IRS denies 501(c)(3) status to a neighborhood watchdog LLC

Plain-English summary

The IRS issued a final adverse determination denying tax-exempt status under IRC § 501(c)(3) to a limited liability company that advocated for neighborhood residents on zoning, development, and historic-preservation matters. The organization failed the organizational test because its governing documents did not include the provisions required for an exempt LLC, and the organization did not submit an operating agreement. It also failed the operational test because substantial advocacy and efforts to influence legislation served the private interests of a member and local property owners. The IRS characterized those activities as making the organization an action organization and concluded that they were not exclusively charitable or educational. Donors generally cannot deduct contributions to the organization under IRC § 170.

Ruling snapshot

• Question: Does the neighborhood watchdog LLC qualify for exemption under IRC § 501(c)(3)?
• Outcome: Denied.
• Key authorities: IRC §§ 501(a), 501(c)(3), 170, 508(e)(1), 6104(c), 6110, and 7428(b)(2); Treas. Reg. §§ 1.501(c)(3)-1(a)(1), (c)(1), (c)(3), and (d)(1)-(3); Notice 2021-56; Rev. Rul. 67-6; Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945).

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities

Date:
06/10/2026
Employer ID number:

Form you must file:

Tax years:
Release Number: 202636019
Release Date: 9/4/26
Person to contact:
Name:
UIL Code: 501.03-00, 501.03-25, 501.03-30, 501.35-00, 501.38-01
Telephone:

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
Redacted Letter 4038

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

Department of the Treasury
Internal Revenue Service

Date:
04/17/2026
Employer ID number:

Person to contact:

Name:
ID number
Telephone:
Fax
Legend: UIL:
B = Date 501.03-00
C = State 501.03-25
D = Name 501.03-30
E = Name 501.35-00
F = Entity 501.38-01
G = Number
H = Entity

J = Ordinance

t percent = Percent
u percent = Percent
v percent = Percent
w percent = Percent
x percent = Percent
y percent = Percent

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 formed as a limited liability company (LLC) on B, in C. Your Articles of Organization state that you are formed to engage in any lawful activity for which limited liability companies may be formed. They further state that you are manager managed, and that your sole manager is D. You provided Articles of Amendment that do not show proof of filing with the C Secretary of State. These unfiled articles contain updated purpose and dissolution provisions and a Conflict of Interest Policy. Neither your Articles of Incorporation, nor your unfiled Articles of Amendment, contain express Chapter 42 compliance provisions described in Section 508(e)(1).

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

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You identify as an independent watchdog group for the development and historic preservation of the E neighborhood. Your primary activity is advocating for E neighbors at municipal meetings on zoning, city planning, historic preservation, and legislative and appellate matters at the F. You advocate for the rights of residents in opposition to inappropriate commercial incursions or in opposition to demolition applications. You have filed lawsuits on behalf of neighbors on G occasions and have also attempted to file an injunction to halt a demolition. You allocate t percent of your total time and u percent of your total expenses to these activities.

You monitor developers who introduce inappropriate commercial uses and architectural styles into the residential neighborhoods, primarily, the practice of converting old houses to private dormitories for college students. You also compile news and value-added data on development activity, permit violations, and the response of city agencies in consultation with neighbors and community groups. This information is distributed to the public via social media, email, and through your website. You allocate v percent of your time and w percent of your expenses to these activities.

You also preserve the character of G historic commercial corridors. You dedicate x percent of your total time and y percent of your total expenses to these activities.

You further state that on a few occasions each year you present written and spoken public comments in H hearings to suggest changes to the cities J in support of residents, both homeowners and renters, and in opposition to developers who are engaged in the gentrification and commercialization of residential-zoned neighborhoods. You state that you allocate less than x percent of your total time to these activities.

All of your activities are conducted solely by your sole member D. You are funded by D’s donated funds and from a few private donations. Due to this you requested exemption under IRC Section 501(c)(3) with classification as a private operating foundation. Your expenses include professional fees, neon sign repairs, zoning appeal filing fees, services and supplies, advertising, video production, and occupancy expenses.

Law

IRC Section 501(c)(3) provides for the recognition of exemption of organizations that are organized and operated exclusively for educational, 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) 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 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(c)(3)(i) states that an organization is not operated exclusively for one or more exempt purposes if it is an "action" organization as defined in subdivisions (ii), (iii), or (iv) of this subparagraph.

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

3

Treas. Reg. Section 1.501(c)(3)-1(c)(3)(ii) states that an organization is an “action” organization if a substantial part of its activities is attempting to influence legislation by propaganda or otherwise. For this purpose, an organization will be regarded as attempting to influence legislation if the organization:

a) Contacts, or urges the public to contact, members of a legislative body for the purpose of proposing, supporting, or opposing legislation; or b) Advocates the adoption or rejection of legislation.

The term legislation, as used in this subdivision, includes action by the Congress, by any State legislature, by any local council or similar governing body, or by the public in a referendum, initiative, constitutional amendment, or similar procedure. An organization will not fail to meet the operational test merely because it advocates, as an insubstantial part of its activities, the adoption or rejection of legislation.

Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated exclusively for exempt purposes unless it serves a public rather than a private interest. To meet this requirement, it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests.

Treas. Reg. Section 1.501(c)(3)-1(d)(2) provides a definition of the term "charitable" used in IRC Section 501(c)(3) of the Code that includes relief of the poor and distressed or of the underprivileged; advancement of religion; advancement of education or science; erection or maintenance of public buildings, monuments or works; lessening the burdens of government and promotion of social welfare by organizations designed to accomplish any of the above purposes. The fact that an organization in carrying out its primary purpose, advocates social or civic changes or presents opinion on controversial issues with the intention of molding public opinion or creating public sentiment to an acceptance of its views does not preclude such organization from qualifying under Section 501(c)(3) so long as it is not an "action" organization.

Treas. Reg. Section 1.501(c)(3)-1(d)(3)(i) describes the meaning of “educational” to include a) the instruction

or training of the individual for the purpose of improving or developing the individual's capabilities; or b) the instruction of the public on subjects useful to the individual and beneficial to the community. It also provides, in part, that an organization may be educational even though it advocates a particular position or viewpoint so long as it presents a sufficiently full and fair exposition of the pertinent facts to permit an individual or the public to form an independent opinion or conclusion. On the other hand, an organization is not educational if its principal function is the mere presentation of unsupported opinion.

Notice 2021-56, 2021-45 I.R.B. 716, 2021, sets forth current standards that a limited liability company (LLC) must satisfy to receive a determination letter recognizing it as tax-exempt under IRC Section 501(a) and described in Section 501(c)(3).

Notice 2021-56, Section 3.02 provides the required provisions that an LLC must have in their articles of organization and operating agreement. To qualify, both the LLC's articles of organization and its operating agreement must include:

1) Provisions requiring that each member of the LLC be either (i) an organization described in IRC Section 501(c)(3) and exempt from taxation under Section 501(a) or (ii) a governmental unit described in Section 170(c)(1) (or wholly owned instrumentality of such a governmental unit).

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

4

2) Express charitable purposes and charitable dissolution provisions in compliance with Treas. Reg. Sections 1.501(c)(3)-1(b)(1) and (4).

3) The express Chapter 42 compliance provisions described in Section 508(e)(1), if the LLC is a private foundation.

4) An acceptable contingency plan (such as suspension of its membership rights until a member regains recognition of its Section 501(c)(3) status) in the event that one or more members cease to be Section 501(c)(3) organizations or governmental units (or wholly owned instrumentalities thereof).

Notice 2021-56, Section 3.03 provides required provisions regarding representation on enforceability. The LLC must represent that all provisions in its articles of organization and operating agreement are consistent with applicable state LLC law and are legally enforceable.

Revenue Ruling 67-6, 1967-1 C.B. 135, holds that an association whose activities are primarily devoted to preserving the traditions, architecture, and appearance of a community by means of individual and group action before the local legislature and administrative agencies with respect to zoning, traffic, and parking regulations may be exempt from federal income tax under IRC Section 501(c)(4). It is not exempt under Section 501(c)(3).

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) 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 Section 501(c)(3). Based on the information you provided in your application, we conclude that you fail both tests.

Organizational Test

You do not pass the organizational test because you do not meet the organizational requirements outlined in Notice 2021-56 including Sections 3.02 and 3.03. You did not submit an operating agreement. Your Articles do not include provisions requiring that each member of the LLC be either (i) an organization described in IRC Section 501(c)(3) and exempt from taxation under Section 501(a) or (ii) a governmental unit described in Section 170(c)(1) (or wholly owned instrumentality of such a governmental unit). Instead, you have D as your single person member. Although you submitted an amendment to your Articles of Organization to include express charitable purposes and charitable dissolution provisions, this amendment does not show any evidence of being

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

filed with the C Secretary of State. Your Articles do not include express Chapter 42 compliance provisions described in Section 508(e)(1), as a private operating foundation. Your Articles do not contain an acceptable contingency plan (such as suspension of its membership rights until a member regains recognition of its Section 501(c)(3) status) in the event that one or more members cease to be Section 501(c)(3) organizations or governmental units (or wholly owned instrumentalities thereof). You have not provided representation that all provisions in your Articles of Organization are consistent with applicable state LLC law and are legally enforceable.

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

Operational Test
The news and value-added data you distribute to the public in an effort to monitor developers and violations and preserve your neighborhood seems to be presented sufficiently with a full and fair explanation of the relevant facts to permit the public to form an independent opinion. This appears educational within the meaning of IRC Section 501(c)(3) and Treas. Reg. Section 1.501(c)(3)-1(d)(3)(i).

Although some of your activities are educational and charitable in nature, your activities are not exclusively charitable and educational. Your advocacy efforts and attempts to influence legislation serve the private interests of D and their neighbors. These activities are substantial and involve advocating for the adoption or rejection of legislation which would classify you as an “action” organization described in Treas. Reg. Section 1.501(c)(3)-1(c)(3)(ii). The substantial nature of these activities precludes exemption as described in Better Business Bureau, Treas. Reg. Section 1.501(c)(3)-1(c)(3)(i), and Treas. Reg. Section 1.501(c)(3)-1(d)(2).

Operating to benefit local property owners and being organized as a single person member LLC serves private interests, not public interests as described Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii). You are not “operated exclusively” for exempt purposes as described in Treas. Reg. Section 1.501(c)(3)-1(c)(1) since more than an insubstantial part of your activities are not in furtherance of an exempt purpose. This substantial non-exempt purpose, as explained in Better Business Bureau, destroys your claim for exemption regardless of the number or importance of truly exempt purposes.

You are like the organization described in Rev. Rul. 67-6 which was not found to be exempt under IRC Section 501(c)(3). You take action to preserve architectural appearances, advocate at municipal meetings on zoning, planning, historic preservation, and legislative and appellate matters at F, H, and J meetings/hearings. As described in Rev. Rul. 67-6, preserving the traditions, architecture, and appearance of a community for the benefit solely of residents of the community, as distinguished from the general public both within and without the community involved, is not charitable. These actions also classify you as an “action” organization as described in Treas. Reg. Section 1.501(c)(3)-1(c)(3)(ii), as described above.

Conclusion

Based on the above facts and analysis, you do not qualify for exemption under IRC Section 501(c)(3). You fail both the organizational and operational tests. You fail the organizational test because you were formed as a single person member LLC and do not meet the requirements of Notice 2021-56. You fail the operational test because you have substantial non-exempt purposes serving as an “action” organization for the private interests of property owners in E.

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

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

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• 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.

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

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

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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