IRS denies exemption for insufficiently documented downtown program

Plain-English summary

An organization raised funds to revitalize a city's central business district and made grants to landlords and businesses within that district. It also ran annual community events and made grants to the city. The IRS asked for details showing whether the area was economically depressed, blighted, or historic, whether benefits targeted a disadvantaged group, how recipients were selected, and whether the program lessened a government burden. The organization did not respond to that request or follow-up calls, so the administrative record did not establish operation exclusively for charitable purposes. It did not protest the proposed adverse determination, and the IRS issued a final denial of Section 501(c)(3) exemption.

Ruling snapshot

• Question: Did the downtown revitalization organization establish that its activities were charitable or lessened government burdens?
• Outcome: Denied.
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Proc. 2020-5

Full text (IRS public release)

       Department of the Treasury
                                                                  Date:
       Internal Revenue Service
                                                                    February 10, 2021

IRS
Tax Exempt and Government Entities Employer ID number:
PO Box 2508
Form you must file:
Cincinnati, OH 45201
Tax years:

       Number: 202118021                                          Person to contact:
       Release Date: 5/7/2021                                       Name:
                                                                    ID number:
                                                                    Telephone:
       UIL Number: 501.03-00, 501.03-05, 501.03-33

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 ofour determination, as required by JRC Section 6104(c), by
sending them a copy ofthis 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
ofthis letter unless you request an extension oftime 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 oflntention to Disclose, and review the two attached
letters that show our proposed deletions. Ifyou disagree with our proposed deletions, follow the
instructions in the Notice 437 on how to notify us. lfyou agree with our deletions, you don't need to
take any further action.

Ifyou have questions about this letter, you can call the contact person shown above. Ifyou have
questions about your federal income tax status and responsibilities, call our customer service number at
800-829-1040 (TTY 800-829-4933 for deafor hard of hearing) or customer service for businesses at
800-829-4933.

                                                                                           Letter 4038 (Rev. 5-2020)
                                                                                        Catalog Number 4 7632S
                   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
P.O. Box 2508
IRS Cincinnati, OH 45201
Date:
December 15, 2020
Employer ID number:

                                                                          Contact person/ID number:


                                                                          Contact telephone number:


                                                                          Contact fax number:

Legend: UIL:
B = State 501 .03-00
C = Date 501 .03-05
D = City 501 .03-33

Dear

We considered your application for recognition of exemption from federal income tax under Internal Revenue
Code (IRC) Section 50l(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 the state of B as a non-profit corporation on C. Your articles of incorporation state
that your purpose is to "revitalize and redevelop the central business district of the Municipality."

You conduct fundraising for the revitalization and redevelopment of the central business district ofD. You
support revitalization and redevelopment by financing projects that develop and promote the public good and
general welfare, trade, commerce, industry, and employment opportunities in the district. This enhances the city
and creates a climate favorable to the location of new industry, trade and commerce. Your other activities
include an annual carnival with craft and food vendors and the annual

You operate a grant funding program which is only available to landlords and businesses located in the central
business district boundaries ofD. Projects are funded through grants made to landlords and businesses. You
have a grant committee that reviews and selects grantees.

                                                                                  Letter4034 (Rev.11-2018)
                                                                                   Catalog Number 47628K
                                                     2

We sent a request for additional information clarifying your economic development activities, including, but not
limited to, whether or not the area you are assisting is economically depressed, if you will target benefits
towards a disadvantaged group, the crime rate of the area, how you select recipients, etc. Although you
responded to prior requests, you did not respond to this request, or to telephone calls to follow up on our
request.

Your fundraising activities include community events, mail solicitations, personal solicitations, public and
private grant solicitations, and government grant solicitations. Your budgets indicate that your income consists
primarily of your festival vendor fees, proceeds from your carnival, and pageant fees. Your expenses consist of
supplies, equipment rentals, contest winner grants, and grants to the City ofD.

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) states 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 such section. If an organization fails to meet either the organizational test or the
operational test, it is not exempt.

Treas. Reg. Section 1.501(c)(3)-l(c)(l) 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)(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.

Revenue Procedure 2020-5, 2020-1 I.R.B. 241 , Section 3 states that a determination letter or ruling on exempt
status is issued based solely upon the facts and representations contained in the administrative record. The
applicant is responsible for the accuracy of any factual representations contained in the application. Section 6
(and its predecessors) provides that a favorable determination letter or ruling will be issued to an organization
only if its application and supporting documents establish that it meets the particular requirements of the section
under which exemption from federal income tax is claimed.

In Universal Life Church v. United States, 372 F. Supp. 770 (E.D. Cal. 1974), the court concluded that "one
seeking a tax exemption has the burden of establishing his right to a tax-exempt status."

Pius XII Academy, Inc. v. Commissioner, T.C. Memo. 1982-97, affd. 711 F.2d 1058 (6th Cir. 1983), provides
that an organization must establish through the administrative record that it operates as an exempt organization.
Denial of exemption may be based solely upon failure to provide information describing in adequate detail how
the operational test will be met.

                                                                                   Letter4034 (Rev.11-2018)
                                                                                     Catalog Number 47628K
                                                      3

In La Verdad v. Commissioner, 82 T.C. 215 (1984), the administrative record did not demonstrate that the
organization would operate exclusively in furtherance of an exempt purpose. Therefore, denial of organization ' s
request for tax-exempt status was reasonable.

New Dynamics Foundation v. United States, 70 Fed. Cl. 782 (2006), was an action for declaratory judgment
that the petitioner brought to challenge the denial of his application for exempt status. The court, in finding that
the actual purposes displayed in the administrative record supported the Service's denial, stated " It is well-
accepted that, in initial qualification cases such as this, gaps in the administrative record are resolved against the
applicant." The court noted that if the petitioner had evidence that contradicted these findings, it should have
submitted it as part of the administrative process. The court also highlighted the principle that exemptions from
income tax are matters of legislative grace.

Ohio Disability Association v. Commissioner, T.C. Memo 2009-261 (2009), states denial is justified because
responses to requests for additional information failed to supplement the initial application or clarify purposes
and activities, and generalizations did not provide sufficient detail to determine that the organization would be
operated exclusively for exempt purposes.

Application of law
A ruling on exempt status is based solely on facts and representations in the administrative file. You have not
provided supporting documentation to establish you meet the requirements of IRC Section 50l(c)(3). As stated
in Treas. Reg. l.50l(c)(3)-l(a)(l), an organization must be both organized and operated exclusively for
purposes described in JRC Section 50l(c)(3).

You do not meet the operational test under IRC Section 501 (c)(3) because you are not operating exclusively for
charitable purposes as required under Treas. Reg. Section 1.501 (c )(3)-1 (c )(1 ). You indicated that you will be
revitalizing the downtown district of D. Revitalizing a business district is not deemed charitable unless the area
being revitalized is historical or blighted, or if the revitalization can lessen neighborhood tensions. You also
have not established that you are lessening the burdens of government. You have not established that you meet
the requirements of Treas. Reg. Section l.50l(c)(3)-l(d)(2) because you failed to provide detailed information
about your revitalization program.

You have not established that your downtown revitalization activities are charitable in nature. Accordingly, you
have not established that you meet the requirements ofIRC Section 501(c)(3) as required by Rev. Proc. 2020-5.
As in Universal Life Church, you have the burden of establishing that you qualify for tax exemption .

In Pius XII Academy, Inc. and La Verdad, it was found that an organization must establish, through its
administrative record, that it meets the requirements for exemption. Because you failed to provide sufficient
details in your initial application and the additional information you provided did not meet the statutory and
regulatory requirements for exemption, you have not established that you meet the requirements for exemption
under IRC Section 501(c)(3). As provided in New Dynamics Foundation, any gaps in the administrative record
will be resolved against the applicant. Similarly, in Ohio Disability Association, the court found that even when
additional information was provided, but it contained generalizations and failed to clarify purposes, denial is
justified. You did not provide supplemental information; therefore, we are unable to determine that you qualify
for exemption.

                                                                                    Letter 4034 (Rev. 11-2018)
                                                                                      Catalog Number 4 7628K
                                                       4

Conclusion
Based on the information submitted, we conclude that you are not described in IRC Section 50l(c)(3). You did
not establish that you are operated exclusively for charitable purposes or are lessening the burdens of
government. Therefore, you do not qualify for exemption under Section 50l(c)(3).

If you agree
If you agree with our proposed adverse determination, you don ' t need to do anything. Ifwe 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

• 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)).

                                                                                      Letter4034 (Rev. 11-2018)
                                                                                       Catalog Number 47628K
                                                     5

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:

   lnternal 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 4520 l

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 (T AS) 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 T AS 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