501(c)(3) exemption denied to a low-income residential-solar operator

Plain-English summary

An organization installs, owns, and operates rooftop solar systems on the
homes of low-income households, then charges those households for the
electricity (through power-purchase agreements or fixed leases) at rates set
below the local utility. It applied for 501(c)(3) charity status, and the IRS
denied it. The IRS found the group's main activity is selling energy, a
commercial trade or business ordinarily run for profit, so it fails the
"operational test" that requires operating exclusively for charitable,
educational, or scientific purposes. Serving low-income customers and doing it
at a discount does not by itself make the activity charitable. The IRS
compared the group to B.S.W. Group and American Institute for Economic
Research (commercial fee-based operations denied exemption) and distinguished
Rev. Rul. 72-560 (a genuinely educational recycling charity). It also cited
Geisinger, noting selling electric power is not itself an exempt purpose.
Because the group didn't protest within 30 days, the denial is final; donations
are not deductible. Mission-driven clean-energy ventures that look and earn
like a utility keep running into this operational-test wall.

Ruling snapshot

• Question: Does an organization that owns residential solar systems and sells the power to low-income homeowners operate exclusively for exempt purposes under § 501(c)(3)?
• Outcome: denied
• Key authorities: IRC § 501(c)(3); IRC § 513; Treas. Reg. § 1.501(c)(3)-1(a)(1), -1(c)(1), -1(d)(2), -1(e)(1); Rev. Rul. 72-369; Rev. Rul. 72-560; Better Business Bureau v. United States, 326 U.S. 279 (1945); American Institute for Economic Research v. United States, 302 F.2d 934 (Ct. Cl. 1962); B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978); Geisinger Health Plan v. Commissioner, 30 F.3d 494 (3d Cir. 1994)

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service 02/20/2026
Tax Exempt and Government Entities Employer ID number:

IRS

Form you must file:
Tax years:

Person to contact:

Release Number: 202620005
Release Date: 5/15/26
UIL Code: 501.33-00, 501.35-00, 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:
01/05/2026

Employer ID number:

Person to contact:

Name
ID number
Telephone
Fax
Legend: UIL:
J = State 501.33-00
K = Date 501.35-00
L = Program 501.36-01

M = Agreements
n dollars = dollar 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 were incorporated in J on K, specifically to promote energy, environmental, and climate fairness by
reducing utility bills and environmental pollution for low-income disadvantaged communities while increasing
housing resilience to the impacts from climate change. To do so, you offer solar power energy mechanisms.
Your main activity is L. The program encompasses three interconnected areas of activity, which work together
to accomplish your purpose of reducing energy insecurity and its associated health and economic burdens.

The cornerstone of your operation involves residential solar photovoltaic (PV) systems and battery storage
equipment. PV systems are made up of PV panels. These PV panels are installed on the roof of a residential
home, typically flush to the roof's surface. Each system has a series of PV panels. When sunlight hits the PV
panels, they convert the sunlight into direct current (DC) electricity. Residential homes use alternating current
(AC) electricity, so the PV system includes an inverter, which inverts the DC current into AC current electricity.
The PV system is activated by turning on the inverter, after receiving permission-to-operate (PTO) from the
utility. The PTO consists of a utility interconnection agreement. The AC current electricity flows into a home's
breaker panel, supplying energy to all the circuits in a home (e.g., appliances, lights, computers, etc.). If a home
needs more electricity than the PV system provides, the additional electricity is supplied by the utility. For

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

2

example, at night when there is no sunlight, 100% of the electricity needed in the home is supplied by the
utility.

You will deploy, own, and manage residential PV systems and battery storage equipment involved in L. You
work with licensed solar contractors selected through competitive bidding across the United States. These
contractors perform physical installations while you maintain ownership and oversight of the systems. Your
target sites are residential properties in low-income and marginalized communities where solar installations are
permitted.

Your team will remotely monitor and manage the systems to ensure optimal performance. The system
development and construction work will be fully funded through foundation grants and construction loans.
Once your systems are placed in service and operating, the construction loans will be paid off using long-term
loans and the monetization of investment tax credits under IRC Section 48C. You will maintain ownership of the
PV systems because homeowners are not eligible to receive elective pay (direct pay) of Section 48E tax credits,
but you would be eligible, if approved as a tax-exempt entity.

Upfront cost of installing a new system costs up to n dollars. You will pay these debt obligations from revenue
provided through M and/or lease payments made by low-income households. The plan is to implement a
financial model that ensures households receive immediate energy cost savings of at least 15 percent (compared
to their previous electric utility costs) while you maintain sustainable operations. Both payment structures (M
and/or lease payments) include 20 to 25-year terms, no upfront costs, and full maintenance for the duration of
the system usage.

M is an agreement between you and the low-income homeowner to pay for the electricity (power)
generated by the PV system at a discounted rate. Thus, saving them a significant amount of money, reducing
their energy insecurity, and allowing them to have more money for food, medicine, and other basic needs.

Leases are also agreements between you and the low-income homeowner for the electricity generated by the PV
system. The difference is that a lease is a fixed monthly payment for the electricity versus M which is a variable
payment based on a price per kilowatt of electricity. The fixed monthly payment for a lease would be
determined by reviewing the historical monthly electric bills that the low-income homeowner is paying their
utility. You will set the lease payment to be less than the average monthly utility bill to save these low-income
households money. Again, reducing their energy insecurity, and allowing them to have more money for food,
medicine, and other basic needs.

The reason you will employ both is because in the United States, certain states only allow M, and certain states
only allow leases. All of which is determined by state law. The U.S. Department of Energy's National
Renewable Energy Laboratory has developed the contract templates they recommend for M and lease payment
plans.

To determine eligibility and qualification for L you will gather information on household income, historical
electricity bills, roof age, condition of heating and cooling appliances, insulation in the home, and condition of
windows and doors. Additionally, a "site visit" to the home will be made by local contractors to physically
inspect the roof (both outside and inside the attic), ensure the space available on the roof for PV panels is not
shaded, and inspect the utility electric meter and electrical breaker panel(s). Qualification is determined by
confirming if the potential user could save a significant amount of money on their electricity bills by using a PV

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

system and that their household income is 80% or less of Area Median Income (AMI). You will also determine
if the home would benefit from new insulation or weatherization improvements.

Once eligibility/qualification is determined, you plan to provide the homeowner with an overview of solar
energy and battery storage and how it would help save them money on their electricity and heating utility bills.
An energy audit would be offered, organized by you with a local contractor to analyze the energy use in the
home and recommend improvements to lighting, heating, ventilation, air conditioning, water heating, insulation,
windows, doors, and appliances. You have not yet developed energy efficiency guidance materials, nor have
you developed any educational materials. However, you have been developing a contractor network, and all the
contractors have their own Solar 101 and Battery 101 tutorials, flyers, and video materials to educate
homeowners.

Your primary revenue will be generated through M and lease payments. You expect less than 10% of your
revenue to come in the form of donations. Your expenses are related to M and lease debt servicing, monitoring
L, insurance and compensation to the governing body members.

Law

IRC Section 501(c)(3) provides, in part, exemption from federal income tax for organizations that are organized
and operated exclusively for religious, charitable, scientific, literary, or educational purposes, provided that no
part of the organization's net earnings inures to the benefit of any private shareholder or individual.

IRC Section 513 provides the term "unrelated trade or business" means any trade or business the conduct of
which is not substantially related (aside from the need of such organization for income or funds or the use it
makes of the profits derived) to the exercise or performance by such organization of its charitable, educational,
or other purpose or function constituting the basis for its exemption under IRC Section 501 except that such
term does not include any trade or business--

(1) in which substantially all the work in carrying on such trade or business is performed for the
organization without compensation; or

(2) which is carried on, in the case of an organization described in IRC Section 501(c)(3), by the
organization primarily for the convenience of its members, students, patients, officers, or employees
which is the selling by the organization of items of work-related clothes and equipment and items
normally sold through vending machines, through food dispensing facilities, or by snack bars, for the
convenience of its members at their usual places of employment; or

(3) which is the selling of merchandise, substantially all of which has been received by the organization as
gifts or contributions.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) provides that in order to be exempt as an organization
described in IRC Section 501(c)(3), the organization must be both organized and operated exclusively for one
or more of the purposes specified in that section. If an organization fails to meet either the organizational or
operational test, it is not exempt.

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

4

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. Further, an organization will not be regarded as operated exclusively for exempt purposes if
more than an insubstantial part of its activities is not in furtherance of exempt purposes.

Treas. Reg. Section 1.501(c)(3)-1(d)(2) provides the term "charitable" is used in IRC Section 501(c)(3) in its
generally accepted legal sense and includes relieving the poor and distressed or the underprivileged, lessening
of the burdens of Government, combating community deterioration, lessening neighborhood tensions, and
eliminating prejudice and discrimination.

Treas. Reg. Section 1.501(c)(3)-1(e)(1) provides that an organization may meet the requirements of IRC Section
501(c)(3) although it operates a trade or business as a substantial part of its activities, if the operation of such
trade or business is in furtherance of the organization's exempt purpose or purposes and if the organization is
not organized or operated for the primary purposes of carrying on an unrelated trade or business.

Revenue Ruling 72-369, 1972-2 C.B. 245, describes an organization that was formed to provide managerial and
consulting service at cost to unrelated exempt organizations does not qualify for exemption. Providing
managerial and consulting services on a regular basis for a fee is a trade or business ordinarily carried on for
profit. The services provided at cost and solely for exempt organizations is not sufficient to characterize the
activity as charitable within the meaning of IRC Section 501(c)(3).

Rev. Rul. 72-560, 1972-2 C.B. 248, describes an exempt organization that sponsors workshops, conferences,
and exhibits to inform the public of the environmental problems caused by solid waste. It also established
centers staffed entirely by volunteers that collected recyclable solid waste, which it sold to commercial
companies for recycling. This organization was determined to be described in IRC Section 501(c)(3), and its
solid waste recycling program was determined to be an essential element of its efforts to educate the public
concerning the environmental problems caused by solid waste.

In Better Business Bureau of Washington, D.C., v. U.S., 326 U.S. 279 (1945), the Court held an organization
qualifying for exemption under IRC Section 501(c)(3) must be exclusively devoted to furthering Section
501(c)(3) purposes and the presence of a single substantial non-exempt purpose will prohibit exemption
qualification regardless of presence of any exempt purposes. Noting an activity can have more than one
purpose, the Court also held that once a substantial non-exempt purpose is established, it is unnecessary to
determine whether there are exempt purposes because exemption is unavailable.

In American Institute for Economic Research v. United States, 302 F. 2d 934 (Ct. Cl. 1962), the Court
considered the status of an organization that provided analyses of securities, industries, and of the economic
climate in general. The organization sold subscriptions to various periodicals and services providing advice for
the purchase of individual securities. Although the court noted that education is a broad concept and assumed
for the sake of argument that the organization had an educational purpose, it held the organization had a
significant non-exempt commercial purpose that was not incidental to the educational purpose. It was, therefore,
not entitled to exemption under IRC Section 501(c)(3).

In B.S.W. Group, Inc., v. Commissioner, 70 T.C. 352 (1978), the court found that a corporation formed to
provide consulting services did not satisfy the operational test under IRC Section 501(c)(3) because its activities
constituted the conduct of a trade or business that is ordinarily carried on by commercial ventures organized for

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

5

profit. Its primary purpose was not charitable, educational, or scientific, but rather commercial. In addition, the
court found that the organization's financials did not resemble that of the typical organization exempt under
IRC Section 501(c)(3). It had not solicited nor received voluntary contributions from the public. Its only source
of income was from fees from services, and those fees were set high enough to recoup all project costs and
produce a profit. Finally, the corporation did not limit its clientele to organizations that were exempt under IRC
Section 501(c)(3).

In Geisinger Health Plan v. Commissioner, 30 F.3d 494 (3rd Cir. 1994) ("Geisinger II"), the Court of Appeals
noted that the electric company described in Treas. Reg. Section 1.502-1(b) served a charitable purpose solely
because it provided an essential service (electric power) exclusively to a tax-exempt university. Providing
electric power to paying customers is not an exempt purpose. However, the power company described in the
Treasury Regulation possessed an exclusive relationship with the university. The power company was a wholly
owned subsidiary of the university to which it supplied power. Supporting the university's educational mission
effectively became the mission of the power company.

Application of law

IRC Section 501(c)(3) sets forth two tests to qualify for tax-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 IRC Section
501(c)(3). You do not meet the operational test under Section 501(c)(3) because you are not operating
exclusively for charitable, educational, or scientific purposes as required under Treas. Reg. Section 1.501(c)(3)-
1(c)(1). Your primary activity is selling energy systems. You expect revenue from this activity to comprise a
significant portion of your income.

Although Treas. Reg. Section 1.501(c)(3)-1(e)(1) indicates that an organization can satisfy the requirement for
exemption under IRC Section 501(c)(3) if the organization operates a business as a substantial part of its
activities, such business must be in the furtherance of an exempt purpose and if the organization is not
organized or operated for the primary purposes of carrying on an unrelated trade or business. See IRC Section
513. Your primary purpose and operations are in furtherance of selling energy systems and charging for the use
of the energy generated by such systems.

The fact that you target low-income communities and households does not substantiate your claim for
exemption. As noted in Rev. Rul. 72-369, providing services at cost and solely for exempt recipients is not
sufficient to characterize a commercial activity as charitable as described in Treas. Reg. Section 1.501(c)(3)-
1(d)(2). See American Institute for Economic Research

You are like the organization described in B.S.W. Group, Inc., because you are operating for a substantial
nonexempt commercial purpose. Like the organization denied exemption in the ruling, you rely on fees from
services, where fees are set high enough to recoup all project costs. Donations and contributions only account
for a minimal amount of your revenue.

You are not like the organization granted exemption in Rev. Rul. 72-560, because you have not demonstrated
any significant educational programing. In the ruling, the educational program was robust, including
workshops, exhibits and conferences. The organization recognized as exempt in that ruling also provided a
recycling program to further their educational program and to combat environmental deterioration. Their
recycling program involved voluntary labor, and any income derived from sales of recyclables was incidental.
You intend to promote energy and climate fairness while combatting environmental pollution for low-income

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

6

communities. However, your main program is selling energy systems, you will be compensated for your efforts
and eventually will operate just like a utility company. You have provided no educational materials or plans to
educate the public on how they can make use of solar energy other than by purchasing (or leasing) your product.
Thus, your overall motive is to promote your product.

You have not demonstrated you operate exclusively for an exempt purpose. Electrical energy sales, or the
provision of electrical energy, are activities often carried out by energy utility companies as an ordinary trade or
business. As stated in Geisinger Health Plan, the provision of electrical power is not, in of itself, an exempt
purpose. Thus, your activities further a non-exempt purpose.

Therefore, as noted in Better Business Bureau of Washington, D.C, once a non-exempt purpose is established, it
is unnecessary to determine whether there are exempt purposes because exemption is unavailable. You have not
demonstrated that you are operated for an exempt purpose, therefore your request should be denied.

Conclusion

Your operations do not demonstrate that you will operate exclusively for any exempt purpose. Moreover, your
plan shows that you intend to operate in a commercial manner. Thus, you do not meet the operational test and
cannot be granted recognition as being exempt under IRC Section 501(c)(3). Donations to you are not
deductible to the 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

7

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