Block beautification group fails charitable tests

Plain-English summary

A nonprofit formed to beautify and maintain a particular city block did not qualify under Section 501(c)(3). Its purpose and dissolution clauses expressly included Section 501(c)(4) purposes, so its governing document did not limit its purposes and assets to Section 501(c)(3). Its planting, cleanup, block-party, and beautification-contest activities primarily served residents and businesses on the block. Applying Revenue Ruling 75-286, the IRS concluded that the organization failed both the organizational and operational tests and revoked its exemption.

Ruling snapshot

• Question: Did a block beautification organization qualify under Section 501(c)(3) when its governing clauses also allowed Section 501(c)(4) purposes and its activities chiefly served one block?
• Outcome: Revocation effective January 1 of the redacted year.
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 75-286

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE
1100 Commerce Street, MC 4920DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Number: 202110026
Release Date: 3/12/2021
UIL: 501.03-00

Date: September 18, 2020
Taxpayer ID Number: [redacted]
Form: [redacted]
Tax Period(s) Ending: [redacted]
Person to Contact: [redacted]
Identification Number: [redacted]
Telephone Number: [redacted]
Fax Number: [redacted]

CERTIFIED MAIL — Return Receipt Requested
LAST DAY FOR FILING A PETITION WITH THE TAX COURT: [redacted]

Dear [redacted]:

This is a final determination that you do not 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), effective January 1, 20XX. Your determination letter dated October 4, 20XX
is revoked.

Our adverse determination as to your exempt status was made for the following reasons:

Organizations described in IRC Section 501(c)(3) and exempt under
Section 501(a) must be both organized and operated exclusively for
exempt purposes. You have not demonstrated that you are organized and
operated exclusively for charitable, educational, or other exempt purposes
within the meaning of 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. You have not established that you are
organized and operated exclusively for an exempt purpose.

As such, you failed to meet the requirements of IRC Section 501(c)(3) and Treasury
Regulations Section 1.501(c)(3)-1(a), in that you have not established that you were
organized and operated exclusively for exempt purposes and that no part of your earnings
inured to the benefit of private shareholders or individuals.

Contributions to your organization are no longer deductible under IRC Section 170.

1

Organizations that are not exempt under IRC Section 501 generally are required to file federal
income tax returns and pay tax, where applicable. For further instructions, forms, and
information please visit www.irs.gov.

If you decide to contest this determination, you may file an action for declaratory judgment
under the provisions of IRC Section 7428 in one of the following three venues: 1) United States
Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court
for the District of Columbia. A petition or complaint in one of these three courts must be filed
within 90 days from the date this determination was mailed to you. Please contact the clerk of
the appropriate court for rules and the appropriate forms for filing petitions for declaratory
judgment by referring to the enclosed Publication 892. You may write to the courts at the
following addresses:

United States Tax Court
400 Second Street, NW
Washington, DC 20217

U. S. Court of Federal Claims
717 Madison Place, NW
Washington, DC 20439

U. S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, DC 20001

Processing of income tax returns and assessments of any taxes due will not be delayed if you
file a petition for declaratory judgment under IRC Section 7428.

We'll notify the appropriate state officials (as permitted by law) of our determination that you
aren't an organization described in IRC Section 501(c)(3).

You may be eligible for help from the Taxpayer Advocate Service (TAS). 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 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 1-877-777-4778.

Taxpayer Advocate assistance can’t be used as a substitute for established IRS procedures,
formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or
technically correct tax determination, nor extend the time fixed by law that you have to file a
petition in Court. The Taxpayer Advocate can, however, see that a tax matter that may not have
been resolved through normal channels gets prompt and proper handling.

You can get any of the forms or publications mentioned in this letter by calling 800-TAX-FORM
(800-829-3676) or visiting our website at www.irs.gov/forms-pubs.

If you have any questions, you can contact the person listed at the top of this letter.

Sincerely,

Enclosures:
Publication 892

Sean E. O'Reilly
Director, Exempt Organizations Examinations

2

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
IRS Exempt Organizations Examinations

Date: October 15, 2019
Taxpayer Identification Number: [redacted]
Form: [redacted]
Tax Year(s) Ended: [redacted]
Person to Contact: [redacted]
Employee ID: [redacted]
Telephone: [redacted]
Fax: [redacted]
Manager’s Contact Information: [redacted]
Employee ID: [redacted]
Telephone: [redacted]
Response Due Date: [redacted]

CERTIFIED MAIL — Return Receipt Requested

Dear [redacted]:

Why you’re receiving this letter

We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we
propose to revoke your tax-exempt status as an organization described in Internal Revenue
Code (IRC) Section 501(c)(3).

If you agree

If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and
return it to the contact person shown at the top of this letter. We'll issue a final adverse letter
determining that you aren't an organization described in IRC Section 501(c)(3) for the periods
above.

After we issue the final adverse determination letter, we’ll announce that your organization is no
longer eligible to receive tax deductible contributions under IRC Section 170.

If you disagree

1. Request a meeting or telephone conference with the manager shown at the top of this
   letter.

2. Send any information you want us to consider.

3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or
   send additional information as stated in 1 and 2, above, you'll still be able to file a protest
   with IRS Appeals Office after the meeting or after we consider the information.

The IRS Appeals Office is independent of the Exempt Organizations division and
resolves most disputes informally. If you file a protest, the auditing agent may ask you to
sign a consent to extend the period of limitations for assessing tax. This is to allow the

Letter 3618 (Rev. 9-2017)
Catalog Number 48373U

IRS Appeals Office enough time to consider your case. For your protest to be valid, it
must contain certain specific information, including a statement of the facts, applicable
law, and arguments in support of your position. For specific information needed for a
valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-
Exempt Status.

Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process,
generally doesn’t apply now that we've issued this letter.

4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt
   Government Entities) if you feel the issue hasn’t been addressed in published precedent
   or has been treated inconsistently by the IRS.

If you’re considering requesting technical advice, contact the person shown at the top of
this letter. If you disagree with the technical advice decision, you will be able to appeal
to the IRS Appeals Office, as explained above. A decision made in a technical advice
memorandum, however, generally is final and binding on Appeals.

If we don't hear from you

If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll
issue a final adverse determination letter.

Contacting the Taxpayer Advocate Office is a taxpayer right

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 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.

For additional information

You can get any of 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 shown at the top of this letter.

Sincerely,

Denise Gonzalez for

Maria Hooke
Director, Exempt Organizations
Examinations

Enclosures:
Form 886-A
Form 6018
Publication 892
Publication 3498

2 Letter 3618 (Rev. 9-2017)
Catalog Number 34809F

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer: [redacted] Year/Period Ended
December 31, 20XX

ISSUE:

Whether [redacted], continues to qualify for exemption as an
organization described in the Internal Revenue Code (IRC) Section 501(c)(3).

FACTS:

[redacted] was incorporated under the laws of the State of
[redacted] as a non-profit corporation on September 6, 20XX for the purpose of the
following:

“To beautify and improve the streetscape of [redacted] between [redacted] and
[redacted] for the benefit of the residents of this block, and to engage in other
activities to improve the quality of life of the residents of this block.”

The Article of Incorporation that were provided with the Form 1023-EZ did not have
proof of filing or adoption from the state. The purpose and dissolution clause were as
follows:

“The [redacted] is organized exclusively for charitable
and educational purposes, including for such purposes the making of distributions to
organizations that qualify as tax exempt organizations under Section 501(c)(3) and
Sections 501(c)(4) of the Internal Revenue Code or the corresponding section of any
future tax code.

Upon the dissolution of the corporation, after payment of and or making provisions for
all costs and expenses of dissolution and all liabilities and obligations of this
corporation, the remaining assets shall be distributed by the Directors of the
Corporation for one or more exempt purposes within the meaning Section 501(c)(3)
or 501(c)(4) of the Internal Revenue Code, or the corresponding section of any future
tax code. Any such assets not so disposed of shall be disposed by a Court of
competent jurisdiction of the county in which the corporation shall have its offices at
the time of dissolution.”

On October 4, 20XX [redacted] was recognized to be exempt
from federal income tax as an organization described in IRC Section 501(c)(3).

During an interview on July 11, 20XX, the organization’s [redacted] confirmed the following
activities are conducted on [redacted] Street for the benefit of residents of this block:

• Planting of flowers and greenery in front of houses and commercial property,
in tree pits, and on stoops on the block.

• Block clean-up where all residential and commercial property front yards,
sidewalks are broom swept and tidied while all refuse is packaged for
sanitation.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -1-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer: [redacted] Year/Period Ended
December 31, 20XX

• Block Party with activities for [redacted] residents of all ages (i.e.
children’s games, face painting, music, dancing, food and refreshment)

• Greenest Block Contest offered by [redacted] (residents and
commercial property owners on different blocks compete for the greenest
block designation by following guidelines provided by the [redacted]).
This is not organized by [redacted], but the resident
on [redacted] participate in this contest.

The activities specific to addressing greenery and clean-up takes up 0% of the
organization’s time and resources. The Block-party takes up 0% of the organization’s
time and resources. The organization’s clerical work and meetings take up 0% of the
organization’s time and resources.

LAW:

IRC § 501(c)(3) exempts from federal income tax organizations which are 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 (but only if no part of its activities involve the provision of athletic facilities
or equipment), or for the prevention of cruelty to children or animals, no part of the
net earnings of which inures to the benefit of any private shareholder or individual, no
substantial part of the activities of which is carrying on propaganda, or otherwise
attempting, to influence legislation (except as otherwise provided in subsection (h)),
and which does not participate in, or intervene in (including the publishing or
distributing of statements), any political campaign on behalf of (or in opposition to)
any candidate for public office.

Treasury Regulations § 1.501(c)(3)-1(d)(i) states that an organization may be exempt
as an organization described in 501(c)(3) 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.

Treasury Regulations § 1.501(c)(3)-1(a)(1) of the regulations provides that in order to
be exempt as an organization described in section 501(c)(3) of the Code, the
organization must be one that is both organized and operated exclusively for one or
more of the purposes specified in that section.

Treasury Regulations § 1.501(c)(3)-1(b) of the regulations provides that in order to be
exempt as an organization described in section 501(c)(3) of the Code, the
organization must pass the organizational test. The organizational test requires an
appropriate purpose and dissolution statement limited to the organization’s exempt
purpose.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -2-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer: [redacted] Year/Period Ended
December 31, 20XX

Treasury Regulations § 1.501(c)(3)-1(c)(1) of the 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 of
such exempt purposes specified in section 501(c)(3)

Revenue Ruling 75-286, 1975-2 CB 210, (July 1975) A nonprofit organization with
membership limited to the residents and business operators within a city block and
formed to preserve and beautify the public areas in the block, thereby benefiting the
community as a whole as well as enhancing the members’ property rights, will not
qualify for exemption under section 501(c)(3) of the Code but may qualify under section
501(c)(4).

TAXPAYER’S POSITION:

The organization’s representative declared that the organization has been operating
in accordance with the information that provided on the Form 1023-EZ. The
organization continued operating as such because the organization’s exemption
request was granted on those grounds.

GOVERNMENT'S POSITION:

Per Treasury Regulations § 1.501(c)(3)-1(b), an organization’s purpose and
dissolution clause are required to be limited to one or more exempt purpose under
IRC 501(c)(3).

The purpose clause is as follows:

“The [redacted] is organized exclusively for charitable
and educational purposes, including for such purposes the making of distributions to
organizations that qualify as tax exempt organizations under Section 501(c)(3) and
Sections 501(c)(4) of the Internal Revenue Code or the corresponding section of any
future tax code.”

The dissolution clause is as follows:

“Upon the dissolution of the corporation, after payment of and or making provisions
for all costs and expenses of dissolution and all liabilities and obligations of this
corporation, the remaining assets shall be distributed by the Directors of the
Corporation for one or more exempt purposes within the meaning Section 501(c)(3)
or 501(c)(4) of the Internal Revenue Code, or the corresponding section of any future
tax code. Any such assets not so disposed of shall be disposed by a Court of
competent jurisdiction of the county in which the corporation shall have its offices at
the time of dissolution.”

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -3-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer: [redacted] Year/Period Ended
December 31, 20XX

Both clauses include provisions for 501(c)(4) purposes. Therefore, [redacted]
does not pass the organizational test because the clauses do not limit the
organization’s purpose to exclusively one or more purposes specified in the Internal
Revenue Code Section 501(c)(3) nor limit the organization’s assets to organization
specified in the Internal Revenue Code Section 501(c)(3).

As demonstrated in Rev. Rul. 75-286, an organization with membership limited to the
residents and business operators within a city block and formed to preserve and
beautify the public areas in the block, thereby benefiting the community as a whole
as well as enhancing the members’ property rights, will not qualify for exemption
under section 501(c)(3) of the Code. Therefore, [redacted]
does not pass the operational test.

CONCLUSION:

[redacted] does not qualify for exemption under 501(c)(3) of
the Code because it does not pass the organizational and operational test.
The effective revocation date will be January 1, 20XX.

If you agree to this conclusion, please sign the attached Forms.

If you disagree please submit a statement of your position.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service

Page: -4-