IRS disqualifies a self-declared § 501(c)(4) social welfare group that ran a for-profit business and benefited its president

Plain-English summary

An organization had treated itself as a tax-exempt social welfare group under Section 501(c)(4), which allows exemption for civic leagues operated exclusively to promote social welfare (the common good of a community). On audit, the IRS found the group did not meet the operational test. Its actual day-to-day activity was a commercial business (breeding and selling), and its records showed no charitable, social welfare, educational, or recreational activity for the public. The IRS also found that the group's net earnings inured to the benefit of its president. Because the organization was operated for a substantial non-exempt (profit-making) purpose and its earnings benefited a private individual, the IRS issued this final adverse determination that it does not qualify under Section 501(c)(4). The practical result: the group must file regular corporate income tax returns (Form 1120). It can contest the determination in court under Section 7428 within 90 days, or later reapply using Form 1024-A.

Ruling snapshot

• Question: Does a self-declared 501(c)(4) group qualify when its main activity is a for-profit business and its earnings benefit its president?
• Outcome: revocation (final adverse determination; does not qualify under § 501(c)(4))
• Key authorities: IRC § 501(c)(4); Treas. Reg. § 1.501(c)(4)-1

Full text (IRS public release)

Transcription note: This is a scanned document, made up of the final adverse
determination (Letter 6337), the enclosed proposed adverse determination (Letter 3618),
and the Form 886-A "Explanations of Items" audit report. Per the runbook's OCR
proofreading duty, obvious scanning misreads have been corrected and the repeating
Form 886-A page furniture has been replaced with [Page N] markers; genuinely unreadable
spots are marked [illegible]; blanks where the IRS redacted identifying details (including
the redacted dollar figures in the income statement) are left as gaps. The proposed
letter's date field was garbled by the scan and corrected against the original PDF image
to 10/26/2020 (scanned as "40/26/2020"). Wording is otherwise reproduced verbatim.

Department of the Treasury Date: March 12, 2021
Internal Revenue Service
Tax Exempt and Government Entities

IRS Taxpayer ID number:

Form:

Number: 202216018 . sods ended:
Release Date: 4/22/2022 ax periods ended:

Person to contact
Name:
ID number:
Telephone:
Fax:

UIL: 501.04-00

CERTIFIED MAIL. - RETURN RECEIPT REQUESTED
Dear

Why we are sending you this letter
This is a final determination explaining why your organization doesn’t qualify as an organization described in
Internal Revenue Code (IRC) Section 501(c)(4) for the fax periods above.

In the future, if you believe your organization qualifies for tax-exempt status and would like a determination
letter from the Internal Revenue Service, you can request a determination by filing Form 1024, Application for
Recognition of Exemption Under Section 501(a), or Form 1024-A, Application for Recognition of Exemption
Under Section 501(c)(4) of the Internal Revenue Code, (as applicable) and paying the required user fee.

Our adverse determination as to your exempt status was made for the following reasons: You have not
established that you are operated exclusively for the promotion of social welfare under IRC Section 501(c)(4).
It is the government’s position that you fail to meet the operational test due to the following:

* You are operated for a substantial non-exempt purpose, selling
* Your net earnings inured to the benefit of your President.

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.

What you must do if you disagree with this determination
If you want to contest our final determination, you have 90 days from the date this determination letter was
mailed to you to file a petition or complaint in one of the three federal courts listed below.

How to file your action for declaratory judgment ;
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.

Letter 6337 (12-2020)
Catalog Number 74808E

Please contact the clerk of the appropriate court for rules and the appropriate forms for filing an action for
declaratory judgment by referring to the enclosed Publication 892, How to Appeal an IRS Determination on
Tax-Exempt Status. You may write to the courts at the following addresses:

United States Tax Court U.S. Court of Federal Claims USS. District Court for the District of Columbia
400 Second Street, NW 717 Madison Place, NW 333 Constitution Ave., N.W.
Washington, DC 20217 Washington, DC 20439 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.

Information about the IRS Taxpayer Advocate Service

The IRS office whose phone number appears at the top of the notice can best address and access your tax
information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate
Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't
working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects
taxpayer rights. Contact your local Taxpayer Advocate Office at:

Internal Revenue Service
Taxpayer Advocate Office

Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights,
go to taxpayeradvocate.irs.gov. Do not send your federal court pleading to the TAS address listed above. Use
the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to
file an action for declaratory judgment.

Where you can find more information
Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for
more comprehensive information.

Find tax forms or publications by visiting www. irs.gov/forms or calling 800-TAX-FORM (800-829-3676).
If you have questions, you can call the person shown at the top of this letter.

If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best
time to call, and a copy of this letter.

Keep the original letter for your records.

Sincerely,
i ne cae ae)
Sean E. O'Reilly; /
Director, Exempt Organizations Examinations

Enclosures:
Publication 1
Publication 594
Publication 892

Letter 6337 (12-2020)
Catalog Number 74808E

Department of the Treasury Date:
Internal Revenue Service                          10/26/2020
Tax Exempt and Government Entities

IRS Taxpayer ID number:

Form:
Tax periods ended:

Person to contact:
Name.
ID number:
Telephone:
Fax:
Address:
Manager's contact information:
Name:
ID number:
CERTIFIED MAIL — Relurn Receipt Requested [elephone:

Response due date:

Dear

Why you’re receiving this letter
We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that your organization
doesn’t qualify as an organization described in Internal Revenue Code (IRC) Section [501 (c) 4].

This letter is not a determination of your tax-exempt status under IRC Section 501 for any period other than the
tax periods above.

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) 4] for the periods above.

If you disagree

1. Request a meeting or telephone conference with the manager shown al 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 | 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 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.

Letter 3618 (Rev. 8-2019)
Catalog Number 34809F

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. [f 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. Ifyou 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,

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,
Sean O' Reilly
Director, Exempt Organizations Examinations

Enclosures:
Form 886-A,, Pub 892. Pub 3498
Form 6018, F 4621A

Letter 3618 (Rev. 8-2019)
Catalog Number 34809F

Issues
Should continue to have self-declared exemption from tax under

Internal Revenue Code (IRC) §501(c)(4) as a social welfare organization or be
disqualified on the grounds that:

1. It is operated for a substantial non-exempt purpose, selling

2. lts net earnings inured to the benefit of its President.

Facts:

The EO Association was incorporated in 20 on March 1st. The EO Association’s
Articles of Incorporation (AOI), Article III, states the following purpose for which the
corporation was formed:

The specific purpose for which this corporation is organized is:

According to IRS records, the organization self-declared as a tax-exempt status as a
501(c)(4) organization in 20

EO submitted a properly executed Form 2848, which designates CPA as Power of
Attorney (POA) for Form 990 for the years ended 20

The organization filed Forms 990 for the fiscal years ended December 31, 20 only.
To date, has not filed Forms 1120 for the years under examination.

Operation

daily operations is selling and breeding a particular of
. The organization receives % ( ) in donations for
income, the remainder is from selling . are also brought from other
and businesses. There are no indications in the books and records that
reflects charitable contributions, social welfare, educational nor recreational to the public
or community. This also does not reflect in the organization’s daily operations. «

Financial information

The Income statements for 20 are as follows:

[Page 1]

waine
sales $
Donations
Fema Federal Disaster Receipt
Less Returns and Allowances {

Total Sales
Expenses for 20;

Cost of Goods Sold
Purchases -
Purchases - Food
Purchases - and
Purchases -
Purchases ~Suppiles .
Purchases- Furniture & bedding
Purchases -
Purchases

Total Cost of Goods Sold

Gross Profit

Law:
Internal Revenue Code

IRC §501(c)(4)(A)

Civic leagues or organizations not organized for profit but operated exclusively for the
promotion of social welfare, or local associations of employees, the membership of
which is limited to the employees of a designated person or persons in a particular

municipality, and the net earnings of which are devoted exclusively to charitable,
educational, or recreational purposes.

[Page 2]

Federal Tax Regulations

§1.501(c)(4) Civic organizations and local associations of employees
Reg. §1.501(c)(4)-1 does not reflect P.L. 99-514, P.L. 100-203, P.L. 100-647, P.L. 101-
73 or P.L. 104-168.

(a) Civic organizations

(1) In general. —A civic league or organization may be exempt as an organization
described in section 501(c)(4) if:

(i) It is not organized or operated for profit; and

(it) It is operated exclusively for the promotion of social welfare

(2) Promotion of social welfare
(i) In general. —An organization is operated exclusively for the promotion of social
welfare if it is primarily engaged in promoting in some way the common good and
general welfare of the people of the community. An organization embraced within
this section is one which is operated primarily for the purpose of bringing about
civic betterments and social improvements. A “social welfare” organization will
qualify for exemption as a charitable organization if it falls within the definition of
“charitable” set forth in paragraph (d)(2) of §1.501(c)(3)-1 and is not an “action”
organization as set forth in paragraph (c)(3) of §1.501(c)(3)-1.

(ii) Political or social activities. —The promotion of social welfare does not include
direct or indirect participation or intervention in political campaigns on behalf of or in
opposition to any candidate for public office. Nor is an organization operated
primarily for the promotion of social welfare if its primary activity is operating a
social club for the benefit, pleasure, or recreation of its members, or is carrying on a
business with the general public in a manner similar to organizations which are
operated for profit. See, however, section 501(c)(6) and §1.501(c)(6)-1, relating to
business leagues and similar organizations. A social welfare organization that is
not, at any time after October 4, 1976, exempt from taxation as an organization
described in section 501(c)(3) may qualify under section 501(c)(4) even though it is
an “action” organization described in §1.501(c)(3)-1(c)(3)(ii) or (iv), if it otherwise

‘ qualifies under this section. For rules relating to an organization that is, after
October 4, 1976, exempt from taxation as an organization described in section
501{c)(3), see section 504 and §1.504-1.

Taxpayer's Position:
The taxpayer is being presented with this report at this time. The examining agent is
awaiting their response as to this position.

[Page 3]

Government’s Position and Conclusion:

The government contends that the EO does not operate as a 501(c){4) organization for
the following reasons:

1. The organization does not promote social welfare.

A 501(c)(4) organization must operate “exclusively for the promotion of social welfare”
which is further explained by the Regulations thts: being primarily engaged in
promoting in some way the common good and general welfare of the people of the
community.

2. The organization is organized exclusively for profit and therefore can not and does
not operate as a 501(c)(4).

[Page 4]