Contract-bound pageant awards did not support charitable exemption

Plain-English summary

An organization promoted western culture and rodeo through pageants, clinics, schools, and scholarships for winning contestants. Its articles provided that assets on dissolution would go to a similar nonprofit but did not expressly dedicate them to a Section 501(c)(3) organization or purpose. Pageant winners also had to sign contracts requiring appearances, school visits, speaking engagements, rodeos, clinics, and sponsor events, with prizes subject to return if conditions were not met. The IRS viewed the awards as compensation for winning and performing services rather than unconditional educational scholarships. The organization therefore failed both the organizational and operational tests and was denied Section 501(c)(3) exemption.

Ruling snapshot

• Question: Did the rodeo-pageant and scholarship organization qualify as a Section 501(c)(3) charity?
• Outcome: denied
• Key authorities: IRC §§ 117 and 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 66-103; Miss Georgia Scholarship Fund, Inc. v. Commissioner

Full text (IRS public release)

Department of the Treasury Date:

Internal Revenue Service 12/04/2023
Tax Exempt and Government Entities

IRS PO Box 2508

Employer ID number:

Cincinnati, OH 45201 Tax years:
All
Release Number: 202409019 Person to contact:

Release Date: 3/1/2024
UIL Code: 501.03-22

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 Tax Exempt and Government Entities

PO Box 2508
Cincinnati, OH 45201
Date:
September 25, 2023
Employer ID number:
Person to contact:
Name:
ID number:
Telephone:
Fax:
Legend: UIL:
B = state 501.03-22
C = date
D = pageant 1
E = pageant 2

I = number 1
G = number 2
H = number 3
J = number 4
K = number 5

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 section 501(c)(3) of the Code? No, for the reasons stated below.

Facts

You were incorporated under the laws of B on C. Your original Articles of Incorporation indicated your
purpose was the preparation for contestants to compete in the D and formulate rules for fair and safe
competition among contestants. You later amended your Articles to indicate you are formed for exclusive
charitable and educational purposes as well as to promote western culture and way of life by educating the
public on ranching, farming, the agricultural industry and the sport of rodeo.

You provided revised Bylaws which, in part, indicated your primary purpose to be promoting the western
culture and way of life by educating the general public on topics including ranching and farming heritage, the
agriculture industry, and the sport of rodeo.

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

2

Your activities, along with pageants, include rodeos, clinics and schools throughout the state of B and across the
United States. Your goal is to create community interest and attract sponsors to in turn benefit the scholarship
fund for furthering the education of women leaders. You are funded through membership fees; clinic participant
fees; pageant fees and event attendee fees.

In response to our request for information on your activities you stated every summer you conduct a D, where
each contestant competes in public speaking, horsemanship skills, an ability to present oneself for public
appearance, and a test on their knowledge of the sport of rodeo. Scholarships are made available to the winner
of the contest for higher education purposes; those eligible to win are those that succeed in winning the
categories available. The participants are young women ranging from F to G years old and split into three levels
of competition. There are three title holders chosen from the accumulation of scores they earn. Within each
group each contestant will compete for points against their fellow contestants for the opportunity to win
different categories. Once each titleholder has secured their title, they have the opportunity to travel all over B
teaching young children and adults alike about the sport of rodeo, agriculture and our western way of life.

You submitted further information including flyers on the pageant and related events, its schedule,
sponsorships, locations, etc., from past years. You also provided the D contract that is implemented between
you and the pageant winner which included IJ contracted stipulations placed upon the individual.

Winners are expected to make scheduled appearances, including grade school visits, speaking engagements,
rodeos, motivational clinics and promotional sponsor events. The winner also represents B while participating
in the annual E. The winner's financial responsibilities (J listed) were premised with the statement of
understanding that financial culpability may lie solely on her at any time and that the “job expectations will
remain the same”. Also listed in the contract were declared conditions (K listed) precedent to the agreement; if
any shall fail, the agreement may at the sole and exclusive opinion of you/your board be declared null and void
and all prizes must be returned.

Law

Section 501(c)(3) of the Code and section 1.501(c)(3)-1(a) of the regulations sets forth two main tests to qualify
for exempt status. An organization must be organized and operated exclusively for purposes described in
section 501(c)(3) of the Code.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) states that, 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)(4) provides that an organization is not organized exclusively for one or
more exempt purposes unless its assets are dedicated to an exempt purpose.

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.

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

3

Treas. Reg. Section 1.501(c)(3)-1(d)(2) defines the term charitable as including the relief of the poor and
distressed or of the underprivileged, and the promotion of social welfare by organizations designed to lessen
neighborhood tensions, to eliminate prejudice and discrimination, or lo combat community deterioration. The
term “charitable” also includes lessening of the burdens of government.

Revenue Ruling 66-103, 1966-1 C.B. 1034, states an organization which makes unconditional grants to
individuals who are in need of funds to initiate, develop, or complete creative or scholarly works, or to conduct
necessary research for such projects, may qualify for exemption under IRC Section 501(c)(3), where the
purpose of such grants is to assist the recipient to carry on his creative efforts.

Miss Georgia Scholarship Fund, Inc. v. Commissioner, 72 T.C. 267 (1979), the Tax Court held that a separate
fund created by the Miss Georgia Pageant (Pageant), which was recognized exempt under IRC Section
501(c)(4) solely to award scholarships to the Pageant’s contestants, did not qualify under Section 501(c)(3)
because the scholarships were awarded in consideration of contractual obligations. The Tax Court concluded
that scholarships were compensation for signing the Pageant Contract and for performing services under it.
These awards were not IRC Section 117 scholarships and the Fund was not operated exclusively for Section
501(c)(3) purposes.

Application of law

IRC Section 501(c)(3) sets forth two main tests for qualification for exempt status. As stated in 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 amended the purpose clause in your Articles of Incorporation, but your
dissolution clause states you will give any remaining funds to a similar non-profit. Per Treas. Reg. Section
1.501(c)(3)-1(b)(4), assets on dissolution must be dedicated to an exempt purpose under Section 501(c)(3). As
your Articles do not expressly dedicate assets on dissolution to another Section 501(c)(3) entity you fail the
organizational test.

You do not meet the operational test under IRC Section 501(c)(3) because you did not establish that you operate
exclusively for charitable or educational purposes as required under Treas. Reg. Section 1.501(c)(3)-1(c)(1).
Your scholarship program is not based on financial need or academic achievement. Instead, the scholarship is
more of a prize or award for the winner of B and requires actions on the part of the recipient to maintain or
retain funds. Contracts provided and required to be signed by the winning contestant indicate winners must
engage in public appearances and speaking engagements for both you and your sponsors. Although some of
your activities are educational in nature and provide historical and regional significance, the scholarship
program is more than insubstantial in nature. As provided in Treas. Reg. Section 1.501(c)(3)-1(d)(2), you have
not established that your operations accomplish exclusively charitable purposes.

You require pageant winners to abide by contractual obligation in return for scholarship funds and specifically
refer to the winner’s ‘job expectations’. Violation of the contract could result in termination of their contract
and subsequently scholarship funds. Scholarships provided for merit or scholarly achievement can be an exempt
activity, as seen in Revenue Ruling 66-103. The grants awarded in this case were unconditional. In this
instance, scholarships are more compensation for competing, winning, signing your contract and performing
required services rather than an unconditional, ‘no strings attached’ award. This results in these scholarships
being compensatory in nature to the contestants for performing certain services for the pageant and/or pageant
sponsors. As seen in Miss Georgia v. Commissioner, scholarships that are granted as a form of compensation
are not exclusively educational or charitable. Rather, they serve a substantial non-exempt purpose of

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

4

compensating the recipients for past, present, or future services. By paying compensatory awards rather than
true scholarships you do not operate exclusively for one or more of the exempt purposes specified in IRC
Section 501(c)(3).

Conclusion

Based on our analysis of the facts presented we have determined you do not qualify for tax exemption as an
organization described in IRC Section 501(c)(3). You fail both the organizational and operational tests and your
scholarship program does not further exclusive charitable or educational 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

* 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 IRS 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