Member discount program primarily benefited participating businesses

Plain-English summary

A group of local employers and businesses proposed a membership program intended to encourage shopping locally. Employer members would pay annual dues so their employees could use an electronic card for discounts at participating business members. The IRS found that the articles neither limited the organization to exempt purposes nor dedicated its assets to an exempt purpose on dissolution. It also found that the program served the private economic interests of member businesses by bringing them more shoppers, rather than serving an exclusively charitable public purpose. The IRS therefore denied section 501(c)(3) status, and the denial became final after no protest was filed.

Ruling snapshot

• Question: Did a membership discount program for local employers, employees, and businesses qualify for exemption under section 501(c)(3)?
• Outcome: Denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 76-366; Rev. Rul. 77-111; Better Business Bureau v. United States

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service 10/17/2022
Tax Exempt and Government Entities Employer ID number:

IRS PO Box 2508
Cincinnati, OH 45201

Form you must file:

Number: 202302017 Tax years:
Release Date: 1/13/2023

Person to contact:

UIL: 501.00-00, 501.03-00, 501.03-30, 501.33-00, 501.35-00

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 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
IRS PO Box 2508

Cincinnati, OH 45201

Date:
8/24/22

Employer ID number:

Person to contact:
Name:

ID number:
Telephone:

Fax:

Legend: UIL:
B = State 501.00-00

C = Date 501.03-00
501.03-30
501.33-00
501.35-00

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 submitted Form 1023-EZ, Streamline Application for Recognition of Exemption Under Section 501(c)(3)
of the Internal Revenue Code. You attested that you are organized and operated exclusively to further charitable
purposes and that you have not conducted and will not conduct prohibited activities under Section 501(c)(3).

Your mission on the Form 1023-EZ states, “we are a group of employers that work with local businesses to
offer discounts to our members. Our goal is to support the local area businesses and families by shopping local.”
You were formed as a corporation in B on C.

During review of your Form 1023-EZ, we sent a request for information regarding your activities to supplement
the above information. You responded that you are a group of local businesses that have joined together to
support the local economy. Your Articles of Incorporation state that you were organized to provide discounts to
member businesses. Your Articles are silent regarding the disposition of your assets upon dissolution.

Your membership consists of Employer members and Business members. Employer members will pay an
annual fee for their employees to have access to an electronic membership card that will provide discounts at
local businesses (provided by Business members). This activity will bring your Business members more
shoppers and help Employer members strengthen their family finances.

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

Revenues consist of membership dues. Expenses include website and other administrative fees.

Law

IRC Section 501(c)(3) provides for the exemption from federal income tax of organizations that are organized
and operated exclusively for charitable, religious, educational, or other purposes as specified by 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 qualify under IRC Section 501(c)(3), an
organization must be both organized and operated exclusively for one or more exempt purposes specified in
such section. If an organization fails to meet either the organizational or 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.

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.

Treas. Reg. 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. It must not
be operated for the benefit of designated individuals or the persons who created it.

Revenue Ruling 76-366, 1976-2 C.B. 144, held that an association of investment clubs formed to enable
members and prospective investors to make sound investments by the mutual exchange of investment
information that carries on not only educational activities but other activities to support and promote the
economic interest of its members doesn’t qualify for exemption under IRC Section 501(c)(3). The activities,
directed in whole or in part, to support and promote member economic interests are not in furtherance of
charitable or educational purposes; instead, they serve private interests.

Rev. Rul. 77-111, 1977-1 C.B. 144, held that an organization formed to increase business patronage in a
deteriorated area by providing information on the area's shopping opportunities, local transportation, and
accommodations didn’t qualify for exemption under IRC Section 501(c)(3). The overall thrust of the
organization’s activities was to promote business rather than to accomplish exclusively IRC Section 501(c)(3)
objectives. Similarly, an organization whose purpose is to revive retail sales in an area of economic decline by
constructing a shopping center doesn’t qualify for exemption. The activities resulted in major benefits to
businesses within the shopping center rather than exclusively to accomplish Section 501(c)(3) purposes.

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

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 a claim for

exemption regardless of the number or importance of truly 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).

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.

You do not meet the operational test because you are not operated “exclusively” for exempt purposes as
required by Treas. Reg. Section 1.501(c)(3)-1(c)(1). More than an insubstantial part of your activities includes
providing benefits to your member businesses. These benefits serve the private interests of your members,
rather than a public interest as required by Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii). Like Better Business
Bureau, this substantial, non-exempt purpose precludes exemption under IRC Section 501(c)(3).

You are similar to the organization described in Rev. Rul. 76-366 because your activities (in whole or in part)
support and promote member economic interests. These substantial activities are not in furtherance of charitable
purposes and, also, serve private interests.

You are also like the organization described in Rev. Rul. 77-111 because your activities, overall, promote
business and provide substantial benefits to businesses rather than accomplish exclusively IRC Section

501(c)(3) purposes.

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. You do not meet the operational test because you are
operated for substantial, non-exempt purposes.

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

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

4

• 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: 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

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

5

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