Adult social club denied 501(c)(3) status because recreation was a substantial purpose

Plain-English summary

An adult social club applied for recognition under Section 501(c)(3), then asked to change its application to Section 501(c)(7). Its activities included dinners, plays, movies, picnics, winery trips, entertainment events, social day trips, and some charitable projects. The IRS denied the 501(c)(3) application because most of the club's activities served recreational or social purposes. A charitable organization cannot qualify when it has a substantial non-exempt purpose, even if it also conducts some charitable activities. The IRS concluded that the club failed the operational test because its social and recreational purposes were substantial.

Ruling snapshot

• Question: Does an adult social club that conducts monthly recreational activities and some charitable projects qualify under IRC § 501(c)(3)?
• Outcome: denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a), (c); Rev. Ruls. 67-139, 77-366; Better Business Bureau of Washington, D.C., Inc. v. United States; Schoger Foundation v. Commissioner; St. Louis Science Fiction Limited v. Commissioner

Full text (IRS public release)

Department of the Treasury                              Date:
Internal Revenue Service                                05/09/2024
Tax Exempt and Government Entities
PO Box 2508                                             Employer ID number:
Cincinnati, OH 45201

                                                        Person to contact:

Release Number: 202431012
Release Date: 8/2/2024
UUIL Code: 501.00-00,
501.03-00, 501.03-30

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
Letter 4038

Letter 4038 (Rev. 11-2021)
Catalog Number 47632S


Department of the Treasury
Internal Revenue Service
PO Box 2508
Cincinnati, OH 45201

Date: 01/29/2024

Employer ID number:

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

Legend:                         UIL:
B = Date                        501.00-00
C = State                       501.03-00
D = Name                        501.03-30
y percent = percentage 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 are an unincorporated association formed on B, in 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 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

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

2

* 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

Form 1023-EZ states that your mission or most significant activity is an adult social club organized to engage in
social entertainment and charitable activities.

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

You state you engage in social activities as a group such as: attending entertainment events, meeting for dinner,
going to a play, going to the movies, engaging in charitable activities, and social day trips. You state these
activities occur about once per month at corresponding places to the activity such as: parks, restaurants,
theaters, and specific venues.

You state the recreational or social activities you conduct include meeting as a group to have a picnic, working
on a D project, attending a play, or a short day trip to a winery. You state y percent of your time is spent on
recreational or social activities.

You also submitted a written request to change the section you are applying for to IRC Section 501(c)(7).

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.

In Revenue Ruling 67-139, 1967-1 C.B. 129, Situation 2 describes a club formed by mineralogy and lapidary
enthusiasts “to disseminate knowledge of mineralogical and lapidary subjects, to promote their application so that
greater pleasure may be derived from these activities, and to promote good fellowship among its members.” To
further its purposes, this club held meetings in which its members would “discuss gem and mineral topics and sell,
purchase, or exchange rock and mineral specimens”. It was determined that the club was organized and operated

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

3

primarily for the benefit, pleasure, or recreation of its members. Its activities were only incidentally educational,
and as such, the club did not qualify for tax exemption under IRC Section 501(c)(3). However, it did qualify under
Section 501(c)(7).

Rev. Rul. 77-366, 1977-2 C.B. 192, states that a nonprofit organization that arranges and conducts wintertime
ocean cruises during which activities to further religious and educational purposes were provided in addition to
extensive social and recreational activities was not operated exclusively for exempt purposes and did not qualify
for exemption under IRC Section 501(c)(3).

In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 179 (1945), the Supreme Court
held that the presence of a single non-exempt purpose, if substantial in nature, will destroy a claim for
exemption under Section 501(c)(3) of the Code regardless of the number or importance of truly exempt
purposes.

In Schoger Foundation v. Commissioner, 76 T.C. 380 (1981), it was held that if an activity serves a substantial
non-exempt purpose, the organization does not qualify for exemption even if the activity also furthers an
exempt purpose.

In St. Louis Science Fiction Limited v. Commissioner, T.C. Memo 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 were education, its overall agenda was not exclusively
educational. A substantial portion of convention affairs were social and recreational in nature.

Application of law

You are not operated exclusively for one or more exempt purposes as required by Treas. Reg. Section
1.501(c)(3)-1(c)(1), because you are operated for substantial recreational and social purposes. Instead, you
engage in social activities such as attending dinners or entertainment events. While you do engage in some
charitable activities, most of your activities serve recreational or social purposes. As a result, you are not
described in IRC Section 501(c)(3) because you do not meet the operational test as required by Treas. Reg.
Section 1.501(c)(3)-1(a)(1).

You operate like the organizations described in Situation 2 of Rev. Rul. 67-139 and Rev. Rul. 77-366. Although
some of your activities may serve charitable purposes, a substantial portion of your activities serve recreational
and social purposes. This shows you are not operated exclusively for an exempt purpose, but primarily for
recreational or social purposes.

Although an organization may carry on activities that further one or more tax-exempt purposes, it will not be
treated as operated exclusively for an exempt purpose if it has a single non-charitable purpose that is substantial
in nature. (See Schoger Foundation). Further, as noted in Better Business Bureau of Washington, D.C., Inc., the
presence of a single non-exempt purpose, if substantial in nation will destroy a claim for exemption under IRC
Section 501(c)(3). Similar to the organizations in Schoger Foundation and St. Louis Science Fiction Limited,
while you conduct certain charitable activities, such as working through D, overall you are substantially
operated for social and recreational purposes. As your recreational or social purposes are substantial in nature
you are not operated exclusively for exempt purposes under Section 501(c)(3).

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

4

Conclusion
Based on the above facts and analysis, you do not qualify for exemption under IRC Section 501(c)(3) because
you fail the operational test. You fail the operational test because you operate for substantial non-exempt
recreational or social 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