Bingo and political activities prevent social-welfare exemption

Plain-English summary

A political-party membership organization sought exemption under section 501(c)(4). Its main activity was weekly traditional and instant bingo, which consumed most of its staff and volunteer time and produced most of its revenue. Less than five percent of gross gaming receipts was available for scholarships and other community distributions, while the organization also held social fundraising events, endorsed political candidates, and gave members tickets to political fundraisers. The IRS concluded that bingo was a commercial and recreational activity rather than a social-welfare program, and that the social and campaign activities also did not further social welfare. Because the organization did not protest the proposed decision, the IRS made the denial final.

Ruling snapshot

• Question: Does an organization qualify under section 501(c)(4) when bingo is its primary activity and its other significant activities are social events and political campaign intervention?
• Outcome: denied
• Key authorities: IRC § 501(c)(4); Treas. Reg. § 1.501(c)(4)-1; Rev. Ruls. 66-179, 68-45, 74-361, and 81-95; Smith-Dodd Businessman's Association v. Commissioner

Full text (IRS public release)

Scanned document; transcription proofread from IRS OCR against all 9 page images. Obvious OCR misreads were corrected, blank redactions were preserved, and wording is otherwise verbatim.

Department of the Treasury
Internal Revenue Service

P.O. Box 2508
IRS Cincinnati, OH 45201

Release Number: 201802018 Date: October 18, 2017
Release Date: 1/12/2018
UIL Code: 501.04-00 Employer ID number:

Contact person/ID number:
Contact telephone number:
Form you must file:

Tax years:

Dear

This letter is our final determination that you don’t qualify for tax-exempt status under Section 501(c)(4) 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.

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.

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.

Letter 4040 (Rev. 7-2014)
Catalog Number 47635Z

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Notice 437
Redacted Letter 4034, Proposed Adverse Determination under IRC Section 501(a) Other Than 501 (c)(3)
Redacted Letter 4040, Final Adverse Determination under IRC Section 501(a) Other Than 501 (c)(3) - No

Protest

Letter 4040 (Rev. 7-2014)
Catalog Number 47635Z


Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201
Date: June 28, 2017

Employer ID number:
Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:

B = State 501.04-00
C = Date of formation

D = Geographic area

E = Political party

f dollars = Amount

g dollars = Amount

h dollars = Amount

j dollars = Amount

k dollars = Amount

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)(4) 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)(4) of the Code? No, for the reasons stated below.

Facts

You were formed as a nonprofit corporation under the laws of the state of B on C. Your purposes as set out in
your Articles of Incorporation are to promote the general welfare of your members, party government, and
community. You also consider persons seeking public office, preference of such persons, and you participate in
projects and endeavors that are for the betterment of your community, government, and fellow men.

Your Bylaws state that your object shall be to promote the political and social welfare of your membership, the
community of D and vicinity. Your Bylaws also reiterate the purposes outlined in your Articles of
Incorporation.

You are organized on a membership basis. All members must be registered members of the E political party
within B. Any registered E voter in B may become a candidate for membership. Such candidate must be
vouched for by a member in good standing and voted upon at a regular meeting. Continuance of membership is
at the sole discretion of the Board of Directors.

2

In furtherance of your purposes you are engaged in the following activities:

1.

You conduct bingo once a week. This includes traditional bingo and substantially similar variations, as
well as instant bingo. The events take place at a local veterans’ facility and are open to the public. They
are made known to your members at your monthly meetings and via your monthly newsletter. The
veterans’ organization also advertises the bingo by putting it on their calendar. The events are conducted
by two paid staff members and one volunteer. One compensated staff person is a member operates and
coordinates the bingo. The other compensated staff person is a non-member. The volunteer is also a non-
member. One person is assigned the responsibility of handling the instant bingo. Food and beverages are
available at the events, but you are not involved as the veterans’ organization handles all food and
beverage sales. You estimate that you spend 21 hours a week on bingo.

Bingo is legal in the locality where your events take place if conducted for charitable and other nonprofit
purposes. You have the requisite gaming licenses from the county for both bingo and instant bingo.

Net bingo proceeds are used mainly to provide local college and high school scholarships and, to a much
lesser extent, to support other community needs as they arise. Amounts not used in one year are kept in
the bingo account (a separate account used only for bingo revenues and expenditures) for distribution in
the following year. If you should dissolve, any remaining funds in the bingo account would go into the
endowment fund of the local community college.

A large portion of your bingo receipts are paid out as bingo prizes. The payout percentage from bingo
was about % and % for the last two years, respectively. Other direct costs (e.g., payroll, rent,
supplies and equipment) of conducting bingo remained much the same over the two years and consumed
about % of the bingo receipts each year. Approximately % of your bingo revenue was expended for
scholarships each year for the last two years.

Scholarships are not limited to your members or their children. The applications are reviewed by the
board members and the qualified candidates then receive a pro-rata portion of the money set aside for
scholarships for the year. Applications are distributed to area schools. The program is also publicized
(and applications are made available) at your bingo games, as well as promoted by your members to
potential applicants and mentioned in your monthly newsletter. The number of awards depends on the
amount of funds available. Awards are usually f dollars each for college students and g dollars each for
high school students.

2. You also conduct annual or semi-annual bull roasts. Tickets are sold to those who wish to attend the
events, which serve food and drinks and have live music. An estimated 83 hours per year are spent to
conduct this activity.

3. You also vet/endorse political candidates and provide political fundraiser tickets for members. You
consider the candidacies of any persons seeking public office or the preference of such persons. They
are invited to your monthly meetings. Your board of directors then decides whether to endorse the
candidate. If your board decides to do so, the endorsement is publicized.

You also purchase tickets to political fundraising events. Tickets are purchased using funds from your
membership dues and the net income from the bull roasts. They are then given out to your members at

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K

3

membership meetings via a raffle mechanism, whereby each member present at the meeting receives a
raffle ticket and the randomly selected winners then receive tickets to the fundraiser events.

You estimate that you spend 3 hours a month on these activities. Your expenditures for these tickets
have more than doubled over the last few years and were h dollars in the most recent year.

4. You also hold monthly membership meetings and produce a monthly newsletter. During your meetings
you discuss, coordinate, and report on your operations and activities. Members are welcome to bring
guests. You also publish a newsletter to communicate your activities and to serve as a forum for the
exchange of views. Editorials on political topics may be included, as well as articles from members on
matters pertaining to your mission.

Gross receipts from bingo make up the bulk of your revenues. In your most recently reported two years, bingo
revenue was j dollars one year (more than half of which was from instant bingo) and k dollars in the subsequent
year (more than % of which was from instant bingo). Your only other revenue comes from your bull roasts
and from annual membership dues.

Law
Section 501(c)(4) of the Code provides for the exemption from federal income tax of organizations not
organized for profit but operated exclusively for the promotion of social welfare.

Treasury Regulation Section 1.501(c)(4)-1(a)(2)(i) provides that 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.

Treas. Reg. Section 1.501(c)(4)-1(a)(2)(ii) provides that 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.

Rev. Rul. 66-179, 1966-1 C.B. 139, compares the requirements for qualification under Sections 501(c)(3), (4),
(5), and (7). With regard to Section 501(c)(4), it indicates that conducting substantial social activities for the
benefit, pleasure, and recreation of members would not preclude exemption under Section 501(c)(4), so long as
such activities do not constitute the organization's primary activity. It may be inferred from this that the
promotion of "social welfare" (i.e., the common good of civil society) does not include the conduct of "social"
activities (i.e., activities for the recreational and personal enjoyment of private individuals), since the latter
cannot constitute a Section 501(c)(4) organization's primary activity.

Rev. Rul. 68-45, 1968-1 C.B. 259, describes a veterans' organization which engages in social welfare activities
traditional to such organizations but whose main funding comes from the conduct of bingo games open to the
general public. Rev. Rul. 68-45, 1968-1 C.B. 259 and Rev. Rul. 74-361, 1974-2 C.B. 159 provide that whether
an organization is primarily engaged in promoting social welfare is a facts and circumstances determination.
Relevant factors include the manner in which the organization's activities are conducted; resources used in
conducting such activities, such as buildings and equipment; the time devoted to activities (by volunteers as

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K

4

well as employees); the purposes furthered by various activities; and the amount of funds received from and
devoted to particular activities.

Rev. Rul. 81-95, 1981-1 C.B. 332, considered the effect of engaging in political campaign activities on a
Section 501(c)(4) organization. The ruling concludes that an organization may carry on lawful political
activities and remain exempt under Section 501(c)(4) of the Code as long as it is primarily engaged in activities
that promote social welfare.

In Help The Children, Inc. v. Commissioner, 28 T.C. 1128 (1957), the court held that an organization engaged
in fund-raising activities through operation of bingo games and whose actual charitable contributions consisted
of contributions to charitable institutions of insubstantial amounts when compared to its gross receipts from
operation of bingo games, did not qualify for exemption under Section 501(c)(3).

Smith-Dodd Businessman's Association v. Commissioner, 65 T.C. 620 (1975), states that "[t]he operation of
bingo games for the production of income is a trade or business."

Julius M. Israel Lodge of B'nai B'rith No. 2113 v. Commissioner, 98 F.3d 190 (1996), held that instant bingo
did not constitute "game of bingo" within the meaning of the statute excluding bingo games from unrelated
business income tax.

Application of law
You are not operated exclusively for the promotion of social welfare within the meaning of Section 501(c)(4) of
the Code because you are not primarily engaged in activities that promote social welfare.

Conducting bingo activities does not promote social welfare, as described in Treas. Reg. Section 1.501(c)(4)-
1(a)(2)(i). Bingo accounts for the majority of your time expended in terms of staff/volunteer work hours and
also generates your highest gross revenue. As discussed in Smith-Dodd Businessman's Association, bingo, and
gaming in general, is normally a commercial trade or business. Bingo is intrinsically recreational in nature and
does not promote any Section 501(c)(4) purpose. Furthermore, more than half of your annual bingo proceeds
come from instant bingo, which is considered an unrelated trade or business activity, as described in Julius M.

Israel Lodge.

You are distinguished from Rev. Rul. 68-45, where bingo activities are clearly secondary to the conduct of a
well-established social welfare program. Unlike the organization in this ruling, you do not have a distinct social
welfare program.

Although bingo may be a means of raising funds for worthy causes, the amounts of gaming proceeds that you
have available for scholarship grants and other community welfare distributions have averaged less than five
percent of your gross gaming receipts annually. As in Help the Children, the fact that so little of your gaming
revenue has ultimately been used for community benefit indicates that it is not conducted for social welfare
purposes; rather, it is incidental to recreational purposes.

Your vetting and endorsement of candidates for the E political party and purchasing of tickets to political
fundraisers aid the political campaign function of the E party. These activities help the E party select viable
candidates and promote the visibility of such candidates. These activities constitute political campaign
intervention and are not in furtherance of social welfare purposes as described in Treas. Reg. Section

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K

5

1.501(c)(4)-1(a)(2)(ii). As explained in Rev. Rul. 81-95, it is permissible to conduct political campaign
intervention activities as long as your primary purpose is one that furthers a social welfare purpose. Your

primary activity is conducting bingo, which is also not a social welfare purpose. Therefore, you do not qualify

for exemption under Section 501(c)(4) of the Code.

You also conduct bull roast events, which are social events for your members. In addition, they also serve to
raise funds that are used, at least in part, to purchase political fundraiser tickets. These events are social and
political in nature, neither of which promotes social welfare. Although social and political activities will not

preclude exemption under Section 501(c)(4) of the Code if they aren’t your primary activity, your primary

activity is conducting bingo, which in and of itself is not a Section 501(c)(4) purpose. See. Rev. Rul. 66-179.
The social and political activities you conduct, in addition to your substantial bingo activities, further affirm

your preclusion under Section 501(c)(4).

Conclusion

You do not meet the requirements of Section 501(c)(4) of the Code because you are not operated primarily for
the promotion of social welfare. Your social welfare activities are incidental to your overall social, recreational

and political campaign intervention purposes. Therefore, you are not exempt under Section 501(c)(4).

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.

Letter 4034 (Rev. 7-2014)

Catalog Number 47628K

6

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).

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.

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K

7

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,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

Letter 4034 (Rev. 7-2014)
Catalog Number 47628K