Cattle-breed association denied 501(c)(3) status because member sales served private interests

Plain-English summary

An association of cattle owners and breeders applied for recognition under Section 501(c)(3). It held an annual show, meeting, banquet, and member sale, advertised members' cattle, and helped buyers locate animals offered by members. The IRS acknowledged that the association educated members and the public about the breed, but found that facilitating and marketing member sales was a substantial non-exempt activity. Those sales and advertising activities created a market for members and primarily advanced their private interests. Because a single substantial non-exempt purpose prevents 501(c)(3) qualification, the IRS denied exemption and stated that donors could not deduct contributions to the association.

Ruling snapshot

• Question: Does a cattle-breed association that educates the public but also advertises and facilitates sales of members' animals qualify under IRC § 501(c)(3)?
• Outcome: denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a), (c), (d); Rev. Ruls. 61-170, 67-216, 71-395; Better Business Bureau of Washington, D.C., Inc. v. United States

Full text (IRS public release)

Department of the Treasury                              Date:
Internal Revenue Service                                05/09/2024
Tax Exempt and Government Entities                      Employer ID number:

Release Number: 202431014
Release Date: 8/2/2024

UIL Code: 501.03-30,
501.35-00

                                                        Person to contact:

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

Date: 03/21/2024

Employer ID number:

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

Legend:                         UIL:
B = Date                        501.03-30
C = State                       501.35-00
D = Organization Name
F = Date
G = Organization Name
H = Organization Name
J = Organization Name

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 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 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:

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

2

* 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
* 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

According to your application, you are an association of D owners in C who gather annually for a banquet, sale
and D showing.

Detailed information was subsequently requested.

You provided a copy of your original Articles of Incorporation which were filed on F. Your Articles of
Incorporation state your purpose is to unite the D breeders of C in an effort to breed better D, to promote the use
of purebred sires, to improve the methods of growing and marketing D, to further the D interest of the state, and
for the general education of your members. You attested to filing an amendment with the state that includes
limiting paragraphs compliant with IRC Section 501(c)(3).

Your activities include an annual show, meeting, and banquet. Your members gather for a sale of D in
conjunction with the banquet. Your annual show of D is in conjunction with a county fair.

Participants in your activities must be members of the G and be current in their annual membership dues to
participate in your show and sale. In addition to being able to participate in the state sale, benefits of
membership include advertisement on your website and the ability to place an ad in your membership directory.
The banquet is open to all members and guests.

Two of your members manage the annual sale. Their duties include preparing a catalog, promoting the sale,
depositing the sales payments, and disbursing the payments to members who sold cattle. All of the animals for
sale are produced by members, some of which are on your board of directors.

According to your website, you support the H and junior livestock shows and events. Your website contains a
member's website listing to assist buyers in locating and selecting D. Members may advertise their sales or post
a flyer in exchange for a small fee.

You stated that your sales activity is performed in conjunction with a separate non-profit organization, J. Each
year J creates the sale catalog and manages all aspects of the sale, including location, collection, and payment. J
remits to you a minor percentage of the sale proceeds. Further, you stated that J is controlled by a sales
committee chosen annually by your board.

Your revenue consists of membership dues, contributions, sale of directory ads and proceeds from the sale.
Your expenses are related to your activities and the sales of D at your annual event. You collect the amounts

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

3

paid by buyers to purchase D and then remit the amount minus expenses and commission to the member who
sold that specific D.

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) of the regulations provides that an organization is not organized or
operated exclusively for exempt purposes unless it serves a public rather than a private interest.

Treas. Reg. Section 1.501(c)(3)-1(d)(3)(i) defines the term educational as the instruction or training of the
individual for the purpose of improving or developing his capabilities or the instruction of the public on subjects
useful to the individual and beneficial to the community.

Revenue Ruling 61-170, 1961-2 C.B. 112, held that an association composed of professional private duty
nurses and practical nurses which supported and operated a nurses' registry primarily to afford greater
employment opportunities for its members was not entitled to exemption under IRC Section 501(c)(3).
Although the public received some benefit from the organization's activities, the primary benefit of these
activities was to the organization's members.

Rev. Rul. 67-216, 1967-2 C.B. 180, held that a nonprofit organization formed and operated exclusively to
instruct the public on agricultural matters by conducting annual public fairs and exhibitions of livestock,
poultry, and farm products may qualify for exemption from federal income tax under IRC Section 501(c)(3).
The organization's activities and exhibits were planned and managed by or in collaboration with persons whose
business it was to inform and instruct farmers and the general public on agricultural matters (i.e., home
demonstration agents, county agricultural agents), and the resulting displays were designed to be instructive.
The presence at the fair of recreational features such as midway shows, refreshment stands, and a rodeo are
incidental to the fair's overall educational purpose.

Rev. Rul. 71-395, 1971-2 C.B. 228, held that a cooperative art gallery formed and operated by a group of artists
to exhibit and sell their works doesn't qualify for exemption under IRC Section 501(c)(3). The gallery showed
and sold only the works of its own members and is a vehicle for advancing the careers and for promoting the
sale of their work. The ruling held that the organization serves the private purposes of its members, even though
the exhibition and sale of paintings may be an educational activity in other respects.

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

4

In Better Business Bureau of Washington D.C., Inc. v. United States, 326 U.S. 279, 66 S. Ct. 112, 90 L. Ed. 67,
1945 C.B. 375 (1945), the Supreme Court held that the presence of a single non-exempt purpose, if substantial
in nature, will destroy the exemption regardless of the number or importance of truly exempt 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). Based on the information you provided in your application and supporting
documentation, we conclude you fail the operational test.

Treas. Reg. Section 1.501(c)(3)-1(c)(1) provides that an organization operates exclusively for exempt purposes
only if it engages primarily in activities that accomplish exempt purposes specified in IRC Section 501(c)(3).
While you do educate members and the public as to the advantages of the breed of D, you engage in a
substantial non-exempt activity by providing for the advertisement and sale of your members D.

Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated
exclusively for exempt purposes unless it serves a public rather than a private interest. You have a substantial
purpose to advance the private interests of your members. This includes providing advertisement of your
members' D for sale and a market for the sale of members' D. As stated in Better Business Bureau of
Washington D.C., serving the private interests of your membership is a substantial nonexempt purpose which
precludes exemption under IRC Section 501(c)(3).

Treas. Reg. Section 1.501(c)(3)-1(d)(3)(i) provides, in part, that the term educational relates to the instruction of
the public on subjects useful to the individual and beneficial to the community. Facilitating and marketing sales
is not exclusively educational. These activities are a means of pairing potential buyers with sellers. While you
have some educational activities, the sales activities are a substantial part of your operations. For this reason,
you are not serving exclusively educational purposes.

You are similar to the organizations described in Rev. Rul. 61-170 and 71-395. These rulings noted that any
public benefit provided by the organizations was superseded by the primary benefit established for
organizational members which precluded exemption under IRC Section 501(c)(3). You have a substantial
purpose to provide a market for your members, thus advancing the private interests of your members rather than
the public.

You are not like the organization in Rev. Rul. 67-216 because your principal activity is not educational, rather,
it's to facilitate a market for your members.

Conclusion

You are not operated exclusively for IRC Section 501(c)(3) purposes; you conduct substantial non-exempt
activities that promote the private interests of your members. Therefore, we conclude that you do not qualify for
exemption under Section 501(c)(3). Donors cannot deduct their contributions to you.

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.

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

5

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:

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.

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

6

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