202031010: IRS denies 501(c)(3) status to a for-profit used car dealership

Plain-English summary

A domestic for-profit limited liability company operating a used car dealership and repair shop applied for 501(c)(3) status. Its only income came from car sales and repair services, and paid directors, salespeople, and mechanics conducted the daily business. The company advertised used cars, auto services, and financing options to the general public. The IRS found that the for-profit organizational form failed the organizational test and that the commercial dealership activity failed the operational test. Because the business operated like an ordinary for-profit dealership and had no exempt activity, the IRS denied exemption. The proposed denial became final after no protest was filed within 30 days.

Ruling snapshot

• Question: Did a for-profit LLC operating a used car dealership and repair service qualify for exemption under IRC § 501(c)(3)?
• Outcome: denied (final adverse determination after no protest was filed)
• Key authorities: IRC §§ 501(c)(3), 513(a), 513(c); Treas. Reg. § 1.501(c)(3)-1(a)(1), (c)(1), (e)(1); B.S.W. Group, Inc. v. Commissioner; Airlie Foundation v. IRS

Full text (IRS public release)

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

Number: 202031010
Release Date: 7/31/2020

Date: May 8, 2020

Employer ID number:

Contact person/ID number:

Contact telephone number:

UIL Number: 501.00-00, 501.35-00

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

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

Date: March 11, 2020

Employer ID number:

Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend:                                        UIL:
                                               501.00-00
X = Date                                       501.35-00
Y = State

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 on X in Y as a domestic for-profit limited liability company.

Your activities consist of operating a used car dealership, which is opened daily. You sell as well as service
used cars. You have two directors who are husband and wife who are responsible for your daily operations and
are compensated. Other paid employees include salesmen and mechanics.

Your income is solely from the sale of used cars and from repair services that you provide. Your expenses
include compensation, rent, utilities, auto parts and inventory purchases.

Your website describes you as a family owned and operated dealership that offers quality used cars for sale,
auto services and vehicle finance options

Law

IRC Section 501(c)(3) exempts from taxation any corporation organized and operated exclusively for religious,
charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

2

international amateur sports competition, or for the prevention of cruelty to children or animals, provided no
part of the net earnings of which inures to the benefit of any private shareholder or individual.

IRC Section 513(a) describes an “unrelated trade or business” as any trade or business the conduct of which is
not substantially related to the exercise or performance by such organization of its charitable, educational, or
other purpose or function constituting the basis for its exemption under Section 501 Code.

IRC Section 513(c) provides that a “trade or business” includes any activity which is carried on producing
income from the sale of goods or the performance of services. Where an activity carried on for profit
constitutes an unrelated trade or business, no part of such trade or business shall be excluded from such
classification merely because it does not result in profit.

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), an organization must be both organized and operated exclusively for one or
more of the purposes specified in IRC Section 501(c)(3). If an organization fails to meet either the
organizational or 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 which 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(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 purpose of carrying on an unrelated trade or business as defined in
IRC Section 513.

In B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978) the Court considered an organization which
provided consulting services to groups that were mostly IRC 501(c)(3) organizations. The organization charged
fees for its services set close to its own cost. The court concluded that there was nothing to distinguish its
activities from those of an ordinary commercial consulting enterprise and therefore did not qualify for
exemption.

In Airlie Foundation v. Internal Revenue Service, 283 F. Supp. 2d 58 (D.D.C., 2003), the Court determined the
organization was operated for non-exempt commercial purposes rather than for exempt purposes because of the
commercial manner in which the organization conducted its activities. The organization did not qualify for
exemption.

Application of law
You do not meet the requirements for recognition of tax exemption under IRC Section 501(c)(3) because you
fail both the operational and the organizational tests.

You fail the organizational test for IRC Section 501(c)(3) because you were formed as a for profit limited
liability company under Y. Moreover, you fail the operational test because your sole activity is the conduct of a
trade or business for the production of income. You conduct no other activity aside from selling and servicing

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

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used cars at rates similar to that of for-profit businesses. You provide your products and services to anyone
willing to pay for them. Compensated employees also conduct your operations on a regular and continuous
basis. You also offer financing options to qualifying customers. This shows that you operate in the same
manner as any other used car dealership and repair service provider. Based on Treas. Reg. Section 1.501(c)(3)-
1(e)(1), you do not meet the requirements for recognition of tax exemption under Section 501(c)(3) because you
are operated for the primary purpose of carrying on an unrelated trade or business, as defined in IRC Section
513(a) and IRC Section 513(c).

Furthermore, you fail the operational test as described in Treas. Reg. Section 1.501(c)(3)-1(a)(1). You are not
operating per Treas. Reg. Section 1.501(c)(3)-1(c)(1) because you operate for a substantial nonexempt
commercial purpose. Your activities consist of operating a used car dealership and service provider on a daily
basis open to the general public, similar to that of a for profit business.

You are comparable to the organization described in B.S.W. Group, Inc. v. Commissioner, because your
activities constitute the conduct of a trade or business that is ordinarily carried on by commercial ventures
organized for profit. Like a for-profit business, your revenues are solely from fees paid by customers for your
products and services. Paid employees conduct your operations. Therefore, based on the information, you are
operating for substantial nonexempt purposes.

You are similar to the organization described in Airlie Foundation v. Internal Revenue Service, supra. The fact
that you sell products and provide services to the public for a fee directly competes with other businesses that
provide similar products and services. Like any commercial business, your products and services are available
to any individual or organization willing to pay your fees.

Conclusion
Based on the above facts and analysis, you do not qualify for tax exemption because you are neither organized
nor operated exclusively for purposes described in IRC Section 501(c)(3). You were formed as a for profit
limited liability company and you are operating for a nonexempt business purpose. Accordingly, you do not
qualify for exemption under Section 501(c)(3).

If you agree
If you agree with our proposed adverse determination, you don’t need to do anything. If we don’t hear from
you within 30 days, we’ll issue a final adverse determination letter. That letter will provide information on
your income tax filing requirements.

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

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• 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 Decision 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
P.O. 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

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

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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. 11-2018)
Catalog Number 47628K