A workplace social club for lab employees does not qualify for 501(c)(3) exemption

Plain-English summary

A group that describes itself as a social club supporting and celebrating the anatomic and clinical laboratories of an employer applied for tax-exempt charitable status under Section 501(c)(3) using the streamlined Form 1023-EZ. Its members pay annual dues, which fund gifts and events: Christmas and lab-week celebrations, biannual potlucks, chocolates, baked goods, monogrammed pens, birthday cards, and flowers, held at members' homes. The IRS denied exemption. To qualify under 501(c)(3), an organization must operate exclusively for exempt purposes, and more than an insubstantial amount of non-exempt activity defeats that. Here the club's activities were substantially social and recreational for its dues-paying members, which is a substantial non-exempt purpose. This release contains the final adverse determination letter (Letter 4038) along with the enclosed proposed adverse letter (Letter 4034) that explains the reasoning.

Ruling snapshot

• Question: Does a dues-funded social club that provides gifts and social events to its member employees qualify for exemption under IRC § 501(c)(3)?
• Outcome: Denied (final adverse determination)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a)(1), (c)(1); Better Business Bureau of Washington D.C., Inc. v. United States, 326 U.S. 279 (1945); Minnesota Kingsmen Chess Association v. Commissioner, T.C. Memo 1983-495; St. Louis Science Fiction Limited v. Commissioner, T.C. Memo 1985-162; International Postgraduate Medical Foundation v. Commissioner, T.C. Memo 1989-36

Full text (IRS public release)

                       Sincerely,


                       Stephen A. Martin
                       Director, Exempt Organizations
                       Rulings and Agreements
Enclosures:
Letter 437
Redacted Letter 4034
Redacted Letter 4038




                                                   Letter 4038 (Rev. 11-2021)
                                                   Catalog Number 47632S
           Department of the Treasury
           Internal Revenue Service



                                                                               Date:
                                                                               06/09/2025
                                                                               Employer ID number:


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



Legend:                                                                       UIL:
B = Date                                                                      501.03-00
C = State                                                                     501.03-04
D = Date                                                                      501.35-00
E = Organization
F = Number
G = Number
h dollars = Dollars

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, Application for Recognition of Exemption under Section 501(c)(3) of the
Internal Revenue Code, on date D.

You attest that you were incorporated on date 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). During
review of your Form 1023-EZ, detailed information was requested supplemental to your attestations.

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 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 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.

You state that you are a social club created to support and celebrate the anatomic and clinical labs of E. Your
board members direct up to F different laboratories across C state and up to G employees and supports staff.
Your members pay dues of h dollars annually. Membership dues are your only source of income, and all of the
funds generated from these dues are used to provide gifts and events to your members.

You provide two major events annually for Christmas and lab week, as well as biannual potlucks. You provide
various gifts to your members at these events, including chocolates, homemade baked goods, and
monogrammed pens. You also provide birthday cards and flowers as a show of support to your members. Your
events are held at members home, in a rotating fashion. You specify that your activities are not directed to
children, elderly or disabled persons.

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 in order to qualify for exemption, an organization
must be both organized and operated exclusively for one or more exempt purposes. If an organization fails to
meet either of the above tests, the organization will not qualify for exemption.

Treas. Reg. Section 1.501(c)(3)-1(c)(1) states 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 Section 501(c)(3) of the Code. 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 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 the exemption
regardless of the number or importance of truly exempt purposes.

In Minnesota Kingsmen Chess Association v. Commissioner, T.C. Memo 1983-495 (1983), the organization
sponsored chess tournaments, provided chess magazines and books to libraries, offered free chess lessons, and



                                                                                      Letter 4034 (Rev. 01-2021)
                                                                                      Catalog Number 47628K
                                                         3

published a newsletter that primarily contained reports of past tournaments and announcements of future ones.
The petitioner sought exemption under IRC Section 501(c)(3) because its purposes and activities were described
as educational. The court found that the promotion of chess tournaments furthered a substantial recreational
purpose, even though individual participants may have received some educational benefits.

In St. Louis Science Fiction Limited v. Commissioner, 49 T.C. Memo 1985-162, 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 activities.

International Postgraduate Medical Foundation v. Comm’r, T.C. Memo 1989-36 (1989), held if the
organization’s activities are directed at providing opportunities for recreational endeavors, its claim to exempt
status under IRC Section 501(c)(3) will be denied.

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 provide substantial
recreational and social activities to your dues paying members.

You are a club whose dues paying members participate in substantial recreational activities. By organizing
extensive social and recreational activities for your members, you are not exclusively furthering exempt
purposes as required in Treas. Reg. Section 1.501(c)(3)-1(c)(1). Therefore, you do not meet Section 501(c)(3)
because more than an insubstantial part of your activities is not in furtherance of an exempt purpose.

As noted in Better Business Bureau, the presence of a single non-exempt purpose, if substantial in nature, will
preclude exemption under Section 501(c)(3). Operating as a club for the social and recreational interests of your
members furthers a substantial nonexempt purpose and does not qualify you for exemption under Section
501(c)(3).

Finally, you are similar to the organizations in Minnesota Kingsmen Chess Association, St. Louis Science
Fiction Limited, and International Postgraduate Medical Foundation where substantial social and recreational
activities precluded exemption under Section 501(c)(3). You primarily provide social and recreational activities
to your members which precludes you from exemption under Section 501(c)(3).

Conclusion
You do not qualify for federal exemption under Section 501(c)(3) of the code because you are not operated
exclusively for exempt purposes. You provide substantial social and recreational activities to your members
which precludes your from exemption under Section 501(c)(3).

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.




                                                                                       Letter 4034 (Rev. 01-2021)
                                                                                       Catalog Number 47628K
                                                          4

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

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.




                                                                                        Letter 4034 (Rev. 01-2021)
                                                                                        Catalog Number 47628K
                                                        5

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