Business networking group denied 501(c)(3) for member private benefit

Plain-English summary

A membership organization applied for 501(c)(3) status to help local startups and veteran-owned businesses through networking, education, referrals, discounts, promotional events, and grants for working capital. Members paid fees, had to fill distinct fields of expertise, and received opportunities to promote and grow their businesses. The IRS denied exemption because these activities primarily served the private interests of member businesses rather than a charitable class. The organization did not show that its grants were limited to a blighted area, relieved poverty, or prevented community deterioration. Citing rulings involving employment registries, industry research, and local business promotion, the IRS found that any public benefit was secondary to the substantial non-exempt benefit for members. A single substantial non-exempt purpose defeats 501(c)(3) status, so the organization did not qualify.

Ruling snapshot

• Question: Does a dues-supported networking group that promotes member businesses and gives startup grants 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, 69-632, 77-111; Better Business Bureau v. United States

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service 07/22/2024

Tax Exempt and Government Entities Employer ID number:
PO Box 2508
Cincinnati, OH 45201 Person to contact:

Release Number: 202442010
Release Date: 10/18/244
UIL 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
Cincinnati, OH 45201
Date: 05/09/2024

Employer ID number:

Person to contact:

Name:
ID number:
Telephone:
Fax:
Legend: UIL:
B = Date 501-00.00
C = State 501-03.00
D= City 501-03.30

y dollars = Dollar Amount
z dollars = Dollar Range

Dear Applicant:

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 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 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 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

Your mission is to host local fundraisers to help startups with working capital to build their businesses. You
also support veteran businesses and organizations with membership discounts and networking opportunities.

Detailed information was subsequently requested. You help your members grow their businesses by sharing
knowledge, expertise, and referrals within your community. Your activities include weekly meet and learn
sessions, three-hour networking events open to guests, to promote membership and grow the community, and
monthly business education and development sessions on topics such as funding, financial management and
marketing, entrepreneurship, business formation, among others. You also hold quarterly events for the
promotion of your members’ businesses in conjunction with popular sporting events.

You offer membership to businesses that meet the following criteria: the organization is established in D;
specializes in a field of expertise not held by any other member; attends at least two meetings and applies to fill
in a specific area of expertise; and is vetted by your committee.

Your six-month membership fee is y dollars. Sponsorship opportunities to your events are available at z dollars,
which cover the business grant program, food and drinks, and discounted venue tickets for the sporting event.
Membership fees have been used to establish a solid foundation of members. In the future, they will continue to
fund your operations and support your business grants program.

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 Regulations Section 1.501(c)(3)-1(a)(1) states that, in order to 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 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 that 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) provides that an organization is not organized or operated

exclusively for one or more exempt purposes unless it serves a public rather than a private interest. To meet

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

3

this requirement, it is necessary for an organization to establish that it is not organized or operated for the
benefit of private interests.

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 Section 501(c)(3) of the Code. 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. 69-632, 1969-2 C.B. 120, held that a nonprofit organization composed of members of a particular
industry to develop new and improved uses for existing products of the industry is not exempt under Section
501(c)(3) of the code. The association contracted with various organizations for specific research projects
selected by a committee chosen from its members. Though the research projects may have resulted in new
products and processes that benefit the public, such benefit was considered secondary to that derived by the
association’s members.

Rev. Rul. 77-111, 1977-1 C.B. 144, held that two organizations formed to promote economic development in
deteriorated areas did not qualify for exemption under IRC Section 501(c)(3). In situation 1, the organization
was formed to increase local business patronage in a deteriorated area mainly inhabited by minority groups. In
situation 2, the organization’s purpose was to revive retail sales in an area suffering from economic decline. The
Service held that although the organizations’ activities may achieve purposes described in Section 501(c)(3),
neither qualify for exemption under Section 501(c)(3), because their programs did not limit the financial aid to a
blighted area and to a charitable class.

In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945), the Supreme Court
of the United States interpreted the requirement in IRC Section 501(c)(3) that an organization be “operated
exclusively” by indicating that an organization must be devoted to exempt purposes exclusively. The presence
of a single non-exempt purpose, if more than insubstantial in nature, will destroy the exemption regardless of
the number and importance of truly exempt purposes.

Application of law

IRC Section 501(c)(3) sets forth two main tests for qualification of 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 are not operated in accordance with Treas. Reg. Section 1.501(c)(3)-1(c)(1) because you are operated for a
substantial nonexempt purpose. Your activities include managing businesses, promoting networking events, and
supporting businesses in your local area through offering grants to cover their start-up costs. The facts show you
are operated for the benefit of your members. You are operated to serve the private interests of your member
businesses in contravention to Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii).

You are like the organization described in Rev. Rul. 61-170, because you are a membership organization and
are funded through membership dues, fees, and assessments. You are also like the organization in Rev. Rul. 69-
632 because your referral process increases the sales of your members. As described in Rev. Rul. 77-111, you
did not provide any evidence you assist a charitable class, eliminated poverty, or prevented community
deterioration. Therefore, you do not qualify for exemption under IRC Section 501(c)(3).

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

Like the organization in Better Business Bureau, your activities further substantial non-exempt purposes. You
are operating for the private benefit of your members, which precludes exemption under IRC Section 501(c)(3).

Conclusion

You did not provide any evidence that your activities further an exempt purpose under IRC Section 501(c)(3).
You are a membership organization that conducts activities substantially non-exempt that serve the private
interests of your members. Therefore, you do not qualify for exemption under Section 501(c)(3).

s

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, { 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