202031011: IRS denies 501(c)(3) status to an organization running rodeos and recreational events

Plain-English summary

An organization formed to promote education, recreation, the Western way of life, and equine sports applied for 501(c)(3) status. It ran rodeos, barrel racing, roping, and other prize-based events throughout the year without training programs or formal participation requirements. Most spending went to prizes, outside services, and event operations, while less than 10 percent of proceeds would support charitable contributions. The IRS found that the organization's articles expressly included social and recreational purposes and that its activities did not have an educational or other exempt element. Because the recreational purpose was substantial, the organization was not organized and operated exclusively for a 501(c)(3) purpose. The proposed denial became final after no protest was filed within 30 days.

Ruling snapshot

• Question: Did an organization primarily operating rodeos and other recreational events qualify for exemption under IRC § 501(c)(3)?
• Outcome: denied (final adverse determination after no protest was filed)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a)(1), (b)(1)(iv), (c)(1); Rev. Rul. 67-216; Rev. Rul. 68-224

Full text (IRS public release)

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

Number: 202031011
Release Date: 7/31/2020

UIL Number: 501.03-30; 501.36-02

Date: May 8, 2020

Employer ID number:

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 (IRC). 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) of the Code, donors can’t
deduct contributions to you under IRC 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 IRC 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.

We sent a copy of this letter to your representative as indicated in your power of attorney.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Notice 437
Redacted Letter 4034, Proposed Adverse Determination Under IRC Section 501(a)
Redacted Letter 4038, Final Adverse Determination Under IRC Section 501(c)(3) - No Protest

cc:

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

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

Date: March 5, 2020

Employer ID number:

Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend:                                        UIL:
                                               501.03-30
X = State                                      501.36-02
Y = Date
Z = City
w dollars = $

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 Section 501(c)(3).
This letter explains the reasons for our conclusion. Please keep it for your records.

Issue

Do you qualify for exemption under IRC Section 501(c)(3)? No, for the reasons stated below.

Facts

You were incorporated in X on Y to promote education and educational opportunities as well as to promote
social and recreational activities for the residents of Z and surrounding areas. Your goal is to be able to continue
the longstanding tradition of the “Western Way” of life and equine sports.

You offer rough-stock events such as Barrel Racing (Adult and Youth), Team Roping (Adult and Youth),
Community Rodeo (Adult and Youth), Ground Events without a horse (Adult and Youth) such as Greased Pig,
Goat Race, Boot Race and Dummy Roping where participants win prizes. These recreational events are
conducted throughout the calendar year in Z.

You do not participate in or prepare participants for national or international competitions. You provide no
training programs and there are no formal requirements as to who can participate in your events.

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

2

Any monies generated from the activities goes to pay for prizes, insurance, scholarships for local high school
students, equipment for the rodeo, ropings and barrel races. You intend to make some charitable contributions
including help our local youth sports groups.

You expect your revenue to come from donations and admission fees for your events. Your expenses are mostly
for operations of the events and a small portion goes to charitable contributions. The operational expenses
include prizes (approx. 45%), outside services (approx. 35%) and miscellaneous costs. Less than 10% of the
proceeds will be spent on charitable contributions.

You are a successor to a for-profit of a similar name, which operated in a similar manner. Previously, it hosted
a variety of similar events, granting over w dollars in prizes & payouts.

Law

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

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

Treas. Reg. Section 1.501(c)(3)-1(b)(1)(iv) states that in no case shall an organization be considered to be
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 IRC Section 501(c)(3).

Treas. Reg. Section 1.501(c)(3)-1(c)(1) states 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.

Revenue Ruling 67-216, 1967-2 C.B. 180 - A nonprofit organization formed and operated exclusively to
instruct the public on agricultural matters by conducting annual public fairs and exhibitions of livestock,
poultry, and farm products qualified for exemption from Federal income tax under IRC Section 501(c)(3). The
organization's activities and exhibits are planned and managed by or in collaboration with person whose
business it is to inform and instruct farmers and the general public on agricultural matters (i.e., home
demonstration agents, county agricultural agents), and the resulting displays are designed to be instructive. The
presence at the fair of recreational features such as midway shows, refreshment stands, and a rodeo are
incidental to the fair's overall educational purpose.

Rev. Rul. 68-224, 1968-1 C.B. 262 - An organization that conducts an annual festival centered around regional
customs and traditions is determined to qualify for exemption under IRC Section 501(c)(4). The festival takes
place in an agricultural region where interest in horses and Western traditions runs high and enjoys the broad
involvement of local citizens. It typically features a banquet or barbecue, a parade made up of local
organizations and floats depicting community history, various contests relating to dress and costumes traditional

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

3

of the area, and a rodeo. The revenue ruling holds that, in carrying on these activities, the organization provides
recreation for the community and generally promoted civic betterments and social improvements.

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. This plainly
means that the presence of a single non-exempt purpose, if substantial in nature, will destroy the exemption
regardless of the number and importance of truly exempt purposes.

In Minnesota Kingsmen Chess Association Inc. v. Commissioner, T.C. Memo. 1983-495, the organization
sponsored chess tournaments, provided chess magazines and books to libraries, offered free chess lessons, and
published a newsletter that primarily contained reports of past tournaments and announcements of future ones.
The petitioner sought exemption under IRC Section 501(c)(3) because its purposes and activities were described
as educational. The court found that the promotion of chess tournaments furthered a substantial recreational
purpose, even though individual participants may have received some educational benefits.

In St. Louis Science Fiction Limited v. Commissioner, T.C. Memo. 1985-162, the Tax Court held that a science
fiction society failed to qualify for tax-exempt status under IRC Section 501(c)(3). Although many of the
organization's functions at its annual conventions (the organization's principal activity) were educational, its
overall agenda was not exclusively educational. A substantial portion of convention affairs were social and
recreational in nature.

Application of law

Your Articles of Incorporation clearly state that, among other purposes, you are organized and operated for
social and recreational purposes. Therefore, you are not organized and operated exclusively for an exempt
purpose. (See Treas. Reg. Sections 1.501(c)(3)-1(a)(1), 1.501(c)(3)-1(b)(1)(iv) and 1.501(c)(3)-1(c)(1).)

You are not similar to the organization granted exemption in Rev. Rul. 67-216. In that ruling the recreational
features of the organization’s events were incidental to their overall educational purpose. There is no evidence
that you have any educational or other exempt element to your operations. You are organized and operated to
provide recreation for the community, which is similar to the organization in Rev. Rul. 68-224. However, that
organization was not granted exemption under IRC Section 501(c)(3).

As noted in Better Business Bureau of Washington D.C., exemption under IRC Section 501(c)(3) cannot be
granted when an organization has any non-exempt purpose. This is further clarified in both Minnesota
Kingsmen Chess Association and St. Louis Science Fiction Limited, where the substantial recreational purposes
prohibited exemption under IRC Section 501(c)(3).

Conclusion

A significant portion of your activities are operated for social and recreational purposes. You have not shown
how you further any exempt purpose. Therefore, you are not organized and operated exclusively for an exempt
purpose and do not meet the standards of exemption under IRC Section 501(c)(3). Donations to you are not
deductible to donors.

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

4

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.

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:

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

5

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

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.

We sent a copy of this letter to your representative as indicated in your power of attorney.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

cc:

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