Local business association was denied charitable exemption

Plain-English summary

A member-supported association sought Section 501(c)(3) status while promoting small businesses in a rural community. Its activities included vendor events, parades, business awards and publicity, networking mixers, a business directory, and a scholarship for a high school senior. The IRS found that promoting member businesses and providing them publicity created a substantial private benefit. It also found that a substantial portion of the association's activities was social and recreational, even though the scholarship and some other work were charitable. Because those nonexempt purposes were substantial, the association failed the operational test and was denied charitable exemption.

Ruling snapshot

• Question: Did the association operate exclusively for charitable purposes under Section 501(c)(3)?
• Outcome: denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 71-505; Better Business Bureau v. United States

Full text (IRS public release)

Department of the Treasury Date:

Internal Revenue Service 01/08/2024

Tax Exempt and Government Entities Employer ID number:
IRS PO Box 2508

Cincinnati, OH 45201
Person to contact:

Release Number: 202414005
Release Date: 4/5/2024

UIL Code: 501.00-00,

501.03-00, 501.03-04

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: 09/13/2023

Employer ID number:

Person to contact:

Name:
ID number:
Telephone:
Fax:
Legend: UIL:
B = Date 501.00-00
C = Name of State 501.03-00
D = Award Name 501.03-04

E = Dollar Amount
F = Dollar Amount

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, Streamlined Application for Recognition of Exemption Under Section 501(c)(3)

of the Internal Revenue Code.

You attest that you were an unincorporated association 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

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

2

* 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

* 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 your Form 1023-EZ that you are a member driven organization that assesses the needs of local
business owners in effort to strengthen and support small rural community businesses, stimulate, and advocate
for business growth, development, and opportunities, and promote awareness and preservation.

Detailed information was subsequently requested. You stated that you will conduct a fundraiser event with
plates of food for sale, have door prizes, and have local vendors. You will host an event where children can take
pictures with , receive a gift, and have local vendors. You will conduct two parades, one for

and one for . You will provide scholarships for a high school senior to be applied to the
college of their choice and be named D for the year. You will also select a business of the year to be announced
to the public, given a banner, plaque, have a full article written about the business in the local newspaper, and
promote the business on all social media platforms you are able to. You also do a business spotlight of the
month to recognize and promote local businesses. You have a website you are in the process of building to be
able to provide a business directory to support your local small-town businesses. You also host mixers for your
local businesses to mingle and get to know their neighbors and customers. All events are hosted annually.

Volunteers, officers of your organization, and/or members of your board participate in your activities. The time
and percentage of time on your activities varies depending on how much detail each event entails. Your bigger
events you plan all year working a few days out of the week on it. Your smaller events take a couple of months
to plan and coordinate with local officials. All your resources go back into planning events and providing
support for your local businesses. You strictly have volunteers, and no one is being paid. You charge an annual
fee to become a member. For businesses it is E a year, for families and individuals is it F a year. You decided
these fees with your board and have included them in your by-laws and can only be changed by a majority vote.

Law
IRC Section 501(c)(3) provides, in part, for the recognition of exemption from federal income tax of

organizations that are organized and operated exclusively for charitable, religious, or educational purposes, in
which no part of the net earnings inures 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(c)(1) provides that an organization will be regarded as operated exclusively
for one or more exempt purposes only if it primarily engages only in activities that accomplishes one or more of

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

3

such exempt purposes specified in Section 501(c)(3). An organization will not be so regarded as being exempt 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)(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 to combat community deterioration. The
term “charitable” also includes lessening of the burdens of government.

Revenue Ruling 71-505, 1971-2 C.B. 232, describes a city bar association, exempt under IRC Section
501(c)(6), that could not be reclassified as an educational or charitable organization exempt under Section
501(c)(3). Although the organization had a number of charitable and educational activities, a substantial portion
of the organization’s activities were directed at the promotion and protection of the practice of law and therefore
furthered the common business purpose of its members.

In Better Business Bureau of Washington D.C.., Inc. v. United States, 326 U.S. 279 (1945), the Supreme Court
stated that the presence of a single nonexempt purpose, if substantial in nature, will preclude exemption under
IRC Section 501(c)(3) regardless of the number or importance of statutorily exempt purposes.

In St. Louis Science Fiction Limited v. Commissioner, 49 TCM 1126, 1985-162, the Tax Court held that a
science fiction society failed to qualify for tax-exempt status under IRC Section 501(c)(3). Although many of
the organization's functions at its annual conventions (the organization's principal activity) were educational, its
overall agenda was not exclusively educational. A substantial portion of convention affairs were social and
recreational in nature.

Application of law

A ruling on exempt status is based solely on facts and representations in the administrative file. You have not
provided supporting documentation to establish you meet the requirements of IRC Section 501(c)(3). 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).

You do not meet the operational test under IRC Section 501(c)(3) because you are not operating exclusively for
charitable purposes as required under Treas. Reg. Section 1.501(c)(3)-1(c)(1). You are providing private benefit
to the members of the organization and promoting local businesses. 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 are similar to the organization in Rev. Rul. 71-505 because even though you are conducting charitable
activities, a substantial portion of the organization’s activities are directed at a nonexempt purpose.

As held in Better Business Bureau of Washington, D.C., Inc. v. United States, a single nonexempt purpose, if
substantial, will preclude tax exemption under IRC Section 501(c)(3). Your purposes are to benefit your
members and promote local businesses, which is a significant nonexempt purpose. Therefore, you are not
operating exclusively for an exempt purpose as described in Section 501(c)(3).

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

4

You are like the organizations described in St. Louis Science Fiction Limited v. Commissioner because even
though you are providing scholarships to high school seniors your overall agenda is not exclusively charitable.
A substantial portion of activities are social and recreational in nature.

Conclusion

You do not meet the requirements for tax exemption under IRC Section 501(c)(3). You’re operating for a
substantial nonexempt purpose and serve the private benefits of your members. Accordingly, you do not meet
the operational test because you are operated for substantial, nonexempt 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 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