Banquet-center business prevents charitable exemption

Plain-English summary

A membership organization sought recognition under section 501(c)(3) while operating a banquet center that it rented to the general public for weddings, business meetings, parties, and similar events. The center produced 99 percent of the organization's income, used paid management and contractors, advertised online, and charged customary fees, while charitable contributions represented only 0.1 percent of expenditures. The IRS concluded that the banquet center was operated like a competing commercial business and was the organization's primary purpose, rather than an activity furthering a charitable purpose. It also found that the dissolution clause dedicated assets to a named organization without ensuring that the assets would be used for section 501(c)(3) purposes. The IRS therefore denied exemption because the organization failed both the operational test and the requirement that its assets be permanently dedicated to exempt purposes.

Ruling snapshot

• Question: Does a membership organization qualify under section 501(c)(3) when its primary activity is a commercially operated banquet center and its dissolution clause does not ensure an exempt distribution?
• Outcome: denied
• Key authorities: IRC §§ 501(c)(3) and 513; Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 64-182; Better Business Bureau of Washington, D.C. v. United States; Airlie Foundation 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
Date: October 26, 2017

Employer ID number:

Number: 201803009
Release Date: 1/19/2018

Contact person/ID number:
Contact telephone number:

Form you must file:

Tax years:

UIL: 501.03-00, 501.33-00, 501.36-01

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.

We sent a copy of this letter to your representative as indicated in your power of attorney.

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: August 29, 2017
Employer ID number:
Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend: UIL:

B = Date 501.03-00
C = State 501.33-00
D = Organization 501.36-01

E = State Statute
F = Organization
G = Name

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 were incorporated on B in C. Your Articles state you are a charitable or religious corporation as defined in
E. They also state that in the event you dissolve or terminate at any time, your assets become the sole property
of D. You believe you are exempt under Section 501(c)(10) of the Code but our records show you are exempt
under Section 501(c)(7) of the Code as of B. You are current with all Form 990 filings. You submitted Form
1023 to change your status to be recognized as exempt under Section 501(c)(3) of the Code.

Your mission is to support and supplement the charitable works of D and to facilitate the fraternal, civic and
social pursuits of F. You are a membership organization. Your Bylaws state in Article III that your members are
all members of F that are in good standing. Your bylaws additionally indicate that your members elect your
board of directors.

Your primary activity is the operation of a banquet center doing business as G. The banquet center is rented to
the general public for such events as weddings, events associated with weddings including rehearsal dinners,
showers, luncheons, parties, and business events. The facility can be configured to the needs of the clients
including a classroom, and a theater. You offer numerous packages that can be tailored to the clients and the


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pricing will vary greatly from client to client per each person’s individual needs for their event. Catering is also
available through your preferred caterers to all clients.

You offer several wedding packages which can be customized according to the client’s wishes. You have basic
rates and charge additional fees for drink packages and other amenities such as the use of your patio and the
lounge as well as specialty glassware and specialty beverages.

For your business events, you offer customized seating styles and can accommodate a few hundred. These
packages may include meeting room, tables, chairs, and wireless internet and are generally offered in half day
and full day increments. These clients can also pay an additional fee for audio video services and other
amenities.

You publicize G primarily on your web site which contains details of the numerous available event packages
and fee schedules. The website enables potential clients to download detailed brochures on the various packages
you offer for such events as weddings, business meetings and parties and the fee schedules. Your website also
has photos of the various available amenities and emphasizes the amenities are offered at an affordable price.
To emphasize your customer service, the website solicits testimonials from satisfied clients emphasizing the
pricing and services offered.

You have a salaried full time banquet facility operations manager who is responsible for G’s day to day
operations. The duties consist of contracting with clients for rental of the facility, reporting to your board of
directors and advising the board of all maintenance needs, and making recommendations for improvements the
facility may need. In addition to the base pay, the operations manager may receive a receive a monthly
commission based on the monthly invoicing of hall rental revenue. You wrote this percentage considers the
modest level of base pay compensation and adds an incentive component to the compensation package. In
addition, upon the review of overall financial results, your board at its discretion may provide another annual
bonus in the range of 2-3% of total compensation. Your income statement also shows you hire independent
contractors and members are encouraged to volunteer at G to keep costs down. Ninety nine percent of your
income came from fees earned from G’s operations. Expenses were for its operating expenses such as salaries
(30% of your expenses), interest expense (19% of your expenses), advertising (3% of your expenses) and cost
of sales (15% of your expenses). Charitable contributions were .1% of your expenditures.

You also indicated your facility is debt financed. Finally, your other activity is a weekly bingo game which is
conducted by your volunteer member bingo committee. Your financial information shows you have only
conducted this activity for one year.

Law

Section 501(c)(3) of the Code provides for the recognition of exemption of organizations that are organized and
operated exclusively for religious, charitable or other purposes as specified in the statute. No part of the net
earnings may inure to the benefit of any private shareholder or individual.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) states 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 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.

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


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Treas. Reg. Section 1.501(c)(3)-1(b)(4) holds that an organization is not organized exclusively for one or more
exempt purposes unless its assets are 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 operation of law, be distributed for one or more exempt purposes.

Treas. Reg. Section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as operated exclusively
for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of
such 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.

Treas. Reg. Section 1.501(c)(3)-1(d)(2) defines the term charitable as including the relief of the poor and
distressed or of the underprivileged, and the promotion of social welfare by organizations designed to lessen
neighborhood tensions, to eliminate prejudice and discrimination, or to combat community deterioration. The
term “charitable” also includes lessening of the burdens of government.

Treasury Regulation Section 1.501(c)(3)-1(e)(1) states an organization may qualify for tax exemption under
Section 501(c)(3) of the Code although it operates a trade or business as a substantial part of its activities,

1. if the operation of such trade or business is in furtherance of the organization’s exempt purpose or
purposes

2. and also if the organization is not organized or operated for the primary purpose of carrying on an
unrelated trade or business, as defined in Section 513 of the Code.

Rev. Rul. 64-182, 1964-1 C.B. 186 - A corporation organized exclusively for charitable purposes derives its
income principally from the rental of space in a large commercial office building which it owns, maintains and
operates. The charitable purposes of the corporation are carried out by aiding other charitable organizations,
selected in the discretion of its governing body, through contributions and grants to such organizations for
charitable purposes. Held, the corporation is deemed to meet the primary purpose test of section 1.501(c)(3)-
1(e)(1) of the Income Tax Regulations, and to be entitled to exemption from federal income tax as a corporation
organized and operated exclusively for charitable purposes within the meaning of section 501(c)(3) of the
Internal Revenue Code of 1954, where it is shown to be carrying on through such contributions and grants a
charitable program commensurate in scope with its financial resources.

In Better Business Bureau of Washington, D.C. v. U.S., 326 U.S. 279, 283, 66 S. Ct. 112, 90 L. Ed. 67 (1945),
the Supreme Court held that the “presence of a single . . . [nonexempt] purpose, if substantial in nature, will
destroy the exemption regardless of the number or importance of truly . . . [exempt] purposes.”

In B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978), the court found that a corporation formed to
provide consulting services did not satisfy the operational test under section 501(c)(3) of the Code because its
activities constituted the conduct of a trade or business that is ordinarily carried on by commercial ventures
organized for profit. Its primary purpose was not charitable, educational, or scientific, but rather commercial.
In addition, the court found that the organization's financing did not resemble that of the typical section
501(c)(3) organizations. It had not solicited, nor had it received, voluntary contributions from the public. Its
only source of income was from fees from services, and those fees were set high enough to recoup all projected

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


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costs and to produce a profit. Moreover, it did not appear that the corporation ever planned to charge a fee less
than “cost.” And finally, the corporation did not limit its clientele to organizations that were section 501(c)(3)
exempt organizations.

In Schoger Found. v. Comm'r, 76 T.C. 380 (T.C. 1981), the court held that a not-for-profit corporation that
owned and operated a mountain lodge as a religious retreat facility and made available to lodgers recreational
and social activities comparable to activities offered by vacation resorts does not qualify for tax-exempt status
as an organization described under section 501(c)(3) of the Code.

In Easter House v. U.S., 12 Cl. Ct. 476, 486 (1987), aff'd, 846 F. 2d 78 (Fed. Cir.) cert. denied, 488 U.S. 907,
109 S. Ct. 257, 102 L. Ed. 2d 246 (1988), the court found an organization that operated an adoption agency was
not exempt under section 501(c)(3) of the Code because a substantial purpose of the agency was a nonexempt
commercial purpose. The court concluded that the organization did not qualify for exemption under section
501(c)(3) because its primary activity was placing children for adoption in a manner indistinguishable from that
of a commercial adoption agency. The court rejected the organization's argument that the adoption services
merely complemented the health-related services to unwed mothers and their children. Rather, the court found
that the health-related services were merely incident to the organization's operation of an adoption service,
which, in and of itself, did not serve an exempt purpose. The organization's sole source of support was the fees
it charged adoptive parents, rather than contributions from the public. The court also found that the organization
competed with for-profit adoption agencies, engaged in substantial advertising, and accumulated substantial
profits. Accordingly, the court found that the "business purpose, and not the advancement of educational and
charitable activities purpose, of plaintiff's adoption service is its primary goal" and held that the organization
was not operated exclusively for purposes described in section 501(c)(3). Easter House, 12 Cl. Ct. at 485-486.

In Living Faith, Inc. v. Commissioner, 950 F.2d 365 (1991), the Court of Appeals upheld a Tax Court decision
that an organization operating restaurants and health food stores in a manner consistent with the doctrines of the
Seventh Day Adventist Church did not qualify for exemption under section 501(c)(3) of the Code because the
organization was operated for a substantial nonexempt commercial purpose. The court found that the
organization's activities were "presumptively commercial" because the organization was in competition with
other restaurants, engaged in marketing, and generally operated in a manner similar to commercial businesses.

In Airlie Foundation v. Commissioner, 283 F. Supp. 2d 58 (D.D.C., 2003), the court relied on the
“commerciality” doctrine in applying the operational test. Because of the commercial manner in which this
organization conducted its activities, the court found that it was operated for a non-exempt commercial purpose,
rather than for a tax-exempt purpose. As the court stated:

Among the major factors courts have considered in assessing commerciality are competition with for profit
commercial entities; extent and degree of below cost services provided; pricing policies; and reasonableness of
financial reserves. Additional factors include, inter alia, whether the organization uses commercial promotional
methods (e.g. advertising) and the extent to which the organization receives charitable donations.

Application of law

You are not operated for exempt purposes consistent with Section 501(c)(3) of the Code. Your activities consist
of operating a commercial banquet center. You operate in a manner consistent and in competition with other
banquet centers.

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


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You do not meet the provisions stated in Treas. Reg. Section 1.501(c)(3)-1(b)(4) because your assets upon
dissolution are dedicated to a specifically named entity which does not guarantee that they will be distributed
for one or more exempt purposes described in Section 501(c)(3) of the Code.

You are not operating exclusively for charitable purposes as required under Treas. Reg. Section 1.501(c)(3)-
1(c)(1). Your primary activity is the operation of a banquet center available for a fee to the general public.
Rental fees are paid by anyone using it. As provided in Treas. Reg. Section 1.501(c)(3)-1(d)(2), you have not
established that your operations accomplish exclusively charitable purposes.

Operating as a banquet center for a fee on a regular and continuous basis is an unrelated trade or business for
profit within the meaning of Section 513 of the Code. Pursuant to Treas. Reg. Section 1.501(c)(3)-1(e)(1), you
do not meet the requirements for recognition of tax exemption under Section 501(c)(3) of the Code as your
primary purpose is the operation of an unrelated trade or business for profit within the meaning of Section 513
of the Code.

Unlike the organization in Rev. Rul. 64-182 you do not restrict the rental of your banquet center to other section
501(c)(3) exempt organizations. Maintaining and renting a banquet center to members of the general public
does not further a recognized Section 501(c)(3) purpose. While you have made charitable contributions, this has
been less than 1% of your total revenue. In addition, your primary activity would remain the operation of a
banquet center for rent by the general public. As the court found in Better Business Bureau of Washington, D.C.
v. U.S., the presence of a single, substantial non-exempt purpose will preclude exemption regardless of the
number of other exempt activities.

Your operations are like those of the organization described in Arlie Foundation , Inc. As the owner and operator
of a banquet center, you are in direct competition with other banquet centers who provide services to members
of the public for a fee. The fees you charge are customary to those of the industry. In addition, you will
advertise your services on the internet and use marketing methods common to for-profit businesses. You have
received less than 1% of your total revenue from public donations or grants and are almost solely funded by
fees. You have a paid banquet manager and contract labor as needed. Thus, you meet most of the factors
provided in Airlie Foundation, Inc., indicating that you are operated for a substantial nonexempt commercial

purpose.

You are like the organizations described in B.S.W. Group, Inc., Easter House, Schoger Foundation and Living
Faith because you are operating for a substantial nonexempt commercial purpose rather than for a tax-exempt
purpose. You are open to the general public during regular business hours and the rental of the banquet center is
available to anyone in the general public. You use your rental income to pay for the cost of sales, the upkeep of
your facility, the employment of staff, and the making of interest payments on debt. This is an activity normally
carried on by for-profit businesses. Therefore, you conduct the activity in a manner similar to for profit
businesses and are in direct competition with such businesses.

Conclusion

Based on the information submitted, you have failed to establish that you are organized and operated
exclusively for exempt purposes within the meaning of Section 501(c)(3) of the Code and the related income
tax regulations. Therefore, based on the administrative record, you fail to qualify for exemption under Section
501(c)(3).

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).

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

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


7

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,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

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