IRS denies 501(c)(3) status to a group that gave airline tickets to fee-paying veterans

Plain-English summary

The IRS issued a final adverse determination denying tax-exempt status under IRC § 501(c)(3) to an applicant that planned to provide airline tickets to veterans and service members who paid an annual membership fee. Because the only requirement to receive the travel benefit was paying the fee, and eligible family members of board members and employees could also enroll, the IRS concluded the group operated for a substantial nonexempt private purpose and failed the operational test. The IRS compared the arrangement to Revenue Ruling 67-367 (a "scholarship plan" that paid preselected, named individuals), which likewise served private rather than public interests. The applicant did not file a protest within the 30-day window, so the proposed denial became final, and donors cannot deduct contributions under IRC § 170.

Ruling snapshot

• Question: Does the applicant qualify for exemption under IRC § 501(c)(3)?
• Outcome: Denied (proposed adverse determination made final after no protest).
• Key authorities: IRC §§ 501(a), 501(c)(3), 170, 6104(c), 6110, and 7428(b)(2); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 67-367.

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service

Tax Exempt and Government Entities Employer ID number:

Date: September 29, 2020

IRS

Form you must file:
Tax years:

Person to contact:
Name:
ID number:
Telephone

Number: 202052022
Release Date: 12/24/2020

UIL: 501.03-30, 501.33-00, 501.35-00

Dear

This letter is our final determination that you don't qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in 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 generally can't deduct contributions to you under IRC Section 170.

We may notify the appropriate state officials of our determination, as required by IRC Section 6104(c), by sending them a copy of this final letter along with the proposed determination letter.

You must file the federal income tax forms for the tax years shown above within 30 days from the date of this letter unless you request an extension of time to file. For further instructions, forms, and information, visit www.irs.gov.

We'll make this final adverse determination letter and the proposed adverse determination letter available for public inspection after deleting certain identifying information, as required by IRC Section 6110. 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 call the contact person shown above. If you have questions about your federal income tax status and responsibilities, call our customer service

Letter 4038 (Rev. 5-2020)
Catalog Number 47632S

number at 800-829-1040 (TTY 800-829-4933 for deaf or hard of hearing) or customer service for businesses at 800-829-4933.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Notice 437
Redacted Letter 4034
Redacted Letter 4038

Letter 4038 (Rev. 5-2020)
Catalog Number 47632S

Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201
Date: July 28, 2020

Employer ID number:

Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:

X = State 501.03-30,
Y = Date 501.33-00
Z = Name 501.35-00

q dollars = Amount

r dollars = Amount

t = 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 were incorporated in X on Y. You are organized exclusively for purposes specified in IRC Section 501(c)(3). Your Articles of Incorporation further state that your specific purpose is to show veterans, service

. Specifically,

For your program, you will require that any service member and/or veteran pay a membership fee of q dollars to enroll.

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

In general, your program is limited to veterans and service members. Currently, you are governed by only one individual, Z, who is a veteran. Z also serves as your President and will be compensated r dollars.

You plan to expand your board and staff. You subsequently indicated that eligible family members of board members and employees may enroll in the program.

You expect most of your revenue to come from membership fees and the rest to come from gifts, grants and contributions. Projected expenses include tickets for service members, salaries and occupancy expenses.

Law

IRC Section 501(c)(3) exempts from taxation any corporation organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals, provided no part of the net earnings of which 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 IRC Section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in IRC Section 501(c)(3). If an organization fails to meet either the organizational or operational test, it is not exempt.

Treas. Reg Sec. 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 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)(i) states that an organization is not operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest. It must not be operated for the benefit of designated individuals or the persons who created it.

Revenue Ruling (Rev. Rul.) 67-367, 1967-2 C.B. 188, describes an organization whose sole activity was the operation of a "scholarship plan" for making payments to pre-selected, specifically named individuals. The organization did not qualify for exemption under IRC Section 501(c)(3) because it was serving the private interests of its subscribers rather than public or charitable interests.

Application of law

IRC Section 501(c)(3) and Treas. Reg. Section 1.501(c)(3)-1(a)(1) set forth two main tests to qualify for exempt status. An organization must be both organized and operated exclusively for purposes described in IRC Section 501(c)(3). You have failed to meet the operational test, as explained below.

You do not meet the provisions in Treas. Reg. Section 1.501(c)(3)-1(c)(1) because you are operating for the non-exempt private purpose of providing service members and/or veterans who pay your membership enrollment fee of q dollars airline tickets. The only criterium for your program is to pay the enrollment fee. This non-exempt purpose is substantial and precludes you from exemption.

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

You are not described in Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii). You are a membership organization which provides up to t airline tickets every year for service members and/or veterans who pay your annual fee. In addition, eligible family members of board members and employees may also participate in your program. These facts show that you are serving private interests which prevents you from qualifying under IRC Section 501(c)(3).

You are like the organization denied exemption in Rev. Rul. 67-367. Any veteran and/or service member is eligible to receive up to t airline tickets each year as long as they pay the required annual enrollment fee. This shows that you are serving the private interests of these service members and/or veterans because you are providing travel benefits to preselected individuals, which precludes you from exemption under IRC Section 501(c)(3).

Your position

Z provided his background and experience in the military. Z formed you and previously used

Our response to your position
You failed to provide any additional information from which it can be concluded that your activities exclusively further or advance a purpose described in IRC Section 501(c)(3). As previously explained, you are operating for a substantial nonexempt private purpose, which disqualifies you from exemption under Section 501(c)(3).

Conclusion

Based on the information submitted, we conclude that you are not an organization described in IRC Section 501(c)(3) because you fail the operational test. You are not operated for charitable purposes or for educational purposes. Donations to you are not deductible to the donor.

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.

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

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

• 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:

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.

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

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