Veteran-group-owned LLC denied charitable exemption

Plain-English summary

A nonprofit limited liability company sought section 501(c)(3) status to raise money for a war memorial replica and distribute remaining funds to military charities. Its sole member was exempt under section 501(c)(19), not section 501(c)(3), even though the operating agreement described the member as a section 501(c)(3) organization. Notice 2021-56 generally requires every member of a charitable LLC to be a section 501(c)(3) organization, a qualifying governmental unit, or a wholly owned instrumentality. The IRS also concluded that the company's articles did not adequately limit its purposes and therefore failed the organizational test. The application was denied despite the company's charitable fundraising activities.

Ruling snapshot

• Question: Did an LLC owned by a section 501(c)(19) veterans organization satisfy the organizational requirements for section 501(c)(3) status?
• Outcome: Denied
• Key authorities: IRC §§ 170(c)(1), 501(c)(3), 501(c)(19), 508(e); Treas. Reg. § 1.501(c)(3)-1; Notice 2021-56

Full text (IRS public release)

Department of the Treasury Internal Revenue Service             Date: 08/09/2023
Tax Exempt and Government Entities                              Employer ID number:
PO Box 2508
Cincinnati, OH 45201                                             Tax years:
All

Person to contact:
Release Number: 202344017
Release Date: 11/3/2023
UIL Code: 501.01-00,
501.03-00

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
IRS PO Box 2508
Cincinnati, OH 45201
Date:

June 5, 2023
Employer ID number:

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

Legend: UIL:

B = date 501.00-00
C = state 501.03-00
D = location

F = organization

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 incorporated in C on B as a domestic nonprofit Limited Liability Company (LLC). Your amended
Articles of Organization state that you are organized exclusively for charitable, religious, educational, and
scientific purposes, including, for such purposes, the making of distributions to organizations that qualify as
exempt organizations described under IRC Section 501(c)(3), or corresponding section of any future federal tax
code.

Your activities described on Form 1023 are to raise and distribute funds to military charities. Specifically, your
goal is to create a replica of in D. The project will be funded by individual and corporate
donations. You said based upon the success you will then pursue other civic projects which will enhance the
community of D.

Your operating agreement indicates your purpose is to bring a replica of to D as well as raise
funds, thru various fund raisers to offset the cost and distribute remaining funds to charitable organizations
which assist U.S. military veterans.

Subsequent research indicates that your sole member (F) is not an organization exempt under IRC Section
501(c)(3) but rather exempt under Section 501(c)(19).

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

Your operating agreement indicates that your sole member is F, an IRC Section 501(c)(3) organization, and at
no time shall membership interest in you or your assets be sold or in any other way transferred to any other
person or organization. If a transfer or sale of assets becomes necessary or the sole member of the organization
ceases to be described under Section 501(c)(3), assets must be distributed to a Section 501(c)(3) organization or
governmental unit or instrumentality. All available assets held now or in the future shall only be availed of or
transferred to any non-member other than a Section 501(c)(3) organization or governmental unit or
instrumentality in exchange for fair market value. Upon dissolution, all your remaining assets shall be
distributed to Section 501(c)(3) organizations which help U.S. military veterans. If any amendments are to be
made to the organizing documents amendments must be consistent with Section 501(c)(3). You shall not merge
with or convert into a for-profit entity or distribute any asset to any members or organizations who cease to be
organizations described in Section 501(c)(3) or governmental units or instrumentalities.

Law

IRC Section 501(c)(3) provides that corporations may be exempted from tax if they are organized and operated
exclusively for charitable or educational purposes and no part of their net earnings inures to the benefit of any
private shareholder or individual.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) provides that, for an organization to be exempt and described
in IRC Section 501(c)(3), that 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) provides that an organization is organized and operated exclusively for
one or more exempt purposes only if its articles of organization limit the purposes of the organization to one or
more exempt purposes and do not expressly empower the organization to engage, other than as an insubstantial
part of its activities, in activities that are not in furtherance of one or more exempt purposes.

Notice 2021-56, 2021-45 I.R.B. 716, 2021, sets forth current standards that a limited liability company (LLC)
must satisfy to receive a determination letter recognizing it as tax-exempt under section 501(a) of the Internal
Revenue Code and described in section 501(c)(3).

Notice 2021-56, Section 3.02 provides the required provisions that an LLC must have in their articles of
organization and operating agreement. To qualify, both the LLC’s articles of organization and its operating
agreement must include:

(1) Provisions requiring that each member of the LLC be either (i) an organization described in section
501(c)(3) and exempt from taxation under section 501(a) or (ii) a governmental unit described in section
170(c)(1) (or wholly owned instrumentality of such a governmental unit).

(2) Express charitable purposes and charitable dissolution provisions in compliance with Treas. Reg. Sections

1.501(c)(3)-1(b)(1) and (4).

(3) The express chapter 42 compliance provisions described in section 508(e)(1), if the LLC is a private
foundation.

(4) An acceptable contingency plan (such as suspension of its membership rights until a member regains

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

recognition of its section 501(c)(3) status) in the event that one or more members cease to be section 501(c)(3)
organizations or governmental units (or wholly owned instrumentalities thereof).

Notice 2021-56, Section 3.03 provides required provisions regarding representation on enforceability. The LLC
must represent that all provisions in its articles of organization and operating agreement are consistent with
applicable state LLC law and are legally enforceable.

Application of law

IRC Section 501(c)(3) and Treas. Reg. Section 1.501(c)(3)-1(a)(1) set forth two main tests to qualify for exempt
status. An organization must be both organized and operated exclusively for purposes described in Section
501(c)(3). The standards set forth for issuing determination letters have generally included a requirement that all
members of an LLC must themselves be Section 501(c)(3) organizations, governmental units, or wholly owned
instrumentalities of a state or political subdivision thereof. (See Notice 2021-56) While you are operating to
conduct charitable purposes in raising funds for a war memorial, since your Articles do not limit your purposes
you fail the organizational test under Treas. Reg. Section 1.501(c)(3)-1(b)(1).

Neither your Articles of Organization nor your Operating Agreement meet the organizational requirements for
an LLC outlined in Notice 2021-56:

* Membership is not limited to organizations exempt under IRC Section 501(c)(3) or a governmental unit
described in section 170(c)(1); instead, your sole member is exempt under Section 501(c)(19)

* While your Articles of Organization nor Operating Agreement limit your purposes to one or more
exempt purposes under IRC Section 501(c)(3), and they do not expressly empower you to engage in
activities that are not in furtherance of one or more exempt purposes, this does not apply given your sole
member is not exempt under Section 501(c)(3)

* Your sole member is an organization exempt under IRC Section 501(c)(19), not entities who are exempt
under IRC Section 501(c)(3) or governmental units (or wholly instrumentalities thereof)

Conclusion

Based on the information you have submitted you do not qualify for exemption under IRC Section 501(c)(3).
You do not meet the organizational test because your Articles of Organization do not limit your purposes to one
or more 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

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

* 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: 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

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