Employee social organization denied exemption

Plain-English summary

An employee activity organization sought recognition as a charitable organization under section 501(c)(3). It sold coffee and snacks slightly above cost and used fundraising proceeds to subsidize holiday meals and other social and recreational events for employees, contractors, and their families. The IRS concluded that these activities primarily served the members' private interests rather than an exempt public purpose, so the organization failed the operational test. The organization did not protest the proposed adverse determination within 30 days, making the denial final. As a result, it is not exempt under section 501(c)(3), and donors generally cannot deduct contributions under section 170.

Ruling snapshot

• Question: Does an employee activity group operating social events and subsidizing member recreation qualify under section 501(c)(3)?
• Outcome: Denied, because the organization served substantial private social and recreational interests
• Key authorities: IRC §§ 170, 501(a), 501(c)(3); Treas. Reg. §§ 1.501(c)(3)-1(a)(1), 1.501(c)(3)-1(c)(1), 1.501(c)(3)-1(d)(2); Rev. Rul. 69-175; Rev. Rul. 77-366

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service 05/29/2024
Tax Exempt and Government Entities Employer ID number:

Release Number: 202434014
Release Date: 8/23/2024
UIL Code: 501.00-00,
501.03-05, 501.33-00

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: 03/25/2024

Employer ID number:

Person to contact:

Name:
ID number:
Telephone:
Fax:
Legend: UIL:
B = Date 501.00-00
C = State 501.03-05
D = Name 501.33-00

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 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

• 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

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

2

• 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

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

You are a volunteer employee activity organization of D. All employees who are assigned to D are
automatically your members. Membership ceases upon termination of such assignment or employment with D.
Your goal is to coordinate and facilitate activities throughout the year that foster social interaction amongst D’s
employees along with promoting a general atmosphere of fun and camaraderie. Participation in your activities is
open to D’s employees, contractors, and their families.

Activities are planned by your board which consists of a president, secretary, treasurer, and committee persons.
Your board participation is voluntary and open to all your members. No officers are paid, and all proceeds and
money you collect are used to support activities. Your activities occur regularly throughout the year and are
primarily conducted at D’s facility but may be conducted at other venues. One of your primary fundraising
activities is to provide coffee and snacks in D’s breakroom. Items are purchased from local stores and sold
slightly above cost. Funds from sales are deposited in your bank account to support activities throughout the

year.

Since the beginning of calendar year, you have sponsored D’s Annual Holiday Dinner, Valentine Gram Sale, Pi
Day pie bake off, Take Your Child to Work Day, and a Plant Sale event. The following activities are planned
for this same calendar year: breakfast burrito sales, barbecues and Festivus Celebration, that is an annual
potluck event. You typically provide plates, serving utensils and some serving ware for this event. Each section
of D selects a theme and decorates their area accordingly. Your board members judge each section and select a
winner. The winner is presented with a trophy which they hold until the following year Festivus Celebration.

Fees for all activities are kept as low as possible to encourage participation. In general, fees are slightly above
cost. Any profits are deposited into your bank account and are used to support other activities throughout the
year. Your main use of the proceeds of these events is to subsidize D’s annual holiday dinner.

Law

Internal Revenue Code 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.

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

3

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)(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.

Rev. Rul. 69-175, 1969-1 C.B. 149, describes an organization formed by the parents of pupils attending a
private school exempt under IRC Section 501(c)(3). The organization provides bus transportation to and from
the school for those children whose parents belong to the organization. The ruling states that when a group of
individuals associate to provide a cooperative service for themselves, they are serving a private interest. By
providing bus transportation for school children to school, the organization enables the participating parents to
fulfill their individual responsibility of transporting their children to school.

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 are provided in addition to
extensive social and recreational activities is not operated exclusively for exempt purposes and does not qualify
for exemption under section 501(c)(3) of the Code.

Application of law
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 conducting activities for
a recreational and social purpose that privately benefit D’s employees. As provided in Treas. Reg. Section
1.501(c)(3)-1(d)(2), your operations do not accomplish an exclusively charitable purpose.

The group of parents in Rev. Rul. 69-175 provided a cooperative service for themselves and thus served their
own private interests. Like that organization, you operate for the benefit, and in a way to encourage
participation, of your members. Fees for all your activities are kept as low as possible to encourage their
involvement. You subsidize D’s annual holiday dinner and make other activities financially accessible for the
private benefit of your members. These activities serve private rather than public interests.

As the organization in Rev. Rul. 77-366, you are conducting extensive recreational and social activities limited
to benefiting your members and thus, are not operating exclusively for exempt purposes. Your goal is to
coordinate and facilitate activities throughout the year that foster social interaction amongst D’s employees
along with promoting a general atmosphere of fun and camaraderie. Participation in your activities is open to
D’s employees, contractors, and their families, and any surplus funds collected are deposited into your bank
account and are used to support other activities you conduct throughout the year.

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

Conclusion

Based on the facts and circumstances presented, you do not qualify for exemption from federal income tax as an
organization described in IRC Section 501(c)(3). You are not organized and operated exclusively for exempt
purposes as set forth in Section 501(c)(3). You do not meet the operational test for IRC Section 501(c)(3)
because you are operated for the substantial nonexempt purpose of providing members with an opportunity to
pursue social and recreational activities.

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