IRS revokes motorcycle club's charitable exemption

Plain-English summary

A motorcycle club held an annual fundraiser and made donations to community charities, but much of its property and activities served members, families, and guests. The examination found member-only recreational use, restricted membership, interest-free loans to members, personal hardship payments, and help with members' burial expenses. The IRS concluded that these private benefits and the club's substantial social and recreational purpose prevented it from operating exclusively for charitable purposes under IRC § 501(c)(3). It revoked the club's exemption effective on a redacted date, ended the deductibility of later contributions, and required the club to file corporate income tax returns. The attached report explains that some charitable activity did not overcome a substantial noncharitable purpose or private inurement.

Ruling snapshot

• Question: Did the club continue to qualify under IRC § 501(c)(3) despite substantial social, recreational, and financial benefits for members and insiders?
• Outcome: Revocation
• Key authorities: IRC §§ 170, 501(a), 501(c)(3), and 7428; Treas. Reg. § 1.501(c)(3)-1(c) and (d)

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TE/GE: EO Examinations
1100 Commerce Street, MC 4920 DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION March 23, 2016

Taxpayer Identification Number:

Number: 201626025 Person to Contact:

Release Date: 6/24/2016
Identification Number:

UIL: 501.03-00 Contact Telephone Number:

CERTIFIED MAIL — RETURN RECEIPT REQUESTED
Dear

This is a final adverse determination regarding your exempt status under section
501(c)(3) of the Internal Revenue Code (the Code). Our favorable determination letter
to you dated June 20XX is hereby revoked and you are no longer exempt under section
501(a) of the Code effective January 1, 20XX.

The revocation of your exempt status was made for the following reason(s):

You are not operating exclusively for any charitable purpose, educational purpose, or
any other exempt purpose. Our examination reveals that you are not engaged primarily
in activities which accomplish charitable, educational or other exempt purposes as
required by Treas. Reg. 1.501(c)(3)-1(c)(1). Your activities, including your financial
transactions, more than insubstantially furthered non-exempt purposes. Moreover, you
failed to establish that you were not operated for the benefit of private interest of your
members, officers and trustees as required for continued recognition of exemption
pursuant to Treas. Reg. 1.501(c)(3)-1(d)(1)(ii). Your income inured to the benefit of
private shareholders and individuals.

Contributions to your organization are no longer deductible under IRC §170 after
January 1, 20XX.

You are required to file Form 1120 U. S. Corporation Income Tax Return. These
returns should be filed with the appropriate Service Center for all years beginning
January 1, 20XX. We have secured Form 1120 for years ended December 31, 20XX
and December 31, 20XX.


Processing of income tax returns and assessments of any taxes due will not be delayed
should a petition for declaratory judgment be filed under section 7428 of the Internal
Revenue Code.

If you decide to contest this determination under the declaratory judgment provisions of
section 7428 of the Code, a petition to the United States Tax Court, the United States
Claims Court, or the district court of the United States for the District of Columbia must
be filed before the 91st Day after the date this determination was mailed to you. Please
contact the clerk of the appropriate court for rules regarding filing petitions for
declaratory judgments by referring to the enclosed Publication 892. You may write to
these courts at the following addresses:

United States Tax Court United States Court of Federal Claims
400 Second Street, NW 717 Madison Place, NW
Washington, D.C. 20217 Washington, D.C. 20005

United States District Court for the District of Columbia
333 Constitution Avenue, NW
Washington, D.C. 20001

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 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 taxpayeradvocate.irs.gov
or call 1-877-777-4778.

If you have any questions, please contact the person whose name and telephone
number are shown in the heading of this letter.

Sincerely,

Paul A. Marmolejo
Acting Director, EO Examinations

Enclosure:
Publication 892

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
Exempt Organizations: Examinations
1100 Commerce Street MS 4900 DAL

Dallas, TX 75242-1100

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION
January 4, 2016 TIN:
Form:
Tax Year Ended:

Person to Contact:

Dear

We propose to revoke our recognition of your exempt status as an organization described in
section 501(c)(3) of the Internal Revenue Code (the Code). We enclose our report of
examination explaining why we are proposing this action.

If you accept our proposal, please sign and return the enclosed Form 6018, Consent to
Proposed Action - Section 7428, unless you have already provided us a signed Form 6018.
We will issue a final revocation letter determining you are not an organization described in
section 501(c)(3). After the issuance of the final revocation letter we will publish an
announcement that you have been deleted from the cumulative list of organizations
contributions to which are deductible under section 170 of the Code. If you do not respond to
this proposal, we will similarly issue a final revocation letter. Failing to respond to this
proposal may adversely impact your legal standing to seek a declaratory judgment because
you may be deemed to have failed to exhaust administrative remedies.

If you do not agree with our proposed revocation and wish to protest our proposed
revocation to the Appeals Office of the Internal Revenue Service, then you must submit to us
a written request for Appeals Office consideration within 30 days from the date of this letter
to protest our decision. This written request is called a protest. For your protest to be valid it
needs to contain certain specific information, which generally includes a statement of the
facts, the applicable law, and arguments in support of your position. For the specific


information needed for a valid protest, please refer to page 6 of the enclosed Publication
3498, The Examination Process, and page 1 of the enclosed Publication 892, How to Appeal
an IRS Decision on Tax-Exempt Status.

If you do submit a valid protest, then an Appeals officer will review your case. The Appeals
Office is independent of the Director, EO Examinations. The Appeals Office resolves most
disputes informally and promptly. The enclosed Publication 3498 and Publication 892
explain how to appeal an Internal Revenue Service (IRS) decision. Publication 3498 also
includes information on your rights as a taxpayer and the IRS collection process. Please
note that Fast Track Mediation Services referred to in Publication 3498 generally do not
apply after issuance of this letter. You may also request that we refer this matter for
Technical Advice as explained in Publication 892 and an annual revenue procedure. Please
contact the individual identified on the first page of this letter if you are considering
requesting Technical Advice. If we issue a determination letter to you based on a Technical
Advice Memorandum issued by the EO Rulings and Agreements function, then no further
administrative appeal will be available to you within the IRS on the matter.

If you receive a final revocation letter, you will be required to file Federal income tax returns
for the tax period(s) shown above as well as for subsequent years. You have the right to
contact the office of the Taxpayer Advocate. Taxpayer Advocate assistance is

not a substitute for established IRS procedures, such as the formal appeals process. The
Taxpayer Advocate cannot reverse a legally correct tax determination, or extend the time
fixed by law that you have to file a petition in a United States court. The Taxpayer Advocate
can, however, see that a tax matter that may not have been resolved through normal
channels gets prompt and proper handling. You may call toll-free, 1-877-777-4778, and ask
for Taxpayer Advocate Assistance. If you prefer, you may contact your local Taxpayer
Advocate at:

Internal Revenue Service
Office of the Taxpayer Advocate

If you have any questions, please call the contact person at the telephone number shown in
the heading of this letter. If you write, please provide a telephone number and the most
convenient time to call if we need to contact you.


Thank you for your cooperation.

Sincerely,

Margaret Von Lienen
Director, EO Examinations

Enclosures:

Form 4621-A

Form 886-A

Agreement Form 6018
Publications 3498, 5, and 892

Form 886-A Department of the Treasury - Internal Revenue Service Report date
Explanation of Items December 4, 2015
Name of Taxpayer Year/Period Ended
December 31, 20XX
ISSUE

Whether an organization that provides substantial private benefit to members and
affiliated individuals is an organization operating within the meaning of IRC 501(c)(3).

FACTS

Organizing Documents

was organized as a non-profit

corporation in the State of in June of 19XX. The Articles of Incorporation state its

exempt purpose is to encourage safe recreational motorcycling; to raise funds for charities
that help youth; and to sponsor social and sporting events related to
Articles include the following clause: "No part of the net earnings of the corporation shall
inure to the benefit of or be distributable to its members, trustees, officers or other private
persons, except that the corporation shall be authorized and empowered to pay
reasonable compensation for services rendered and to make payments and distributions
in furtherance of the purposes [stated above. ]"

Application for Exemption

The filed Form 1024 with the Internal Revenue Service in 19XX requesting tax
exemption under IRC 501(c)(7), but the application was incomplete, so no recognition
resulted. The Club filed Form 1023 in July 20XX requesting recognition under IRC
501(c)(3.)

Attached to the Form 1023 were flyers describing the

held during the last weekend in July for . This is the

main revenue source, a portion of which the organization uses to make charitable

donations that benefit local organizations that serve children, veterans, firemen, etc.
activities include , etc.

In a letter dated June 7, 20XX, the IRS documents a telephone conversation with the
representative . confirmed the organization's

primary activity is that raises money for charitable
causes. The letter states the Service's understanding that the social and recreational
activities of the organization are incidental to the charitable purposes of the organization
and requested confirmation of this. The letter states, as discussed in the conversation,
that while the organization may assist those in distress, the pre-selection of an individual
or family as a recipient of aid does not qualify as an exempt activity under IRC Section
501(c)(3) and could jeopardize a determination of exemption.

In a letter dated June 24, 20XX, the CEO, confirmed
they were made aware of the pre-selection of fundraising does not qualify as an exempt

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -1-


Form 886-A Department of the Treasury - Internal Revenue Service Report date

Explanation of Items December 4, 2015
Year/Period Ended
December 31, 20XX

Name of Taxpayer

activity. Regarding charitable donations, he states that the organization's total net profits
(excluding charitable donations) over the past five years were $ . Of this total,
the organization donated $ , or %, to charitable causes.

confirmed that any social and recreational activities of the organization were incidental to
the charitable purpose of the organization.

Bylaws

The Club's bylaws, updated as of June 20XX, contain the following language:

Membership:

"Persons wanting to join the are only allowed to join between and

. Probationaries must be sponsored by one ; are allowed to sponsor
one per year. New members will then be all summer, totaling

months. will then be voted on at the , as to whether they
are in or out of the or will have a one year extension as a . Also,

are not allowed to vote on anything during their probationary period."

Property:
"Visitors are allowed to come out to the property only if they are with a member. Anyone
caught out there without a member will be arrested for trespassing. Members need to

have their when they are at the property, or be with someone who
does. are only allowed to bring immediate family out to the
property."

Guests:

“Members may invite guests to a function, ( ), but to attend a
meeting, they must be interested in joining . Please no extra people at

meetings if they are not interested in joining.”

Property

The owns acres in ,in County. The property
comprises club building, pond, farm fields, parking lot, children's area, and camper area.
Part of the property is leased to a local farmer for feed crops such as clover or hay, with
the EO receiving percent of net profits.

Club dues are $ /year, with an additional $ = fee if members wish to park a camper
on site year round. One camper spot is allowed per member, but fee is required if member
wishes to use the space.

The also owns non-contiguous additional acres, of which acres are
leased to another local farmer at $ per acre.
Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -2-


Form 886-A Department of the Treasury - Internal Revenue Service Report date
Explanation of Items December 4, 2015
Year/Period Ended
December 31, 20XX

Name of Taxpayer

At the initial interview, the taxpayer confirmed that other than the "
(fundraiser) held for each summer, use of the facility and grounds are
available to club members, families and guests only. The also hosts a Fourth of
July fireworks event open to the public.

According to Form 990, property related expenses (occupancy, depreciation,
repair/maintenance, insurance, and equipment) were $

Activities for members

Holiday parties, outings, suppers, etc. are available only to members/families/guests.
Children's activities funded by the are for children of members.
According to the accounting records, expenses for club activities in 20XX were $

Loans to members

In 20XX, the Club's books and records report the following transactions related to loans to
members:

Loans to Members Amount
Beginning Balance $
New loan to trustee $

Payments received on $
new and existing loans

Ending balance $

The $ loan made in 20XX to a trustee was interest-free, according to the
terms of a written agreement.

"Personal hardship" payments to members

In 20XX, the Club's books and records report the following transactions related to
"personal hardship payments" to members:

Date Check # Payee Amount Purpose

$ Assistance with
travel expenses
related to
serious illness

See above

Information not
available

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -3-


Form 886-A Department of the Treasury - Internal Revenue Service Report date

Explanation of Items December 4, 2015
Year/Period Ended
December 31, 20XX

Name of Taxpayer

Taxpayer describes the purpose of such payments as providing assistance to individuals
in difficult situations which have arisen through "no fault of the their own", such as illness,
disasters, etc. Taxpayer states that personal hardship assistance was technically available
to non-members as well as members, but availability of assistance was not publicized.

Payment of funeral expenses for certain members

In the year under examination, the reported $ in burial expenses ($
paid to veterans’ organizations and $ to a fundraiser for an individual.) In other
years, the has helped to pay burial expenses of individual members.
Documentation voluntarily provided to the examiner shows burial expenses of $ in
20XX for one member and $ in 20XX for another member.

Charitable/community activities

The Club donates a percentage of its assets each year to support charities in the local
community. In 20XX, the organization gave $ to community organizations . Per
Form 990, gross revenue from the annual party was $ , with $ in
related expenses. Assets at January 1, 20XX were $ . Donations
therefore represent % of the $ net income from the annual fundraiser, or
% of assets at the beginning of the year. Charitable donations include revenue generated
from an annual " "to raise money to purchase holiday toys for children in
need.

The also participates in Department of Transportation's "Adopt a
Highway" program (volunteer highway cleanup.)

Law

Internal Revenue Code 501(c)(3) provides exemption from federal income tax for
organizations that are "organized and operated exclusively" for religious, educational, or
charitable purposes. The exemption is further conditioned on the organization being one
where "no part of the net income inures to the benefit of any private shareholder or
individual."

Treasury Regulation 1.501(c)(3)-1(c)(2) explains the prohibition against private inurement
as follows: Distribution of earnings. An organization is not operated exclusively for one or
more exempt purposes if its net earnings inure in whole or in part to the benefit of private
individuals. For the definition of the words "private shareholder or individual," see
paragraph (c) of section 1.501(a)-1.

Treas. Reg. 1.501(c)(3)-1(c)(1): (c) Operational test. (1) Primary Activities. 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

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -4-


Form 886-A Department of the Treasury - Internal Revenue Service Report date
Explanation of Items December 4, 2015

Year/Period Ended
December 31, 20XX

Name of Taxpayer

specified in 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. 1.501(c)(3)-1(d)(1)(ii) states that an organization is not organized or operated
exclusively for exempt purposes unless it serves a public rather than a private interest.
The regulation places the burden of proof on the organization to demonstrate that it is not
organized or operated for the benefit of private interests such as designated individuals,
the creator or his family, shareholders of the organization, or persons controlled directly or
indirectly by such private interests.

In Spokane Motorcycle Club v. U.S., 222 F. Supp. 151 (E.D. Wash. 1963), net profits were
found to inure to private individuals where refreshments, goods and services amounting to
$825 (representing some 8% of gross revenues) were furnished to members.

In Hoffer v. U.S., 64 Cl. Ct. 672 (1928), where the property and income of a religious
community was held for the common use and benefit of its members to be used for their
support and maintenance (and the support and maintenance of the heirs of deceased
members), the Court of Claims found that there was inurement of net earnings to the
benefit of private shareholders or individuals.

In Beth-El Ministries, Inc. V. U.S., 79-2 USTC 9412 (D.C. D.C. 1979), exemption was
denied because the organization failed to meet its burden to show that no part of its net
earnings inured to the benefit of any of its members, who were entitled to receive benefits
in the form of food, clothing, shelter, medical care, recreational facilities, and educational
services in exchange for a commitment by donating all possessions and salaries to the
organization.

In Better Business Bureau v. U.S., 326 U.S. 279 (1945), the Court held that an
organization which engaged in some educational activity but pursued nonprofit goals
outside the scope of the statute was not exempt under IRC 501(c)(3). The Court stated
that an organization is not operated exclusively for charitable purposes if it has a single
noncharitable purpose that is substantial in nature.

In North American Sequential Sweepstakes v. Commissioner, 77 T.C. 1087 (1981), the
Tax Court found that the organization's primary purpose was to hold a recreational event
for the benefit of a few skydivers, particularly the organization's founders.

In The Callaway Family Association, Inc. v. Commissioner, 71 T.C. 340 (1978), the Tax
Court noted that the Service had, in effect, conceded that the organization did have some
educational purposes. However, exemption had been denied not because the organization
had no educational purposes, but because its activities taken as a whole were not
exclusively in furtherance of exempt purposes. The primary benefit of the Association's
activities flowed directly to family members. Any benefit to the general public was clearly a
secondary and incidental result of the Association's activities.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -5-


Form 886-A Department of the Treasury - Internal Revenue Service Report date

Explanation of Items December 4, 2015
Year/Period Ended
December 31, 20XX

Name of Taxpayer

In United Cancer Council v. Commissioner, 165 F.3d 1173, 1176 (7th Cir. 1999), the Court
stated "A charity is not to siphon its earnings to its founder, or the members of its board,
or their families, or anyone else fairly to be described as an insider, that is, as the
equivalent of an owner or manager."

In Capital Gymnastics Booster Club, Inc., T.C. Memo 2013-193, it was held that
Organization's fundraising activities conferred a more than insubstantial benefit on the
families who participated in the fundraising. In this case, the Court stated "The issue here
is not whether [CG] had any charitable purpose but whether (as the statute requires) it was
operated exclusively for exempt purposes. We hold it was not."

In General Counsel Memorandum 38459, Chief Counsel had observed that "an
organization which serves a private interest other than incidentally is not entitled to
exemption as an organization described in section 501(c)(3). Thus, although an
organization's operations serve a public interest, exemption will be denied if private
interests are also served." In G.C.M. 38459 Chief Counsel reaffirmed the standards
previously set forth in G.C.M. 37789 (December 18, 1978) for determining whether private
benefit is more than incidental. The discussion in G.C.M. 37789 on this point is set forth
below.

...[I]f an organization serves a public interest and also serves a private interest other than
incidentally, it is not entitled to exemption under section 501(c)(3)... This proposition is
simply an expression of the basic principle underlying the enforcement of charitable trusts
and their exemption from federal income taxation under section 501(c)(3): Their property
is devoted to purposes which are considered beneficial to the community in general, rather
than particular individuals. See, e.g., IV A. Scott on Trusts, section 348 (3d ed. 1967).
Thus, although an organization's operations may be deemed to be beneficial to the

public, ...if it also serves private interests other than incidentally, it is not entitled to
exemption.

Taxpayer Position

believes it is operating for exempt purposes by hosting an
annual fundraiser and contributing a portion of the net proceeds to charitable causes, in
addition to supporting programs that provide toys for children in need.

Government Position

Examination shows that the social, recreational, and other private benefit to
members, including officers and trustees, is significant. Examples of private benefit to
members includes the following:

• The property, including building and acre grounds, is
available year round to members only for activities such as meetings, parties,

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -6-


Form 886-A Department of the Treasury - Internal Revenue Service Report date

Explanation of Items December 4, 2015
Year/Period Ended
December 31, 20XX

Name of Taxpayer

camping, and special events. The property is open to the public only a year
for the and on the Fourth of July for a fireworks display. The
bylaws state that visitors on the grounds who are not accompanied by a member
are trespassing.

• Membership is restricted by the policies. Potential members must be
sponsored by an existing member, pass a one year probationary period, and must
be accepted by a membership vote.

• Holiday parties, outings, suppers, etc. are available only to embers/families/guests.

Children's events and parties funded by the are only for children of
members.
• The made interest-free loans to members, including officers. (In 20XX,

at least one loan was written for "random amounts" under a "one year renewable"
agreement, similar to a revolving line of credit.)

• The made personal hardship payments to members.

• The has helped to pay burial expenses for members.

• The has approximately members. Dues are $ per year. There
is a camper fee of $ per year, which covers year round space on the

grounds for one personal camper, that is recorded as dues.

Sources of funds per Form 990:

Net annual $
party income
Net farm $
income & USDA
payments
Membership $
dues and
camper fees
Investment $
income
Other income
Total

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -7-


Form 886-A Department of the Treasury - Internal Revenue Service Report date
Explanation of Items December 4, 2015
Year/Period Ended
December 31, 20XX

Name of Taxpayer

Uses of funds per Form 990 and books:

Grants and $
other assistance
(charitable
donations)

Administrative $
exp.

Expenses $
related to
property used
year round by
members

Hardship $
payments to
members

Bereavement $
and sickness

Other

$
Total $

Examination shows that the operational test for an IRC 501(c)(3) organization is not met,
because the Club's activities more than insubstantially — in fact, primarily -serve a non —
exempt purpose of social and recreational benefit of members.

Note: Although the Club's operates somewhat like an IRC 501(c)(7) social club, its current
activities result in significant non-member income that would preclude it from exemption
under that subsection.

Conclusion

, DBA , provides more than insignificant
private benefit to members and affiliated individuals. It is therefore not an organization
recognized as exempt from Federal income tax under IRC Section 501(a) described in
Section 501(c)(3). The organization's exempt status is revoked effective January 1, 20XX.
The organization is required to file Form 1120, U.S. Corporation Income Tax Return, for
the period ended December 31, 20XX, and all subsequent periods.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -8-