IRS denies 501(c)(3) status to a group whose main activity was securing member discounts

Plain-English summary

To be tax-exempt under section 501(c)(3), an organization must be both organized and operated exclusively for charitable (or other exempt) purposes, and it cannot mainly serve the private interests of its members. This applicant, an ethnic-community group formed in a given state, had applied on the streamlined Form 1023-EZ. When the IRS asked for details, it turned out the group's stated purpose was to "enrich and uplift the socio-economic well-being of your members," and its actual activity was lining up businesses to give its roughly sixteen members free or discounted goods and services. The IRS determined the group failed the organizational test (its articles stated a purpose broader than section 501(c)(3) allows and lacked the required dedication-of-assets language) and the operational test (its sole activity served the private interests of its members). Because the group did not file a protest within 30 days of the proposed denial, the IRS issued this final adverse determination: no exemption, contributions are not deductible under section 170, and the group must file income tax returns. The letter is a routine reminder that a members-only benefit club is not a charity.

Ruling snapshot

• Question: Does the applicant qualify for exemption under section 501(c)(3)?
• Outcome: Denied (final adverse determination; no protest filed)
• Key authorities: IRC § 501(c)(3); Treas. Reg. §§ 1.501(c)(3)-1(a), (b), (c), (d); Better Business Bureau v. United States, 326 U.S. 279 (1945); IRC §§ 170, 6110, 6104(c), 7428(b)(2)

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service

P.O. Box 2508
IRS Cincinnati, OH 45201

Date: November 1, 2018

Release Number: 201904015 Employer ID number:
Release Date: 1/25/2019
UIL Code: 501.03-00 Contact person/ID number:
501.03-30
501.33-00 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)(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: September 6, 2018
Employer ID number:
Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:

W = Ethnicity 501.03-00
X = State 501.03-30
Y = Date #1 501.33-00
Z = Date #2

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 Section501(c)(3) of the Code? No, for the reasons stated below.

Facts
You submitted Form 1023-EZ, Streamline Application for Recognition of Exemption Under Section 501(c)(3) of
the Internal Revenue Code, on Y.

You attest that you were incorporated on Z, in the state of X. You attest that you have the necessary organizing
document, that your organizing document limits your purposes to one or more exempt purposes within the
meaning of Section 501(c)(3), that your organizing document does not expressly empower you to engage in
activities, other than an insubstantial part, that are not in furtherance of one or more exempt purposes, and that
your organizing document contains the dissolution provision required under Section 501(c)(3).

You attest that you are organized and operated exclusively to further charitable purposes. You attest that you
have not conducted and will not conduct prohibited activities under Section 501(c)(3). Specifically, you attest
you will:

• Refrain from supporting or opposing candidates in political campaigns in any way
• Ensure that your net earnings do not inure in whole or in part to the benefit of private shareholders or
individuals

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

2

• Not further non-exempt purposes (such as purposes that benefit private interests) more than
insubstantially

• Not be organized or operated for the primary purpose of conducting a trade or business that is not related
to your exempt purpose(s)

• Not devote more than an insubstantial part of your activities attempting to influence legislation or, if you
made a Section 501(h) election, not normally make expenditures in excess of expenditure limitations
outlined in Section 501(h)

• Not provide commercial-type insurance as a substantial part of your activities

During review of your Form 1023-EZ, detailed information was requested supplemental to the above
attestations including a complete copy of your original organizing document and a narrative description of your
activities.

Your purpose as stated in your articles of incorporation is:
to develop programs that will enrich and uplift the socio-economic well-being of your members.

Your bylaws state that your purposes include:

1. To encourage all Ws residing in the X area to join in unity and solidarity.
2. To develop and promote community-oriented and charitable programs that will enrich and uplift the
   socio-economic well-being of its members
   To integrate and assimilate into the body politic of the US
3. To coordinate with and work in close cooperation with other W organizations based in the USA for
   the purpose of maintaining mutual and beneficial relationships towards causes befitting both
   organizations.

[illegible]

Your bylaws provide that your assets are irrevocably dedicated to charitable purposes; no part of the net income
or assets shall inure to the benefit any private individual or entity.

You describe your specific activities as contacting several W professional and business owners in your area to
provide services and/or products for free or at discounted prices for your members. You have sixteen members
but have not elected a board of directors. So far, four businesses have promised to offer discounts to your
members. You state you need the recognition of exempt status so that businesses will provide your members
free or discounted services and/or products.

Law
Section 501(c)(3) of the Code describes corporations organized and operated exclusively for charitable purposes
no part of the net earnings of which inures to the benefit of any private shareholder or individual.

Section 1.501(c)(3)-1(a)(1) of the Treasury Regulations provides that, in order for an organization to be exempt
under Section501(c)(3) of the Code, it 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 or operational test,
it is not exempt.

Section 1.501(c)(3)—1(b)(1)(iv) of the Treasury Regulations provides that in no case shall an organization be
considered to be organized exclusively for one, or more exempt purposes, if, by the terms of its articles, the
purposes for which such organization is created are broader than the purposes specified in Section 501(c)(3).

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

Section 1.501(c)(3)-1(b)(4) of the Treasury Regulations states an organization is not organized exclusively for
one or more exempt purposes unless its assets are dedicated to an exempt purpose such as distributing its net
assets to another charitable organization.

Section 1.501(c)(3)-1(c)(1) of the Treasury Regulations 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 such exempt purposes specified in Section 501(c)(3). An organization will not be so
regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.

Section 1.501(c)(3)-1(d)(1)(i) of the Treasury Regulations provides than an organization may be exempt as an
organization described in Section501(c)(3) of the Code if it is organized and operated exclusively for one or
more of the following purposes: religious, charitable, scientific, testing for public safety, literary, educational,
or prevention of cruelty to children or animals.

Section 1.501(c)(3)-1(d)(1)(ii) of the Treasury Regulations provides that an organization is not organized or
operated exclusively for one or more of the purposes specified in the Regulations unless it serves a public rather
than a private interest. To meet the requirement of this section, it is necessary for an organization to establish
that it is not organized or operated for 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.

In Better Business Bureau v. United States, 326 U.S. 279 (1945), the court held that an organization is not
operated exclusively for charitable purposes, and thus will not qualify for exemption under Section 501(c)(3), if
it has a single non-charitable purpose that is substantial in nature. This is true regardless of the number or
importance of the organization's charitable purposes.

Application of law
You are not described in Section 501(c)(3) of the Code because you are not organized and operated exclusively

for charitable purposes. Furthermore, your activities provide substantial private benefit to your members.

Organizational Test

Your Articles of Incorporation do not contain the requisite purpose and dissolution provisions of Section
501(c)(3) of the Code.

You do not meet the requirements of Section 1.501(c)(3)-1(a)(1) of the Regulations because you fail to meet
both the organizational and operational tests.

Your Articles of Incorporation contain a purpose that is broader than the purposes specified in Section501(c)(3)
of the Code and Section 1.501(c)(3)-1(b)(1)(iv) of the Regulations. Your purpose is to develop programs that
will enrich and uplift the socio-economic well-being of your members. Secondly, your Articles fail to state
your assets are dedicated to an exempt purpose. See Treas. Reg. Section 1.501(c)(3)-1(b)(4).

Operational Test

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

4

Your exclusive activity is securing free or discounted services and/or products for your members. These are not
activities that are described in Section 501(c)(3) of the Code. In fact, these activities serve the private interests

of your members. Exemption under Section 501(c)(3) is precluded when more than an insubstantial amount of
the activities serve private interests. Therefore, you do not meet the requirements of Section 1.501(c)(3)-1(c)(1)
of the Regulations.

You are not described in Section 501(c)(3) because you are not organized and operated exclusively for one or
more exempt purposes described in Section 1.501(c)(3)-1(d)(1)(i) of the Regulations.

You are organized and operated for the private benefit of your members. Therefore, you do not meet the
requirements of Section1.501(c)(3)-1(d)(1)(ii) of the Regulations.

Like the organization in Better Business Bureau v. United States, supra, you have a substantial non-exempt
purpose, that is, securing free and discounted services and products for your members.

Conclusion

Base on the above, we find that you are not organized and operated for exempt purposes within the meaning of
Section 501(c)(3) of the Code. You do not meet the organizational test for exemption because your organizing
document does not limit your purposes to a charitable purpose nor do your articles state, upon dissolution, your
assets will be it contain the requisite dissolution clause. You do not meet the operational test for exemption
since your activities consist of serving the private interests of your members. Accordingly, we conclude you do
not qualify for exemption under Section501(c)(3) of the Code.

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

• Acopy of this letter highlighting the findings you disagree with
• Anexplanation 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.

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

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:

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

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