Employee social association denied exemption

Plain-English summary

A voluntary employee association applied for exemption under IRC § 501(c)(3). It organized bowling, softball, and cornhole tournaments, employee appreciation days, and picnics or parties for members' retirements and promotions. Membership was limited to employees at one location, although family members could join some events. The IRS found that these activities primarily provided pleasure, recreation, workplace morale, and general well-being to members rather than relief to a charitable class. Because substantially all of the association's activities served a nonexempt social and recreational purpose, the IRS denied exemption.

Ruling snapshot

• Question: Does an employee association that conducts social, recreational, and morale-building events qualify under IRC § 501(c)(3)?
• Outcome: Denied because the association failed the operational test and primarily benefited its members through social and recreational activities
• Key authorities: IRC §§ 170, 501(c)(3), 6104(c), 6110, 7428(b)(2); 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. 77-366; Better Business Bureau of Washington, D.C., Inc. v. United States; Spanish American Cultural Association of Bergenfield v. Commissioner

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service 05/12/2025
Tax Exempt and Government Entities Employer ID number:
PO Box 2508
Cincinnati, OH 45201

Person to contact:

Release Number: 202532014
Release Date: 8/8/2025
UIL Code: 501.03-00, 501.03-01

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
PO Box 2508
Cincinnati, OH 45201

Date:

03/14/2025
Employer ID number:

Person to contact:

Name:
ID number:
Telephone:
Fax:

Legend: UIL:
B = Date 501.03-00
C = State 501.03-01
D = Entity
E = Location

x percent = percentage
y dollars = dollar amount

Dear

We considered your Streamline Application for Recognition of Exemption Under Section 501(c)(3) of the
Internal Revenue Code, 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 meet the operational requirement of section 501(c)(3)? No for the reasons below:

Facts

You submitted Form 1023-EZ, Streamline Application for Recognition of Exemption Under Section 501(c)(3) of
the Internal Revenue Code.

You attest that you were formed as an unincorporated association 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 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 have not conducted and will not conduct prohibited activities under 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

2

• 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 more than expenditure limitations
  outlined in Section 501(h).

• Not provide commercial-type insurance as a substantial part of your activities.

Your Form 1023-EZ indicates you are organized to conduct various recreational, social, and support activities
to promote the morale and wellbeing of D employees stationed at the E.

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

You are a voluntary employee association. Your membership is limited to D employees stationed at E. You
conduct various activities to boost morale in the workplace for your members, including:

• social and recreational activities, such as bowling, softball, and cornhole tournaments,

• employee appreciation days on certain holidays, such as Mother's Day or Veteran's Day, and

• providing financial support for special events upon member request, such as for picnics and parties for
  members' retirements or promotions.

You try to hold at least one event per month. Family members of D employees may also participate in your
social and recreational activities.

Your gross revenues consist of fundraising, donations, and commissions earned from vending services. Any
membership fees you may charge to D employees are limited to employee payroll deductions of no more than x
percent, or donations of approximately y dollars per member.

Law

IRC Section 501(c)(3) provides for the recognition of exemption of organizations that are organized and operated
exclusively for charitable, educational, or other enumerated 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) provides that, 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.

In Rev. Rul. 77-366, 1977-2 C.B. 192, an organization's stated purpose was to provide a continuing educational
program in an atmosphere conducive to spiritual renewal for ministers, members of churches, and their families.
The organization's only activities consisted of fourteen-day wintertime cruises on chartered ships, where
approximately four hours a day were set aside for optional lectures, discussions, and workshops on religious
topics, with the remainder of the time (which, if participants chose, could be all the time) available for meals,
social functions, and recreational activities. Since the educational and religious programming was optional, and
the social and recreational functions and activities were substantial, it was held the organization did not operate
exclusively for exempt purposes and, therefore, did not qualify for exemption under IRC Section 501(c)(3).

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.

In Spanish American Cultural Association of Bergenfield v. Commissioner, T.C. Memo 1994-510 (1994),
an organization was created 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 IRC Section 501(c)(3). It was found that they did not qualify under Section 501(c)(3) because
their social activities (1) did not further exclusively exempt purposes and (2) were more than insubstantial
in comparison to its charitable activities.

Application of law

You do not meet the requirements for recognition of tax exemption under IRC Section 501(c)(3) because you
fail the operational test as described in Treas. Reg. Section 1.501(c)(3)-1(a)(1).

You are an employee association whose members participate in substantial social and recreational activities to
improve their general wellbeing and workplace morale. By organizing extensive social and recreational
activities for the exclusive benefit, pleasure, and recreation of your members, you are not furthering exempt
purposes as required in Treas. Reg. Section 1.501(c)(3)-1(c)(1).

Although your activities may promote your members' general wellbeing and workplace morale, you have not
established how these activities exclusively provide relief to the poor, distressed, or underprivileged, as defined
under Treas. Reg. Section 1.501(c)(3)-1(d)(2). As such, your members do not represent a charitable class
typically described in charitable precedent under IRC Section 501(c)(3). Further, the promotion of your
employees' general welfare and workplace morale does not promote social welfare to the extent designed to
lessen neighborhood tensions, combat community deterioration, or eliminate prejudice and discrimination, per
Treas. Reg. Section 1.501(c)(3)-1(d)(2). Therefore, you do not further exclusively exempt purposes.

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

4

You are like the organization described in Rev. Rul. 77-366, because you have more than an insubstantial
amount of social and recreational activities. While the general wellbeing and workplace morale of your
members is important, such activities do not further exempt purposes under IRC Section 501(c)(3). Similar to
the organization in Rev. Rul. 77-366, you offer a substantial amount of social and recreational activities for your
members, including meals and social functions, which precludes exemption under IRC Section 501(c)(3).

As noted in Better Business Bureau of Washington, D.C., Inc., exemption under IRC Section 501(c)(3) cannot
be granted when an organization has a non-exempt purpose which is more than insubstantial in nature. This is
further clarified in Spanish American Cultural Association of Bergenfield, where substantial recreational
activities prohibited exemption under Section 501(c)(3). Similarly, the primary purpose for which you are
organized and operated is to conduct social and recreational activities for the benefit, pleasure, and recreation of
your members. This furthers a substantial nonexempt purpose and precludes exemption under Section
501(c)(3).

Conclusion

Based on the facts and circumstances provided in your application materials, you do not meet the operational
test under IRC Section 501(c)(3) because substantially all your activities further substantial nonexempt social
and recreational purposes. Thus, you do not meet the requirements for federal tax exemption under Section
501(c)(3). Contributions to you are not deductible by your donors.

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.

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

5

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.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

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