Business member group denied charitable exemption

Plain-English summary

An organization represented businesses from one country operating in a metropolitan area. Its articles said it protected and promoted members' interests, and its quarterly meetings taught members about business practices, market trends, and opportunities. The group later arranged product donations to community organizations and planned scholarships, but its completed and projected early-year spending was limited to member services. The IRS concluded that substantially all of its activities advanced members' common business interests, while any public benefit was secondary. It denied section 501(c)(3) exemption, and the determination became final after no protest was filed.

Ruling snapshot

• Question: Does a business membership group qualify under section 501(c)(3) when its education and services primarily promote members' businesses?
• Outcome: denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 68-504; Rev. Rul. 69-632; Rev. Rul. 71-504; Rev. Rul. 71-505; Rev. Rul. 74-553; Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945)

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201

Date:
January 22, 2020

Employer ID number:

Release Number: 202016018
Release Date: 4/17/2020

Contact person/ID number:

UIL Number: 501.03-00, 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 Internal Revenue Code
(IRC) Section 501(c)(3). 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 IRC Section 501(c)(3), donors can’t deduct
contributions to you under IRC Section 170. 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 IRC Section 6110) 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 IRC Section 6104(c)). 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
P.O. Box 2508
Cincinnati, OH 45201

Date:
November 18, 2019

Employer ID number:

Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend:                                     UIL:
B = Date                                    501.03-30
C = Date                                    501.33-00
M = State
X = Country
Y = Name
z = Number

Dear                 :

We considered your application for recognition of exemption from federal income tax under Internal Revenue
Code (IRC) Section 501(a). We determined that you don’t qualify for exemption under IRC Section 501(c)(3).
This letter explains the reasons for our conclusion. Please keep it for your records.

Issues
Do you qualify for exemption under IRC Section 501(c)(3)? 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 B. You attested on Form 1023-EZ that you are organized and operated
exclusively to further charitable and educational purposes. You also attested that you have not conducted and
will not conduct prohibited activities under IRC Section 501(c)(3).

During review of your Form 1023-EZ, detailed information was requested supplemental to your attestations.
You were incorporated on C in the State of M, and the amendment to your Articles of Incorporation provides
you were formed to protect and promote the interests of your members.

Your Articles of Incorporation describe your membership as business entities that originated in X and are
working in the Y metropolitan area. You have z members.

You hold quarterly meetings in which you educate your members on various topics related to operating their
businesses. These topics have included best practices, market trends, and future business opportunities.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

2

You stated that beginning in your second year of operation you decided to emphasize community outreach. You
arranged for member companies to donate their products to local community organizations. You also plan to
provide scholarships to young people in the area.

You are supported by contributions made by members. Your expenditures in the one tax year you had
completed at the time Form 1023-EZ was submitted were limited to member services. You estimated that your
expenditures in your second year of operation would also be limited to member services. Expenditures for
future years of operation are projected to include member services and community services.

Law
IRC Section 501(c)(3) 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) provides that, for an organization to be exempt under IRC
Section 501(c)(3), 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.

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 that accomplish
one or more of such exempt purposes specified in IRC 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.

Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized and operated
exclusively for charitable purposes unless it serves a public rather than a private interest.

Revenue Ruling 68-504, 1968-2 C.B. 211, held that a nonprofit organization formed and operated to conduct an
educational program for bank employees in a particular urban area may qualify for exemption under IRC
Section 501(c)(3).

Revenue Ruling 69-632, 1969-2 C.B. 120, describes a nonprofit organization composed of members of a
particular industry to develop new and improved uses for existing products of the industry. It was held not to be
exempt under IRC Section 501(c)(3) because any public benefit was secondary to the private benefit derived by
the organization’s members.

Revenue Ruling 71-504, 1971-2 C.B. 231, describes an organization exempt under IRC Section 501(c)(6) that
primarily directed its activities to the promotion of the common business purposes of its members. The
organization could not be reclassified as an organization described in Section 501(c)(3) because its activities
were directed primarily at the promotion of the medical profession and thus furthered the common business
purpose of its members.

Revenue Ruling 71-505, 1971-2 C.B. 232, describes an organization exempt under IRC Section 501(c)(6) that
primarily directed its activities to the promotion and protection of the practice of law. The organization could
not be reclassified as an organization described in Section 501(c)(3) because its activities were directed

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

3

primarily at the promotion of the law profession and thus furthered the common business purpose of its
members.

Revenue Ruling 74-553, 1974-2 C.B. 168, describes an organization whose principal activity is directed to
establishing and maintaining standards for the quality and costs of medical services. Its primary objective is to
maintain the professional standards, prestige, and independence of the organized medical profession and
thereby furthers the common business interest of the organization's members. It did not qualify for exemption
under IRC Section 501(c)(3), in part, because more than an insubstantial amount of its activities furthered the
private interests of its members.

In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945), the Supreme Court
determined the activities of that organization were aimed at promoting the prosperity and standing of the
business community and therefore, served a substantial private purpose. It concluded that the presence of a
single nonexempt purpose, if substantial in nature, will preclude exemption regardless of the number or
importance of statutorily exempt purposes.

Application of law
You are not described in IRC Section 501(c)(3) because you do not meet the operational test as required by
Treas. Reg. Section 1.501(c)(3)-1(a)(1). You do not meet the operational test because you are not, as Treas.
Reg. Section 1.501(c)(3)-1(c)(1) requires, operated exclusively for one or more exempt purposes.

You are not operated exclusively for exempt purposes under Treas. Reg. Sec. 1.501(c)(3)-1(d)(1)(ii) because,
like the organizations described in Revenue Rulings 69-632, 71-504, 71-505, and 74-553, substantially all your
activities are directed primarily at the promotion of business and thus further the common business purposes of
your members.

You are unlike the organization described in Revenue Ruling 68-504. While some of your activities are
educational, substantially all your activities are directed primarily at the promotion of business and thus further
the common business purposes of your members.

While some public benefit is derived from your activities, a more than insubstantial part of your activities is
directed primarily at the promotion of business and thus further the common business purposes of your
members. According to the court in Better Business Bureau of Washington, D.C., Inc, such a single non-exempt
purpose, if substantial in nature, will preclude exemption regardless of the number or importance of exempt
purposes the organization serves.

Conclusion
Based on the above facts and analysis, you do not qualify for exemption under IRC Section 501(c)(3) because
you are not operated exclusively for exempt purposes within the meaning of Section 501(c)(3). You have the
substantial non-exempt purpose of advancing the common business interests of your members, which furthers
private interests. Accordingly, you do not qualify for exemption under Section 501(c)(3).

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. 11-2018)
Catalog Number 47628K

4

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

• Your name, address, employer identification number (EIN), and a daytime phone number
• A statement of the facts, law, and arguments supporting your position
• A statement indicating whether you are requesting an Appeals Office conference
• The signature of an officer, director, trustee, or other official who is authorized to sign for the
  organization or your authorized representative
• The following declaration:

  For an officer, director, trustee, or other official who is authorized to sign for the organization:
  Under penalties of perjury, I declare that I have examined this request, or this modification to the
  request, including accompanying documents, and to the best of my knowledge and belief, the request
  or the modification contains all relevant facts relating to the request, 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 they haven’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 gave us a basis to reconsider our determination. If so,
we’ll continue to process your case considering the information you provided. If you haven’t given us a basis
for reconsideration, we’ll send your case to the Appeals Office and notify you. You can find more information
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 later because the
law requires that you use the IRC administrative process first (IRC Section 7428(b)(2)).

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

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

5

U.S. mail:                                  Street address for delivery service:
Internal Revenue Service                    Internal Revenue Service
EO Determinations Quality Assurance         EO Determinations Quality Assurance
Mail Stop 6403                              550 Main Street, Mail Stop 6403
P.O. Box 2508                               Cincinnati, OH 45202
Cincinnati, OH 45201

You can also fax your protest 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 they received it.

You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-
pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at
the top of this letter.

Contacting the Taxpayer Advocate Service
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 if 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 www.taxpayeradvocate.irs.gov or call 877-777-4778.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K