IRS denies 501(c)(3) status to a group maintaining a shared irrigation pipeline for a set of neighboring families

Plain-English summary

An organization applied for 501(c)(3) charitable status on the short Form 1023-EZ, describing its main activity as managing water usage for residents of a particular area. On closer review, its purpose was to provide water to neighbors in the vicinity: it runs a community irrigation pipeline that delivers water to the residential gardens of a fixed group of families. The organization pays the water bill, maintains and repairs the pipes, and keeps the books, and the connected families fund it by each paying a pro rata share of the costs. The IRS denied exemption. To qualify under 501(c)(3), an organization must be both organized and operated exclusively for exempt purposes and must serve a public rather than a private interest. Supplying water to a set neighborhood is not an exempt purpose, and this group exists to benefit the specific families it serves, sharing costs among them. The IRS compared it to a cooperative art gallery, a parents' school-bus group, and a waterway-dredging company for adjacent landowners, all denied exemption for serving private interests. Because it fails both the organizational and operational tests, it does not qualify.

Ruling snapshot

• Question: Does an organization that maintains a shared irrigation pipeline for a fixed group of cost-sharing families qualify for exemption under IRC § 501(c)(3)?
• Outcome: Denied (fails the organizational and operational tests; serves the private interests of the served families)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a)(1), (b)(1)(i), (c)(1), (d)(1)(ii); Rev. Ruls. 69-175 and 71-395; Benedict Ginsberg and Adele W. Ginsberg v. Commissioner, 46 T.C. 47 (1966)

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service 08/10/2022
Tax Exempt and Government Entities Employer ID number:
PO Box 2508
Cincinnati, OH 45201 Person to contact:
Number: 202244020
Release Date: 11/4/2022

UIL: 501.00-00, 501.03-30, 501.33-00

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
Cincinnati, OH 45201
Date: 06/23/2022

Employer ID number:

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

Legend:
b = Number
W = Date
X = State
Y = Date
Z = Street Name

UIL:
501.00-00
501.03-30
501.33-00

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

You attest that you were incorporated on Y, in the state of X. You attest that you have the necessary organizing
document, that your organizing document limits your purposes to one or more exempt purposes within the
meaning of the IRC Section 501(c)(3), that your organizing document does not expressly empower you to
engage in activities, other than an insubstantial part, 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 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:

• Refrain from supporting or opposing candidates in political campaigns in any way
• 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

• 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)
• Not devote more than an insubstantial part of your activities attempting to influence legislation or, if you made
  a Section 501(h) election, not normally make expenditures in excess of expenditure limitations outlined in
  Section 501(h)
• Not provide commercial-type insurance as a substantial part of your activities

You stated on the Form 1023-EZ that your most significant activity is to manage water usage to Z residents.

Detailed information was subsequently requested. Article 4a of your Articles of Incorporation states your
specific purpose is to manage water usage to Z residents. Your amended Article 4a states your specific purpose
is to provide water to neighbors in the vicinity.

You maintain a community irrigation water pipeline for b families and this irrigation pipeline provides water to
residential gardens. These families are connected to the water delivery system and pipes of Z. You are
responsible to pay the water bill, provide maintenance, repair the pipe system, and provide the corresponding
accounting services. You are funded by these families who pay pro rata share of the expenses you incur. The
approximate size of the area you serve is about _ acres.

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:

(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.

Income Tax Regulation section 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated
exclusively for one or more exempt purposes unless it serves a public rather than a private interest.

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

Revenue Ruling 69-175, 1969-1 C.B. 149, describes an organization which was formed by parents of pupils
attending a private school to provide bus transportation to and from the school for those children whose parents
belong to the organization. The organization did not qualify for exemption under IRC Section 501(c)(3) because
it served a private rather than public interest.

Rev. Rul. 71-395, 1972-2 C.B. 228, holds that a cooperative art gallery formed and operated by a group of
artists for the purpose of exhibiting and selling their works does not qualify for exemption under IRC Section
501(c)(3). The ruling concluded that the cooperative gallery served the private purposes of its members, even
though the exhibition and sales of paintings may be an educational activity in other respects.

In Benedict Ginsberg and Adele W. Ginsberg v. Commissioner, 46 T.C. 47 (1966), exemption was retroactively
revoked from a corporation to conduct the dredging of certain waterways. It was held that the corporation was
organized and operated primarily for the benefit of those persons owning property adjacent to the waterways
dredged rather than for public or charitable purposes. Therefore, the corporation didn't qualify for exemption
under IRC Section 501(c)(3).

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

Your amended organizing document states your specific purpose is to provide water to the neighbors in the
vicinity of Z. Provision of water to a neighborhood is not an exempt purpose described in IRC 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)(i).

Your operation to maintain a community irrigation water pipeline for b families in Z provides direct benefits to
these families. You are not operated exclusively for exempt purposes as described in Treas. Reg. Section
1.501(c)(3)-1(c)(1). As a result, you have not satisfied the operational test requirement.

You do not meet the requirements of Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) because you do not show you
serve a public rather than a private interest. Specifically, you serve the private interests of b families.

You are like the organizations described Benedict Ginsberg and Adele W. Ginsberg, Rev. Rul. 69-175, and Rev.
Rul. 71-395. You were formed to maintain an irrigation water pipeline for b families and these families share
the costs of expenses. This shows that you are operating for the convenience and private interests of b families.

Conclusion

Based on the facts presented, you are organized and operated to serve the private interest of b families.
Therefore, you are not qualified for exemption under IRC Section 501(c)(3).

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.

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

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:

U.S. mail:
Internal Revenue Service
EO Determinations Quality Assurance
Mail Stop 6403
PO Box 2508
Cincinnati, OH 45201

Street address for delivery service:
Internal Revenue Service
EO Determinations Quality Assurance
550 Main Street, Mail Stop 6403
Cincinnati, OH 45202

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.

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

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