Record retailer denied Section 501(c)(3) status

Plain-English summary

An organization applied for Section 501(c)(3) status while operating retail record sales in person and online. It said its purpose included buying and selling records, conducting community events, paying operating expenses and compensation, and eventually funding people or organizations that held similar events. The IRS found that the retail activity was a substantial commercial purpose that did not further an exempt purpose. Payments to people who supplied items for resale also served their private interests rather than a public interest. Applying the operational test and authorities involving grocery, adoption, and online flower businesses, the IRS denied exemption. The denial became final after the organization did not protest within 30 days, and contributions are not deductible.

Ruling snapshot

• Question: Does an organization primarily conducting retail record sales qualify for Section 501(c)(3) because it also plans community events and future grants?
• Outcome: denied
• Key authorities: IRC §§ 170, 501(a), 501(c)(3), 7428(b)(2); Treas. Reg. § 1.501(c)(3)-1(a), (c), (d); Rev. Rul. 73-127

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
P.O. Box 2508
Cincinnati, OH 45201

Date:
04/03/2023

Employer ID number:

Form you must file:

Tax years:

Person to contact:

Number: 202326022
Release Date: 6/30/2023

UIL: 501.03-00, 501.03-05

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: 02/13/2023

Employer ID number:

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

Legend:
B = Date of Incorporation
C = State of Incorporation

UIL:
501.03-00
501.03-05

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, Streamlined Application for Recognition of Exemption Under Section 501(c)(3)
of the Internal Revenue Code.

You attest that you were incorporated on B, in the state of C. 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 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 IRC 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

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

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

2

• 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

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

Your Articles of Incorporation state your specific purpose is the buy and sell records and do communicative
events. You conduct retail sales by selling [redacted]. The sole board member of the
organization conducted this activity in person and online. You donate funds to people that would sell
[redacted], [redacted], or [redacted] to the organization. Your revenue is going towards your operating expenses and
compensation. In the future you would like to donate funds to individuals and organizations that are trying to
conduct communitive events to help them run events.

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(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) states that an organization is not 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 73-127, 1973-1 C.B. 221, held that an organization that operated a cut-price retail grocery
outlet and allocated a small portion of its earnings to provide on-the-job training to the hard-core unemployed
did not qualify for exemption under IRC Section 501(c)(3). The organization's purpose of providing job training
for the hardcore unemployed was charitable and educational within the meaning of the common law concept of
charity; however, the organization's purpose of operating a retail grocery store was not. The ruling concluded
that the operation of the store and the operation of the training program were two distinct purposes. Since the
former purpose was not a recognized charitable purpose, the organization was not organized and operated
exclusively for charitable purposes.

In Easter House v. U.S., 12 Cl. Ct. 476,486 (1987), aff'd, 846 F. 2d 78 (Fed. Cir.) cert. denied, 488 U.S. 907

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

3

(1988), the court found an organization that operated an adoption agency was not exempt under Section
501(c)(3) of the Code because a substantial purpose of the agency was a nonexempt commercial purpose. The
court concluded that the organization did not qualify for exemption under Section 501(c)(3) because its primary
activity was placing children for adoption in a manner indistinguishable from that of a commercial adoption
agency. The court found that the organization competed with for-profit adoption agencies, engaged in
substantial advertising and accumulated substantial profits. Accordingly, the court found that the "business
purpose, and not the advancement of educational and charitable activities purpose, of plaintiff's adoption service

is its primary goal" and held that the organization was not operated exclusively for purposes described in
Section 501(c)(3).

In Zagfly, Inc. v. Commissioner, T.C. Memo 2013-29, the court held that the organization’s primary activity,
the operation of a web-based broker that would sell flowers at market rates, was not a charitable activity but
rather a commercial activity that amounts to an unrelated trade or business. Therefore, the organization did not
meet the requirements of IRC Section 501(c)(3) because its primary activity did not further a Section 501(c)(3)
purpose.

Application of law
IRC Section 501(c)(3) and Treas. Reg. 1.501(c)(3)-1(a)(1) sets forth two main tests for qualification for exempt
status. An organization must be both organized and operated exclusively for purposes described in IRC Section

501(c)(3). You have not provided supporting documentation to establish you meet the requirements of IRC
Section 501(c)(3), as further explained below.

You do not meet the operational test under IRC Section 501(c)(3) because you are engaging primarily in an
activity that does not accomplish an exempt purpose. Your primary activity is to buy and sell [redacted] in a
commercial manner. This activity is substantial and not in furtherance of an exempt purpose. Thus, you do not
qualify for exemption under IRC Section 501(c)(3). See Treas. Reg. Section 1.501(c)(3)-1(c)(1).

Your activities also do not serve a public interest. You are providing funds to people that donate
[redacted], [redacted], or [redacted] to you. This isn’t considered a true donation since people are receiving funds in exchange for
giving products. This activity serves the private interest of the individuals donating items, rather than a public
interest. Therefore, you do not meet the operational requirement for IRC Section 501(c)(3). See Treas. Reg.
Section 1.501(c)(3)-1(d)(1)(ii).


You are similar to the organization described in Rev. Rul. 73-127 because the operation of retail sales and your
program to donate to other organizations are separate and distinct activities. Since the operation of retail sales is
a substantial part of your activities and does not further an exclusively charitable purpose, you are not organized
and operated exclusively for 501(c)(3) purposes.

You are like the organizations described in Easter House v. U.S. and Zagfly, Inc v. Commissioner. Your
primary activity is to operate a retail store. You have not provided any evidence that this is distinguishable from
a general commercial enterprise and that your business purpose is not your primary goal. Because you are
primarily operating for a substantial nonexempt commercial purpose rather than for a tax-exempt purpose, you
do not meet the operational test for exemption under IRC Section 501(c)(3).

Conclusion

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

4

Based on the information you have provided, you do not meet the requirements for tax exemption under IRC
Section 501(c)(3). You are operating for a substantial, commercial non-exempt purpose and you are serving the
private benefit of individuals who donate items to you for sale by providing money for said items. Therefore,
you do not qualify for exemption under IRC Section 501(c)(3). Donations to you are not deductible.

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

5

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