IRS denies exemption to a member-oriented equine events club

Plain-English summary

An equine membership organization operated a barn, arena, bleachers, and concession stand and gave members free facility use, event admission, voting rights, horse boarding, and access to amateur events. It raised much of its revenue through a professional rodeo and a multistate barrel-racing competition. Proceeds from the barrel race helped members' children pay travel and entry costs for approved equine and agricultural competitions after the families completed volunteer hours. The IRS found that the organizing document expressly included recreational horse activities and improving horse quality, so it did not limit the organization to exempt purposes. The IRS also found that the club, rodeo, barrel race, and member-youth funding served substantial social, recreational, and private purposes. Those nonexempt purposes prevented Section 501(c)(3) status even though some activities were educational, charitable, or open to the community.

Ruling snapshot

• Question: Did the equine club and its rodeo, barrel-racing, and member-youth programs qualify as charitable activities under Section 501(c)(3)?
• Outcome: Denied.
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 68-224; Better Business Bureau v. United States

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service Date: March 30, 2021

Tax Exempt and Government Entities

Employer ID number:
IRS Po Box 2508
Cincinnati, OH 45201 Form you must file:
Tax years: All
Number: 202125022
. Person to contact:

Release Date: 6/25/2021 Name:

ID number:
UIL Number: 501.03-30, 501.36-02 Telephone:

Dear [redacted]:

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

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

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: January 5, 2021
Employer ID number:
Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend: UIL:
B = State 501.03-30
C= Date 501.36-02

D = Locations
E = Location
F=Name

t dollars = Amount
u dollars = Amount
v dollars = Amount

Dear [redacted]:

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 formed in B on C for the specific purposes of receiving and administering funds exclusively for
education and charitable purposes without pecuniary gain or profit, incidental projects, undertakings, studies
and other activities in cooperation with governmental and civic bodies; for aiding, assisting, and fostering the
planning and development of recreational activities in any way associated with horses that is legal and safe; for

upgrading the quality of horses; and for aiding in the education of youth as it relates to correct ways to ride and
care for horses.

Your purposes listed in your bylaws include promoting and creating interest in equine and agricultural activities
in D and E including but not limited to barrel racing, rodeo, and team penning; supporting and conducting
educational and informational activities to increase public awareness of equine and agricultural related issues;

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

2

sponsoring equine and agricultural activities; educating the public about equine and agricultural activities;
promoting and assisting youth in developing and achieving their personal best by participation in equine and

livestock sporting events; promoting and encouraging self-confidence and integrity in youth; and encouraging
community involvement in livestock events.

Furthermore, your bylaws indicate you are a membership organization. You offer nontransferable individual
and family memberships. Individual memberships are open to any person 18 years old or older, who pay the
annual dues of t dollars; family memberships are open to any family with the head of the household over 18
years old and will include any dependent children regardless of age. Family membership dues are u dollars.
Members have free use of your facilities which include a barn, an arena and bleachers, and a concession stand.
Other membership privileges consist of:

Free admission to club sponsored events for members in good standing;
Voting rights for all members over 18 years of age in good standing;
Boarding their horse on your grounds for v dollars per month;

The opportunity to participate in amateur events.

You explained that you conduct community and family events for both members and the community throughout
the year to raise funds. Specifically, you host an annual professional rodeo scheduled during the summer to
raise funds for the operation and maintenance of your facility. The rodeo is a competition for professional riders
to compete in their various rodeo specialties and takes place at your facility. The rodeo is responsible for [redacted]%
of your revenue and is funded mainly by local advertising and sponsorships. You also indicated that the rodeo,
more than any of your other events, attracts people from the local community and from surrounding areas to
your facility and provides a wholesome and fun activity for the entire family.

You also conduct an annual large barrel run competition in late spring at a nearby facility which is covered and
larger than yours. Contestants from numerous states pay entry fees and [redacted]% of those fees are paid out to the
winners and [redacted]% is retained by you. Proceeds from this event account for about [redacted]% of your revenue.

You further explained that most of the proceeds from the barrel run are dedicated to the F, whose purpose is to
promote and help raise money for the youth members, who compete in agricultural and/or equine related events.
Your members in good standing can allow their children who range in age from K-12 to participate in the F in
order for them to receive funds for travel and entry fees for board approved events to help defray the costs of
competitions. The children can only receive funds if they and their parents complete so many volunteer hours at
each required sponsored event with a completed and signed work slip. Specifically, the amount of funds the
child may receive depends on the number of volunteer hours they and their parents have worked. Once they
have submitted their work slips, they can request funds by submitting verification that they will be attending the
board qualifying event. Upon completion of the program requirements, they receive money for the approved
events. The child must attend the event prior to the end of the fiscal year and subsequently provide proof of
their attendance. If a child receives funds and does not attend a board qualified event, they must reimburse you
for the funds. Once the child has received the funds and attends the qualifying event, they can begin meeting the
next years requirements concerning volunteer hours.

You also regularly offer smaller events at your facility such as playdays, cattle sortings, and additional smaller
barrel runs for your members enjoyment, and entertainment. Fees for these events are kept low and are used to

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

3

defray the expenses of producing the event. Proceeds from these events generate the remaining 10% of your
annual income.

You also indicated that:

• You are operated by volunteers.

• You promote your activities to the public through social media, flyers, and relevant publications.

• You are a supporter of other charitable organizations whose mission involves engaging youth to receive
  their full potential.

• You have used about [redacted]% of your proceeds for community outreach activities such as assisting
  financially needy with expenses.

Finally, you wrote that upon receiving exemption under IRC Section 501(c)(3), you will be able to apply for a
bingo license in B. You then plan to conduct bingo games in surrounding counties as a source of revenue to
maintain your facilities and conduct your charitable activities.

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 in order to be exempt under IRC Section
501(c)(3) an organization must be organized and operated exclusively for one or more of the exempt purposes
specified in that section. If an organization fails to meet either the organizational test or the operational test, it
does not qualify for exemption.

Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i) provides that an organization is organized exclusively for one or
more exempt purposes only if its articles of organization:

(a) Limit the purposes of such organization to one or more exempt purposes; and
(b) Do not expressly empower the organization engage, otherwise than as an insubstantial part of its
activities, in activities that in themselves are not in furtherance of one or more exempt purposes.

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 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.

Rev. Rul. 68-224,1968-1 C.B. 262 describes an organization that conducts an annual festival centered around
regional customs and traditions that qualified for exemption under IRC Section 501(c)(4). The festival takes
place in an agricultural region where interest in horses and Western traditions runs high and enjoys the broad
involvement of local citizens. The revenue ruling holds that, in carrying on these activities, the organization
provides recreation for the community and generally promoted civic betterments and social improvements
within the meaning of IRC Section 501(c)(4).

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

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 do not meet the two main tests set forth in of IRC Section 501(c)(3) and Treas. Reg. Section 1.501(c)(3)-
1(a)(1). An organization must be both organized and operated exclusively for purposes described in IRC
Section 501(c)(3). You have failed to meet both requirements, as explained below.

The purposes in your Articles of Incorporation state in part that you are organized for aiding, assisting, and
fostering the planning and development of recreational activities in any way associated with horses that is legal
and safe and for upgrading the quality of horses. Because your Articles of Incorporation do not limit your

purposes to those described in Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i), you fail the organizational test under
IRC Section 501(c)(3).

You are not operated exclusively for one or more exempt purposes as required by Treas. Reg. Section
1.501(c)(3)-1(c)(1). A substantial portion of your activities consists of operating a club for your members,
hosting a professional rodeo for the community and conducting a large barrel run which attracts professionals
from nearby states. Further, the proceeds from the annual barrel run are used to fund the competition expenses
of members’ children as long as the member and their child volunteer a specific number of hours. These facts
indicate that you are operated for substantial nonexempt social, recreational and private purposes, which
preclude exemption under IRC Section 501(c)(3).

You are similar to the organization described in Rev. Rul. 68-224 which qualified for exemption under IRC
Section 501(c)(4). Like the organization described in the Revenue Ruling, you are conducting a rodeo for the
community as well as a barrel run. These events attract people from the local community and from surrounding
areas and provides a wholesome and fun activity for the entire family. You are also primarily conducting

activities which provides recreation for the community which precludes exemption under IRC Section
501(c)(3).

You are like the organization described in Better Business Bureau. Although you may have some educational
and charitable purposes, you are operated for substantial nonexempt social, recreational, and private purposes.
The presence of these substantial non-exempt purposes prevents exemption under IRC Section 501(c)(3).

Conclusion

Based on the above facts and analysis, you do not meet the organizational test for IRC Section 501(c)(3)
because your organizing document does not limit your purposes to one or more exempt purposes of IRC Section
501(c)(3). You also do not meet the operational test for IRC Section 501(c)(3) because you are operated for
substantial nonexempt purposes. Accordingly, you do not qualify for exemption under IRC Section 501(c)(3).

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

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

• 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

6

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