IRS denies 501(c)(3) status to a neighborhood association that is substantially social and recreational

Plain-English summary

A midtown neighborhood association applied for charity status under section
501(c)(3) using the short Form 1023-EZ. Its mission was to build community spirit
and civic pride by running events like a Halloween decorating contest, neighbor
meetups, a dog adoption day, holiday caroling and a tree lighting, movie nights in
the park, and a fall festival with food trucks and live music. To be a charity, an
organization must operate "exclusively" for exempt purposes, which the law reads
to allow only insubstantial non-charitable activity. The IRS concluded that this
group's core work was social and recreational, which is more than an insubstantial
non-exempt purpose, so it fails the operational test even if some activities have
charitable or educational value. Comparing it to a case where a cultural group's
social events sank its 501(c)(3) claim (though such groups can often qualify under
501(c)(4)), the IRS issued a final adverse determination. The practical upshot:
donations are not tax-deductible under section 170, and the association must file
regular corporate income tax returns. This shows the line the IRS draws between a
genuine charity and a neighborhood social club.

Ruling snapshot

• Question: Does a neighborhood association whose main activities are community social and recreational events qualify for exemption under section 501(c)(3)?
• Outcome: Denied (final adverse determination; fails the operational test)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a)(1), (c)(1); Rev. Rul. 67-216; Better Business Bureau v. United States, 326 U.S. 279; Spanish American Cultural Association of Bergenfield v. Commissioner, T.C. Memo 1994-510

Full text (IRS public release)

Department of the Treasury                                    Date:
Internal Revenue Service                                      11/27/2024
Tax Exempt and Government Entities                            Employer ID number:

IRS Box 2508
Cincinnati, OH 45201

Form you must file:
1120
Tax years:

All

Person to contact:

Release Number: 202508006
Release Date: 2/21/25
UIL Code: 501.03-00, 501.35-00

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.

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
Cincinnati, OH 45201
Date: October 3, 2024

Employer ID number:

Person to contact:
Name:
ID number
Telephone
Fax

Legend:               UIL

D = Date              501.03-00
E = State             501.35-00
F = City

h dollars = Amount

j dollars = Amount

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 D, in the state of E. 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

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

• 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

You described your mission or most significant activity as "Neighborhood Association".

During review of your Form 1023-EZ, detailed information was requested supplemental to the above
attestations. You operate as a neighborhood association for F's midtown area which encompasses multiple
smaller communities. You explained that your mission is to promote community spirit, common interests,
quality of life and protection of the neighborhoods that you encompass. You foster civic engagement and civic
pride for residents and businesses within the boundaries of the neighborhoods you represent.

You publicize and promote your events on the internet and through social media. Since your inception, you
have organized an array of activities and events.

Examples of activities you have organized include:
• A Halloween house decorating contest
• A meet your neighbor social event at a local restaurant
• A dog adoption event with a local animal shelter
• A holiday event consisting of caroling and tree lighting.
• A neighborhood art project in celebration of Valentine's Day
• Showing evening movies at a community park

Furthermore, you have coordinated a fall festival at a local park. There were food trucks, live music, art
vendors, costume contests, and games for children.

Your membership is optional. Household memberships cost h dollars and business memberships cost j dollars.
Your events are opened to all and there is no charge.

You are operated by a volunteer board which generally meets monthly, and you hold an annual membership
meeting as well as conduct an annual membership drive. You are supported by membership fees from
community residents and businesses.

You indicated:
• Your recreational and social activities are intended to appeal to the entire community, including
children, families, the elderly, and businesses.
• You have been recognized as a neighborhood association by the F municipal government.
• You have directly organized and partnered with F's municipal agencies and other groups to share
important information and resources.

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

3
• You have worked in partnership with F's municipal agencies on community initiatives.
You provided no specifics on the demographics of the area where you operate.

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.

In Revenue Ruling 67-216, 1967-2 C.B. 180, 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 was held exempt under IRC Section 501(c)(3). Although the fair had recreational
features such as midway shows, refreshment stands, and a rodeo, the overall activities of the fair were
conducted in such a fashion and on such subjects as would enlighten the participants on the newest and best
techniques of farming, and on other matters useful and beneficial to them and to the community.

In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945), the Supreme Court
held that the presence of a single non-exempt purpose, if substantial in nature, will destroy a claim for
exemption regardless of the number or importance of truly exempt purposes.

Spanish American Cultural Association of Bergenfield v. Commissioner, T.C. Memo 1994-510 (1994),
describes an organization which was created in order to foster the cultural heritage of the local Spanish-
American residents. Except for the charitable donations and scholarships, the organization primarily engaged in
social activities designed to provide Spanish-American residents with a sense of community. They were granted
exempt status under IRC Section 501(c)(4), but then applied for exempt status as a charitable organization
described in Section 501(c)(3). It was found that they did not qualify under Section 501(c)(3) because their
social activities were more than insubstantial in comparison to its charitable activities.

Application of law

IRC Section 501(c)(3) and Treas. Reg. Section 1.501(c)(3)-1(a)(1) set forth two main tests for an organization
to be recognized as exempt. An organization must be both organized and operated exclusively for purposes
described in IRC Section 501(c)(3). Based on the information you provided in your application and supporting
documentation, we conclude you do not meet the operational test.

Your primary activities consist of organizing events for members of the communities you serve in order to
foster civic engagement and civic pride for residents and businesses. Events you have organized include holiday

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

4

gatherings for caroling and tree lighting, a neighborhood art project in celebration of Valentine's Day, and
showing evening movies at a park. You have also coordinated a fall festival at a park where there were food
trucks, live music, art vendors, costume contests, and games for children.

These activities illustrate you are not operating exclusively for IRC Section 501(c)(3) purposes as described in
Treas. Reg. Section 1.501(c)(3)-1(c)(1) because you are operating for substantial recreational and social
purposes.

You are dissimilar to the organization discussed in Rev. Rul. 67-216. The organization in the ruling was found
to be exempt under IRC Section 501(c)(3) because they offered substantial instructional and educational
opportunities. While you may have some charitable and/or educational components, like the organization in
Spanish American Cultural Association of Bergenfield, you are operated substantially for non-exempt social
and recreational purposes, which prevent you from exemption under Section 501(c)(3).

Similar to the organization in Better Business Bureau, you are operating for substantial nonexempt purposes.
Therefore, you are precluded from exemption for IRC Section 501(c)(3).

Conclusion

Based on the information you provided, you fail the operational test under IRC Section 501(c)(3), because you
have more than an insubstantial amount of social and recreational activities. Any charitable activities you
conduct are incidental to your overall non-exempt purpose of operating multiple social and recreational events
for the community. Therefore, you do not qualify for tax exemption under Section 501(c)(3).

Contributions to you are not deductible under Section 170.

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.

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

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.

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.

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

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

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