Rural tourism organization denied section 501(c)(3) status

Plain-English summary

An organization sought section 501(c)(3) status for programs intended to empower rural communities through tourism, business training, grants, education, and cultural preservation. Its current activity was promoting sustainable tourism, and its expenses included grants to small business owners plus advertising, marketing, website, travel, and program costs. The organization did not limit financial aid to a blighted area or charitable class and had an informal donation arrangement with a similarly named for-profit travel agency. The IRS concluded that promoting tourism and local businesses was a substantial nonexempt purpose and that any educational activity was incidental to that promotion. It denied exemption under the operational test and made the determination final after no protest was filed.

Ruling snapshot

• Question: Does the rural tourism and business-support organization qualify for exemption under section 501(c)(3)?
• Outcome: Denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 74-587; Rev. Rul. 77-111

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service 08/01/2024
IRS Tax Exempt and Government Entities Employer ID number:

Person to contact:

Release Number: 202443021
Release Date: 10/25/2024
UIL Code: 501.03-00,
501.33-00, 501.36-01

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: 05/13/2024

Employer ID number:

Person to contact:

Name:
ID number:
Telephone:
Fax:
Legend:
X = Date
Y = State
w percent = Percentage Range
z percent = Percentage

UIL:
501.03-00
501.33-00
501.36-01

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 X, in the state of Y. 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

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

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

Your purpose includes uplifting rural communities through tourism while celebrating and supporting rural ways
of life. You address the issue of income from tourism activities not reaching the local people with your
program. You support local people that have skills in hospitality and tourism by offering grants and market
support to small local business owners. Your activities will focus on economic empowerment through local
business training and support, health, and education via financial aids for education and others, cultural and
local way of life preservation, and real human interaction by connecting with local community. Your programs
are created to build economic gain and empower rural people to better their lives. You anticipate dedicating w
percent of your time to educational activities and around z percent of your time to promoting sustainable
tourism, which is your sole activity this year.

You plan to change your name to avoid confusion with a similarly named for-profit travel agency, which has an
unwritten, at-will donation agreement with you. This for-profit travel agency has performed similar activities to
yours for several years. It currently does not share board members with you, although you stated that its
employees may be on your board in the future.

Your revenues consisted of donations. Your expenses mostly include grants to small business owners, with a
significant portion going to advertising, marketing, website development/hosting, travel, and program materials
and supplies. You do not limit your financial aid eligibility to a blighted area or to a charitable class.

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.

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

3

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 74-587, 1974-2 C.B. 162, held that an organization which had economic development activities
was exempt under IRC Section 501(c)(3). The declared objectives were relief of poverty and combating
community deterioration in economically depressed areas through financial assistance, among others. The
assistance included technical support and counseling, and making loans to low-income businesses unable to
obtain funds from conventional sources. The financial aid was limited to a blighted area and to a charitable
class.

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, 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

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
Section 501(c)(3). You do not meet the operational test under IRC Section 501(c)(3).

Because you do not limit your financial aid both to a blighted area and to a charitable class, you are like the
organizations in Rev. Rul. 77-111, which did not qualify for exemption, and you are unlike the organization in
the favorable Rev. Rul. 74-587, which had those limits, was considered charitable under Treas. Reg. Section
1.501(c)(3)-1(d)(2), and qualified for exemption.

You do not meet the operational test under IRC Section 501(c)(3) because you are not operating exclusively for
educational purposes as required under Treas. Reg. Sections 1.501(c)(3)-1(c)(1). Since you spend z percent of
your time on the promotion of tourism, your educational activities are an incidental purpose as well as generally
aimed at promoting tourism.

Because your activities further substantial non-exempt purposes, you are similar to the organization in Better
Business Bureau of Washington, D.C., Inc., which did not qualify for exemption under Section 501(c)(3).

Conclusion

Because you conduct substantial activities of promoting the tourism business that further non-exempt purposes,
you are not exclusively furthering exempt purposes and do not meet the operational test. Therefore, you do not
qualify for exemption under IRC Section 501(c)(3).

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

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:

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

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

5

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