IRS denies 501(c)(3) status to a club whose charity was incidental to its social events

Plain-English summary

The IRS denied tax-exempt status under section 501(c)(3) to an unincorporated membership club. The group described itself as a social organization that promotes individuality and self-expression through the display, exhibition, and celebration of a particular activity, with members drawn by unanimous vote of a governing Council, residency and attendance requirements, dues, and monthly social gatherings at which it collected donations for charity. The IRS found the group failed on two independent grounds. First, the organizational test: its charter did not contain the purpose and dissolution language section 501(c)(3) requires, and its stated purpose (promoting individuality and self-expression for members) was broader than what 501(c)(3) allows. Second, the operational test: more than an insubstantial part of its activities was social, and its charitable and educational efforts were incidental to those social events (for example, its event flyer promoted only the social gathering, not charity). Because a single substantial non-charitable purpose defeats exemption regardless of any charitable purposes, the IRS concluded the club did not qualify, so donors cannot deduct contributions under section 170 and the club must file income tax returns. The group did not file a protest within 30 days, which made the proposed denial final.

Ruling snapshot

• Question: Does a membership club that runs primarily social events, with charitable collections incidental to them, qualify for exemption under section 501(c)(3)?
• Outcome: Denied (final adverse determination; no protest filed)
• Key authorities: IRC § 501(c)(3); Treas. Reg. §§ 1.501(c)(3)-1(a)(1), -1(b)(1)(iv), -1(c)(1), -1(d)(2), -1(d)(3)(i); Rev. Rul. 77-366; Rev. Rul. 78-305; Better Business Bureau v. United States

Full text (IRS public release)

[IRS logo] Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201

Date:
Release Number: 201852020 October 2, 2018
Release Date: 12/28/2018 Employer ID number:

UIL Code: 501.03-00, 501.03-30
Contact person/ID number:

Contact telephone number:
Form you must file:

Tax years:

Dear

This letter is our final determination that you don't qualify for tax-exempt status under Section 501(c)(3) of the
Internal Revenue Code (the Code). 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 Section 501(c)(3) of the Code, donors can't
deduct contributions to you under Section 170 of the Code. You must file federal income tax returns for the tax
years listed at the top of this letter using the required form (also listed at the top of this letter) within 30 days of
this letter unless you request an extension of time to file.

We'll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection (as required under Section 6110 of the Code) after deleting certain identifying information.
Please read the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that
show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Notice
437 on how to notify us. If you agree with our deletions, you don't need to take any further action.

We'll also notify the appropriate state officials of our determination by sending them a copy of this final letter
and the proposed determination letter (under Section 6104(c) of the Code). You should contact your state
officials if you have questions about how this determination will affect your state responsibilities and
requirements.

Letter 4038 (Rev. 7-2014)
Catalog Number 47632S

If you have questions about this letter, you can contact the person listed at the top of this letter. If you have
questions about your federal income tax status and responsibilities, call our customer service number at

1-800-829-1040 (TTY 1-800-829-4933 for deaf or hard of hearing) or customer service for businesses at
1-800-829-4933.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Notice 437

Redacted Letter 4036, Proposed Adverse Determination Under IRC Section 501(c)(3)
Redacted Letter 4038, Final Adverse Determination Under IRC Section 501(c)(3) - No Protest

Letter 4038 (Rev. 7-2014)
Catalog Number 47632S

P.O. Box 2508

[IRS logo] Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201

Date:
August 8, 2018

Employer ID number:
Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:
501.03-00
C = Formation date 501.03-30

D = Objects related to club purposes
E = Membership criteria

F = Meeting place

H = Particular type of club event

Dear

We considered your application for recognition of exemption from federal income tax under Section 501(a) of
the Internal Revenue Code (the Code). Based on the information provided, we determined that you don't qualify
for exemption under Section 501(c)(3) of the Code. This letter explains the basis for our conclusion. Please
keep it for your records.

Issues
Do you qualify for exemption under section 501(c)(3) of the Code? No, for the reasons stated below.

Facts

You are an unincorporated association formed on C as "a social organization that promotes individuality and
self-expression of members and the public through education and the display, exhibition and celebration of D in
a non-judgmental and encouraging environment."

You are governed by the Council, new members of which are selected from the general membership by the
unanimous vote of the Council. Your membership is limited to E. Members must agree to abide by your charter
and bylaws and must reside within a -mile radius of the club's home F. They must attend at least one club
event each quarter and pay annual dues. Dues are used to cover incidental costs such as website and entry fees
for activities such as parades. Members have the right to purchase club patches and pins with the club's
insignia.

Club events include H, club socials, club fundraisers or other club sanctioned events. You have monthly socials
at a F or other public establishments. It is unclear how H differ from club socials; however, a flyer you shared
indicates that H are held monthly. The events are also open to the general public. You charge no fees for the
monthly socials. However, you collect donations at the monthly social events and contribute them to selected
charities.

2

You offer hands-on training in certain skills and techniques of interest to your members. Occasionally you
provide educational opportunities about community history and you sponsor an annual pageant. H are posted on
a public Facebook page; educational events are posted on a private Facebook page. The member hosting the
educational event informs H attendees of the event and, after screening those interested in participating, invites
participants to the event venue.

You estimate that [ ] percent of your total time is devoted to social events and [ ] percent of your total time is
devoted to educational activities.

Your projected income includes donations from your members, donations received from monthly F socials, and
annual fundraising income from educational events.

Law
Section 501(c)(3) of the Code describes corporations organized and operated exclusively for charitable purposes
no part of the net earnings of which inures to the benefit of any private shareholder or individual.

Section 1.501(c)(3)-1(a)(1) of the Income Tax Regulations provides that, for an organization to be exempt
under section 501(c)(3) of the Code, it 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 or operational test,
it is not exempt.

Treas. Reg. Sec. 1.501(c)(3)-1(b)(1)(iv) of the regulations provides that in no case shall an organization be
considered organized exclusively for one, or more exempt purposes, if, by the terms of its articles, the purposes
for which such organization is created are broader than the purposes specified in section 501(c)(3).

Treas. Reg. Sec. 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as "operated exclusively" for
one or more exempt purposes only if it engages primarily in activities which accomplish one or more such
exempt purposes 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. Sec. 1.501(c)(3)-1(d)(2) provide that the term "charitable" is used in IRC 501(c)(3) in its generally
accepted legal sense and 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 of the burdens of government; promotion of social welfare.

Treas. Reg. Sec. 1.501(c)(3)-1(d)(3)(i) defines education as (a)"the instruction or training of the individual for
the purpose of improving or developing his capabilities" or (b)."the instruction of the public on subjects useful
to the individual and beneficial to the community."

Revenue Ruling 77-366, 1977-2 C.B. 192 describes a nonprofit organization that arranges and conducts winter
cruises during which activities to further religious and educational purposes are provided in addition to
extensive social and recreational activities. It did not operate exclusively for exempt purposes and therefore did
not qualify for exemption.

Rev. Rul. 78-305, 1978-2 C.B. 172 describes an organization formed to educate the public about
homosexuality in order to foster an understanding and tolerance of homosexuals and their problems, which

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

3
qualifies for exemption under Section 501(c)(3) of the Code. The organization collects factual information
relating to the role of in society and disseminates this information through
seminars, forums, and discussion groups to the public. Materials distributed to the public include copies of
surveys, summaries of opinion polls, scholarly statements, publications of government agencies, and policy
resolutions adopted by educational, medical, scientific, and religious organizations. The organization
accumulates factual information through the use of opinion polls and independently compiled statistical data
from research groups and clinical organizations. All materials disseminated by the organization contain a full
documentation of the facts relied upon to support conclusions contained therein.

In Better Business Bureau v. United States, 326 U.S. 278 (1945), the court held that an organization is not
operated exclusively for charitable purposes, and thus will not qualify for exemption under section 501(c)(3), if
it has a single non-charitable purpose that is substantial in nature. This is true regardless of the number or
importance of the organization's charitable purposes.

Application of law
You are not described in Section 501(c)(3) of the Code because you are not organized and operated exclusively

for charitable or educational purposes as required by Section 1.501(c)(3)-1(a)(1) of the regulations.

Organizational Test

Your charter does not contain the required purpose and dissolution provisions of section 501(c)(3) of the Code.
Your stated purpose, to provide social events to promote individuality and self-expression for your membership,
are broader than the purposes specified in section 501(c)(3) and section 1.501(c)(3)-1(b)(1)(iv) of the
Regulations.

Operational Test

Although you state you contribute any donations you receive during your events to charitable organizations and
provide educational opportunities for your membership, more than an insubstantial amount of your total
activities, percent, is devoted to social activities. Furthermore, the collection of donations for charity always
appears to occur in the context of your social events, as incidental to them. For example, your flyer only
promotes attendance at H, making no mention of charitable or educational activities. Your club functions
therefore appear to primarily serve a social purpose, any charitable purpose being subordinate. Social activities
do not further charitable purposes described in Treas. Reg. Sec. 1.501(c)(3)-1(d)(2) or educational purposes
described in Treas. Reg. Sec. 1.501(c)(3)-1(d)(3)(i). Therefore, you are not engaged primarily in activities
which accomplish one or more such exempt purposes specified in section 501(c)(3) as required by section
1.501(c)(3)-(1)(c)(1) of the Income Tax Regulations.

You are like the organization in Rev. Rul. 77-366, which carries on religious and charitable activities, but does
not qualify for exemption because a substantial amount of its time is devoted to social activities.

Like the organization in Better Business Bureau, a single non-charitable purpose that is substantial in nature
defeats exemption for you, regardless of the number or importance of your charitable and educational purposes.

You are distinguished from the organization described in Rev. Rul. 78-305. The activities you have described
as educational are not open to the public. Anyone attending your educational events must go through your
social event to be screened and privately invited to the events. The activities have the character of personal
instruction, and are not designed to foster understanding and tolerance through public seminars, forums, and
discussion groups and publications.

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

Conclusion

Organizational

Based on the above, we find that you are not organized and operated for exempt purposes within the meaning of

section 501(c)(3) of the Code. Specifically, you do not meet the organizational test for exemption because your
organizing document does not contain the necessary 501(c)(3) language.

Operational

You do not meet the operational test for exemption because more than an insubstantial amount of your activities

is social. In order to qualify for exemption under section 501(c)(3), your activities must be exclusively
educational and/or charitable. More than an insubstantial amount of your activities is devoted to social
activities. Accordingly, we conclude you do not qualify for exemption under section 501(c)(3) of the Code.

If you don't agree
You have a right to file a protest if you don't agree with our proposed adverse determination. To do so, you
must send a statement to us within 30 days of the date of this letter. The statement must include:

Your name, address, employer identification number (EIN), and a daytime phone
number

A copy of this letter highlighting the findings you disagree with
An explanation of why you disagree, including any supporting documents
The law or authority, if any, you are relying on

The signature of an officer, director, trustee, or other official who is authorized to sign for the
organization, or your authorized representative

One of the following declarations:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I examined this protest statement, including

accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts and such facts are true, correct, and complete.

For authorized representatives:

Under penalties of perjury, I declare that I prepared this protest statement, including
accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts 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 he or she hasn't

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

5
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 provided a basis for us to reconsider our determination. If
so, we'll continue to process your case considering the information you provided. If you haven't provided a
basis for reconsideration, we'll forward your case to the Office of Appeals and notify you. You can find more
information about the role of the Appeals Office in Publication 892, How to Appeal an IRS Decision on Tax-
Exempt Status.

If you don't file a protest within 30 days, you can't seek a declaratory judgment in court at a later date because
the law requires that you use the IRS administrative process first (Section 7428(b)(2) of the Code).

Where to send your protest
Please send your protest statement, Form 2848, if needed, 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
Room 7-008 550 Main Street, Room 7-008

P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

You can also fax your statement 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 he or she received
it.

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.

You can find all forms and publications mentioned in this letter on our website at www.irs.gov/formspubs. If
you have questions, you can contact the person listed at the top of this letter.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W