IRS denies 501(c)(3) status to a performing-arts nonprofit that failed the organizational test

Plain-English summary

A newly incorporated nonprofit focused on creating performances that explore the human experience and inspiring young artists applied for recognition as a tax-exempt charity using the short Form 1023-EZ. When the IRS looked at its actual organizing document, the Certificate of Incorporation stated only a broad "any lawful purpose" for a not-for-profit charitable corporation; it did not limit the organization's purposes to exempt (charitable or educational) purposes, and it had no clause dedicating the organization's assets to an exempt purpose if it dissolved. Both are requirements of the "organizational test" under Treasury Regulation § 1.501(c)(3)-1(b). The IRS asked the group to amend its articles to fix these defects but got no response despite repeated attempts to reach it. The IRS issued a proposed denial and then, when no protest was filed within 30 days, a final adverse determination. Because the organization does not qualify under section 501(c)(3), it is not exempt from federal income tax and donors generally cannot deduct contributions to it under section 170.

Ruling snapshot

• Question: Does an organization whose articles state a broad purpose and lack a dissolution clause qualify for exemption under IRC § 501(c)(3)?
• Outcome: Denied (final adverse determination; fails the organizational test).
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a)(1), (b)(1)(i), and (b)(4); IRC § 170.

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service 3/14/22
IRS Tax Exempt and Government Entities

Employer ID number:

PO Box 2508
Cincinnati, OH 45201

Form you must file:
Tax years:

Person to contact:

Release Number: 202223016 Name:

Release Date: 6/10/2022 ID number:

: Telephone:
UIL: 501.00-00, 501.03-00, 501.03-30 DX] Check if 501(c)(3) denial

[_] Check if valid POA

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 800-879-4933

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

Enclosures:

Letter 437

Redacted Letter 4034
Redacted Letter 4038

[_] Hide blank fields.

Sincerely,

Stephen A. Martin

Director, Exempt Organizations

Rulings and Agreements

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

Department of the Treasury
Internal Revenue Service
IRS PO Box 2508
Cincinnati, OH 45201
Date: January 11, 2022

Employer ID number:

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

Legend: UIL:
Y = Date 501.00-00

Z = State 501.03-00
501.03-30

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 submitted Form 1023-EZ, Streamline Application for Recognition of Exemption Under IRC Section
501(c)(3) of the Internal Revenue Code.

You attest that you were incorporated on Y in the state of Z. You attest that you have the necessary organizing
document, that your organizing document limits your purposes to one or more exempt purposes within IRC
Section 501(c)(3), that your organizing document does not expressly empower you to engage, other than an
insubstantial part, in activities that are not in furtherance of one or more exempt purposes, and that your
organizing document contains the dissolution provision required under Section 501(c)(3).

You attest that you are organized and operated exclusively to further charitable and educational purposes. You
attest that you have not conducted and will not conduct prohibited activities under IRC Section 501(c)(3).
Specifically, you attest you will:

e Refrain from supporting or opposing candidates in political campaigns in any way.

e Ensure that your net earnings do not inure in whole or in part to the benefit of private shareholders or
individuals.

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

2

e Not further non-exempt purposes (such as purposes that benefit private interests) more than
insubstantially.

¢ Not be organized or operated for the primary purpose of conducting a trade or business that is not related
to your exempt purpose(s).

e Not devote more than an insubstantial part of your activities attempting to influence legislation or, if you
made an IRC Section 501(h) election, not normally make expenditures in excess of expenditure
limitations outlined in Section 501(h).

e Not provide commercial-type insurance as a substantial part of your activities.

During review of your Form 1023-EZ, detailed information was requested to supplement the above attestations.

You provided a copy of your organizing document, Certificate of Incorporation, which states that the purpose
for which you are formed is any purpose for which corporations may be organized under the Not For Profit
Law as a charitable corporation. It further states that you will be formed to create new modern for
performance that explore the human experience and strive to inspire young artists to share their voices. The
document does not include any provisions for assets upon dissolution.

We requested that you amend your organizing document to meet the organizational test of IRC Section

501(c)(3). No reply was received to this specific request. Numerous attempts were made to contact you via
telephone but were unsuccessful.

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)-1(b)(1)(i) provides that an organization is organized exclusively for one or
more exempt purposes only if its articles of organization limit the purposes of such organization to one or
more exempt purposes; and do not expressly empower the organization to engage, otherwise than as an
insubstantial part of its activities, in activities which in themselves are not in furtherance of one or more
exempt purposes.

Treas. Reg. Section 1.501(c)(3)-1(b)(4) provides that an organization is not organized exclusively for one or
more exempt purposes unless its assets are dedicated to an exempt purpose. An organization’s assets will be
considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, by reason of a
provision in the organization’s articles or operation of law, be distributed for one or more exempt purposes.

Application of law
IRC Section 501(c)(3) sets forth two main tests for qualification of exempt status. Per 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).

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

3

You do not meet the organizational test as explained in Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i) and
1.501(c)(3)-1(b)(4). Your organizing document contains a broad purpose statement that does not limit your

purposes to one or more exempt purposes. Further, your organizing document does not dedicate your assets to
an exempt purpose.

Conclusion

Based on the information submitted, you do not qualify for exemption under IRC Section 501(c)(3). You do not
meet the organizational test because your articles do not limit your purposes to one or more exempt purposes
and your assets are not dedicated to an exempt purpose.

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 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:

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

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