attorney.

We'll review your protest statement and decide if you provided a basis for us to reconsider our determination. If
so, we’ll continue to process your case considering the information you provided. If you haven’t provided a
basis for reconsideration, we’ll forward your case to the Office of Appeals and notify you. You can find more
information about the role of the Appeals Office in Publication 892, How to Appeal an IRS Decision on Tax-
Exempt Status.

If you don’t file a protest within 30 days, you can’t seek a declaratory judgment in court at a later date because
the law requires that you use the IRS administrative process first (Section 7428(b)(2) of the Code).

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W


Where to send your protest
Please send your protest statement, Form 2848, if needed, and any supporting documents to the applicable
address:

U.S. mail: Street address for delivery service:
Internal Revenue Service Internal Revenue Service

EO Determinations Quality Assurance EO Determinations Quality Assurance
Room 7-008 550 Main Street, Room 7-008

P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

You can also fax your statement and supporting documents to the fax number listed at the top of this letter. If
you fax your statement, please contact the person listed at the top of this letter to confirm that he or she received
it.

If you agree

If you agree with our proposed adverse determination, you don’t need to do anything. If we don’t hear from you
within 30 days, we’ll issue a final adverse determination letter. That letter will provide information on your
income tax filing requirements.

You can find all forms and publications mentioned in this letter on our website at www.irs.gov/formspubs. If
you have questions, you can contact the person listed at the top of this letter.

Sincerely,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W