Veterans' organization denied 501(c)(3) status because a civic center for social events is a substantial nonexempt purpose

Plain-English summary

An organization already recognized as a tax-exempt veterans' group under section 501(c)(19) applied to also be recognized as a charity under section 501(c)(3), and the IRS denied it. The denial became final because the organization did not file a protest within 30 days of the proposed adverse letter. To qualify under 501(c)(3), a group must be both organized and operated exclusively for charitable purposes. The IRS found two problems. First, the articles of incorporation listed purposes under both 501(c)(3) and the broader 501(c)(19), so the group flunked the organizational test. Second, while about a quarter of its activities were grants to other charities, the bulk of its plan was to build and run a civic center used largely for social events, mixers, and private-party rentals, which is a substantial nonexempt purpose that defeats exemption under the "exclusively" operational test. The IRS distinguished a revenue ruling that allowed exemption for a building used only by 501(c)(3) tenants below cost, and cited the rule that a single substantial nonexempt purpose destroys exemption. The group's existing 501(c)(19) exemption was not affected.

Ruling snapshot

• Question: Does a 501(c)(19) veterans' organization that plans to build and operate a civic center primarily for social events qualify for exemption under IRC § 501(c)(3)?
• Outcome: denied (proposed adverse determination became final when no protest was filed; the existing 501(c)(19) exemption remains)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Ruls. 69-572 and 77-366; Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279 (1945); Schoger Foundation v. Commissioner, 76 T.C. 380 (1981)

Full text (IRS public release)

Department of the Treasury Date: 02/28/2022
Internal Revenue Service

Tax Exempt and Government Entities

LTRS 0 Box 2508

Cincinnati, OH 45201

Employer ID number:

Person to contact:

Release Number: 202221018
Release Date: 5/27/2022
UIL: 501.26-00, 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 Letter 437, Notice of Intention to Disclose - Rulings, and review the two attached letters that show our
proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Letter 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. 11-2021)
Catalog Number 47632S

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Letter 437

Redacted Letter 4034
Redacted Letter 4038

Letter 4038 (Rev. 11-2021)
Catalog Number 47632S

Department of the Treasury
Internal Revenue Service
PO Box 2508
IRS Cincinnati, OH 45201
Date: 01/04/2022

Employer ID Number:

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

Legend: UIL:
B = Date 501.26-00
C = State 501.35-00

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 formed on B in the State of C. You are currently exempt under IRC Section 501(c)(19). You are now
seeking exemption under Section 501(c){3).

Article III of your Articles of Incorporation provides that you are organized exclusively for charitable,
scientific, literary, and educational purposes within the meaning of IRC Section 501(c)(19). Your Articles
further provide that you "shall not carry on any activities not permitted to be carried on (a) by an organization
exempt from federal income tax under Section 501(c)(3) or 501(c)(19) of the Internal Revenue Code of 1986."

You provided a statement that your Articles of Incorporation limits your purposes to one or more purposes
described in IRC Section 501(c)(3) and your organizing document permanently dedicates your assets to Section
501(c)(3) purposes. You amended your dissolution clause as follows:

Upon dissolution of the corporation, assets shall be distributed for one or more exempt purposes within the
meaning of Section 501(c)(3) of the Internal Revenue Code, or corresponding section of any future federal
tax code, or shall be distributed to the federal government, or a state or local government for a public
purpose.

In your application you explained that 25 percent of your activities is providing grants and contributions to
organizations exempt under IRC Section 501(c)(3). The remaining 75 percent of your time is to construct a

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

2

civic center where you will conduct various activities including information seminars, business trainings and
social events. The operation of the civic center will be your future primary activity.

You explained further that

percent of facility use time will be used to host your own events and percent of

facility time will be used to host private events. You will also make your facility available to active-duty
military and veterans for social events for promotion ceremonies/parties, retirement ceremonies/parties etc. at

no cost. You will charge for the use of your facility by other private parties.

Of the event you host, you explained that
percent is for military veteran organizational social mixers,
organizational information seminars.

percent is for military veteran organizational business meetings.

percent is for military/veteran/civic

Although you classified these events as events you host, in a subsequent correspondence you explained that the
events are actually hosted by small military/veteran organizations within your region.

In your final response, you explained that
own events which include monthly board/membership meetings and social events. The balance of the

percent of facility use time is for IRC Section 501(c)(3) and Section 501(c)(19) organizations which may use
the facility without charge unless they opt to pay the cleaning fee of $

themselves.

petoont of the

petcont facilily use line will be used to host you

rather than clean the facility

Based on the information you provided, we summarized the percentages as follows:

events

Activity Notes Overall Percentage
Distributions to other IRC %

Section 501(c)(3)

organizations

Facility you use for meetings %of % Facility Use %

and social events Time

Use of facility by other % of % Facility Use %

Section 501(c)(3) and Section | Time

501(c)(19) organizations

Facility rented for private. %of % Facility Use Time %

You are mostly funded by gifts, grants and contributions. Your expenses are for fundraising expenses,
professional fees and contributions, gifts, and grants paid out to other organizations.

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.

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

3

Treasury Regulation Section 1.501(c)(3)-I(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(b)(D@ provides that an organization is organized exclusively for one or
more exempt purposes only ifits 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(¢)(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 Ruling 69-572, 1969-2 C.B. 119 concluded that a nonprofit organization created to construct and
maintain a building for the exclusive purpose of housing and serving exempt member agencies exempt under
IRC Section 501(c)(3) is exempt under Section 501(c)(3). Because of the close connection between the
organization and the charitable functions of the tenant-organizations and the rental of the facilities at rates
substantially below fair rental value, the organization furthers the charitable purposes of the tenants. The
organization primarily relied on charitable contributions from the public and loans from charitable organizations
to pay expenses and costs.

Rev. Rul. 77-366, 1977-2 C.B. 192 states that a nonprofit organization that arranges and conducts winter-time
ocean cruises during which activities to further religious and educational purposes are provided in addition to
exclusive social and recreational activities is not operated exclusively for exempt purposes and does not qualify
for exemption under IRC Section 501(c)(3).

In Better Business Bureau of Washington D.C., Inc. v. United States, 326 U.S. 279 (1945), the Supreme Court
held that the presence of a single non-exempt purpose, if substantial in nature, will destroy the exemption
regardless of the number or importance of truly exempt purposes.

In Schoger Foundation, v. Commissioner, 76 T.C. 380 (1981), it was held that ifan activity serves a substantial
non-exempt purpose, the organization does not qualify for exemption under IRC Section 501(c)(3) even if the
activity also furthers an exempt purpose.

Letter 4034 (Rev. 01 2021)
Calaloy Nurnbaer 4/7@281¢

4

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.

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.

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 501(c)(3). Section
501(c)(3) sets forth two main tests for qualification for exempt status. As stated in Treas. Reg. Section

1.501(c)(3)-1(a)(1), an organization must be both organized and operated exclusively for purposes described in
Section 501(c)(3).

Your Articles of incorporation state that you are formed for purposes described in both IRC Section
501(c)(3) and Section 501(c)(19). The purposes in Section 501(c)(19) are different and broader than those
described in Section 501(c)(3). As a result, you have not satisfied the organizational test described in Treas.
Reg. Section 1.501(c)(3)-1(b)(1)@).

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). Although, at least

percent of your activities, making contributions to Section 501(c)(3) organizations may further charitable
purposes, your application shows that you operate substantially for social purposes. As provided in Treas. Reg.
Section 1.501(c)(3)-1(d)(2), you have not established that your operations accomplish exclusively charitable
purposes.

In Pius XII Academy, Inc., La Verdad, and New Dynamics Foundation, it was established that an organization
must establish, through its administrative record, that it meets the requirements for exemption. The information
you provided did not establish that you operate exclusively for the purposes described in IRC Section 501(c)(3).
You conduct your own social events and the primary events conducted by other organizations are social mixers.
You will also make your facility available to veterans for social events for promotion ceremonies/parties,
retirement ceremonies/parties etc,

You are similar to the organization described in Rev. Rul. 77-366, which conducted substantial social activities
and failed to qualify for exemption from federal income tax under IRC Section 501(c)(3). In addition, as held in

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

5

Schoger Foundation, an organization will not qualify if an activity serves a substantial nonexempt purpose even
if the activity also furthers an exempt purpose.

You are distinguished from the organization in Rev. Rul. 69-572 which provided a facility for organizations
exempt under IRC Section 501(c)(3) at below its cost to operate the facility. You provide facility space for both
Section 501(c)(3) and Section 501(c)(19) organizations without charge except for cleaning fees. By providing
facility space to Section 501(c)(19) organizations you are furthering purposes broader than those described in
Section 501(c)(3).

Your own activities together with renting the facility for private parties account for % of your total
activities and do not further purposes described in IRC Section 501(c)(3). As stated in Better Business Bureau
of Washington, D.C., Inc., the presence of a single nonexempt purpose, if substantial in nature, will destroy the
exemption regardless of the number or importance of truly exempt purposes. The substantial nonexempt
purposes preclude exemption under Section 501(c)(3).

Conclusion

Based on the facts presented, we conclude that you do not qualify for exemption under IRC Section 501(c)(3).
A substantial portion of your activities include making your facility available for use for nonexempt purpose.
Therefore, you are precluded from exemption under Section 501(c)(3). Your exemption under Section
501(c)(19) remains in effect.

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 usa
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

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

6

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 Determination 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

PO 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. 01-2021)
Catalog Number 47628K