Letter 4038 (202501013): Exemption denied to a business-networking membership organization serving members' private interests

Plain-English summary

This is a final IRS letter denying tax-exempt status to an organization that applied under Section 501(c)(3). To qualify, a group must be organized and operated exclusively for exempt purposes such as education or charity, and it must serve the public rather than private interests. The applicant ran a membership organization for a business community: it held a multi-day "bootcamp" trade school for aspiring entrepreneurs, business seminars, an annual golf tournament and other fundraisers, an end-of-year celebration, and social outings (skiing, snowboarding, hot springs). It charged members and event participants various fees and gave members access to a global business network. The IRS concluded that although some activities were educational, the organization was operated primarily to help its own members start and grow their private businesses and to provide them social and recreational activities, both of which are non-exempt purposes that serve private rather than public interests. Citing Better Business Bureau v. United States (a single substantial non-exempt purpose defeats exemption) and Rev. Rul. 61-170 (a nurses' registry serving members failed to qualify), the IRS found the organization failed the operational test. Because the applicant did not protest the earlier proposed denial within 30 days, that determination became final, so donors generally cannot deduct contributions and the organization must file regular income tax returns.

Ruling snapshot

• Question: Does the applicant qualify for exemption under IRC § 501(c)(3)?
• Outcome: denied (fails the operational test; serves private member interests and substantial social/recreational purposes)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(c)(1), (d)(1)(ii); Rev. Rul. 61-170; St. Louis Science Fiction Ltd. v. Commissioner, T.C. Memo. 1985-162; Better Business Bureau v. United States, 326 U.S. 279 (1945)

Full text (IRS public release)

Scanned document; transcribed under the runbook proofreading rule. Obvious OCR misreads are corrected; identifying details redacted by the IRS appear as legend placeholders (B, C, D, E, F, x/y/z dollars) or are marked [illegible].

Department of the Treasury                              Date:
Internal Revenue Service                                10/10/2024

IRS Tax Exempt and Government Entities                  Employer ID number:

                                                        Form you must file:

                                                        Tax years:
Release Number: 202501013                               All
Release Date: 1/3/2025                                  Person to contact:

UIL Code: 501.00-00,
501.03-00, 501.03-30

Dear [illegible]:

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.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Letter 437
Redacted Letter 4034

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


Department of the Treasury
Internal Revenue Service

Date: 07/22/2024

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

UIL: 501.00-00, 501.03-00, 501.03-30

Legend:
C = Date
D = State
E = Name
F = Name
x dollars = Amount
y dollars = Between amount and amount
z dollars = Amount as member, Amount as a director

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, Streamline Application for Recognition of Exemption Under Section 501(c)(3)
of the Internal Revenue Code on B.

You attest that you were incorporated on C, in the state of D. 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 the 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 educational 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

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* 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

Your mission on the Form 1023-EZ states that you are supporting the E business community in D and
discovering, nurturing, and supporting the next generation of E entrepreneurs.

Detailed information was subsequently requested. You describe your activities as follows:

* You conduct a trade school, which is a [illegible]-day [event], to educate, provide sources and inspire the
  next generation of E American business entrepreneurs and to continue to broaden their network. F
  members participate to prepare and open the event to gather participants to learn more about you and to
  gain access to business opportunities and data. The event is held at a different location each year, such as
  a hotel, college campus or convention center. The participants work on their business startup projects,
  listen to lectures, and follow the schedule of the event.

* The fees that are charged during the event are the trade school application fees for whoever is attending
  and participating which helps you cover the costs for the event including dining and lodging.

* You conduct a business seminar regarding different topics for both members and nonmembers interested
  on personal growth and business ventures. You host the seminars at an F office located in D. The event
  is free to attend but attendees must apply and register.

* You have an end of year celebration, which is an invitation to all members, to discuss what they have
  achieved and accomplished throughout the year and to announce new goals for the upcoming year. This
  event is held in a ballroom or conference room. There are no fees charged for this event but donations
  and sponsorships can be made.

* You conduct an event that is a friendly get together where all current F next generation members are
  invited to network, get to know one another, and have socialization through activities. Other F chapters
  are invited. You split participants in 2 teams; there are 2 activities skiing/snowboarding or hot springs.
  Each team participates in the activity of their choice. The fee is x dollars per person to cover lodging,
  event cost and food.

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

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* You conduct a golf tournament. It is an annual tournament and fundraising event where you invite E
  American business owners and E American society to partake in the tournament and also be sponsors.
  The participation fee is y dollars.

Your membership criteria differs depending on whether a member is a regular member or a next generation
member. To become a regular senior member, the individual must be a F business owner starting from a certain
age and up. Next generation members are younger, but not younger than 21. Members are interested in
business, entrepreneurship, and international trade.

Your member's services include gaining access to the international F network which is a global network and
can receive and gain access to information and intel from you that can help one's own endeavors in business.
You provide the service to expand and promote advancement of the global economic community. Regular
membership is z dollars. No fees are charged to the next generation members.

Your website described a history remark of your chapter. Your website indicated you provide access to both
local and international networking opportunities that help your chapter members with their journey towards
economic, social and personal success. You educate the young generation through structure programs such as
trade school and to support the community and general members with the trade start-up academy.

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 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 described in IRC Section 501(c)(3) unless it serves a public rather
than a private interest. Thus, it is necessary for an organization to establish that it is not organized or operated
for the benefit of private interests such as designated individuals, the creator or his family, shareholders of the
organization, or persons controlled, directly or indirectly, by such 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 IRC Section 501(c)(3) because it was serving
the private interests of its members.

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

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In St. Louis Science Fiction Limited v. Commissioner, T.C. Memo. 1985-162 (1985), 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 (the organization's principal activity) were educational, its
overall agenda was not exclusively educational. A substantial portion of convention affairs were social and
recreational in nature.

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 engage primarily
in activities which do not further one or more exempt purposes specified in IRC Section 501(c)(3). The 3-4 day
bootcamp and business seminars are primarily to educate, support and promote your members in the operating
of their businesses and give them access to global network data. Although, some your activities are educational,
which is an exempt purpose under Section 501(c)(3), the facts show that you are primarily operated to support
and promote your members in operating their businesses. This serves private interests rather than public
interests. See Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii).

Like the organization described in Rev. Rul. 61-170, which supported and operated a nurses' registry primarily
to afford greater employment opportunities for its members, you operate to afford greater opportunities to your
members to help them start, sustain, and improve their private businesses.

You hold an end of year celebration for your members to discuss achievements and future goals, you conduct an
event where members can bond over skiing/snowboarding or relaxing in hot springs, and you hold an annual
golf tournament for your members. These are networking events that involve social and recreational activities
for your members. Further, social and recreational activities are part of your [illegible] day and your
business seminars. Social and recreational activities are not furthering exempt purposes under IRC Section
501(c)(3). See St. Louis Science Fiction Limited.

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. See Better Business Bureau of Washington
D.C., Inc. You serve the private interests of your members and provide social and recreational activities to
them. These activities further substantial non-exempt purposes.

Conclusion

You fail the operational test. You are not operated exclusively for one or more of the exempt purposes specified
in IRC Section 501(c)(3). By serving the private interests of your members rather than public interests and by
providing social and recreational activities to them, you are furthering substantial non-exempt purposes. Thus,
you do not qualify for 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:

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

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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