202047009: A construction plan-room membership service is denied 501(c)(3) status because it serves its members, not the public

Plain-English summary

An organization formed to take over a for-profit "plan room" (a facility where construction contractors review building plans and specifications to prepare bids) and convert it to a nonprofit applied for charitable exemption under Section 501(c)(3). It sells tiered memberships that give contractors access to plan rooms, workstations, printing, and an online plan library, and it planned to keep operating largely as the for-profit had. The IRS denied exemption on two grounds. First, the group fails the organizational test: its stated purpose, to "facilitate construction plan exchange," is not an exempt purpose. Second, it fails the operational test: it provides fee-based services that serve the private business interests of its contractor members, not a public interest. The IRS compared it to a cooperative art gallery (Rev. Rul. 71-395) and a business-promotion group (Rev. Rul. 77-111), both denied, and cited Better Business Bureau for the rule that a substantial non-exempt purpose bars exemption. Possible future educational activities did not change the result. The taxpayer did not protest within 30 days, so the denial became final.

Ruling snapshot

• Question: Does a membership plan-room service for construction contractors qualify as organized and operated exclusively for exempt purposes under § 501(c)(3)?
• Outcome: Denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a), (b), (c), (d); Rev. Ruls. 71-395 and 77-111; Better Business Bureau v. United States, 326 U.S. 279

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service Date:
August 25, 2020
Tax Exempt and Government Entities Employer ID number:
PO Box 2508
Form you must file:
Cincinnati, OH 45201
Tax years:

Number: 202047009 Person to contact:
Release Date: 11/20/2020 Name:
ID number:
Telephone:
UIL Number: 501.00-00, 501.03-05, 501.03-30,
501.33-00

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 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.

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. 5-2020)
                                                                                 Catalog Number 47632S
                   Sincerely,



                   Stephen A. Martin
                   Director, Exempt Organizations
                   Rulings and Agreements

Enclosures:
Notice 437
Redacted Letter 4034
Redacted Letter 4038

                                               Letter 4038 (Rev. 5-2020)
                                            Catalog Number 47632S
       Department of the Treasury
       Internal Revenue Service
       P.O. Box 2508
       Cincinnati, OH 45201
                                                                          Date:
                                                                           June 26, 2020
                                                                          Employer ID number:


                                                                          Contact person/ID number:


                                                                          Contact telephone number:


                                                                          Contact fax number:

Legend: UIL:
R = State 501.00-00
S = Date 501.03-05
T = Company 501.03-30
V = Year 501.33-00
W = City
x dollars = Amount
y dollars = Amount
z dollars = Amount

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 Code Section 501(c)(3)? No, for the reasons stated below.

Facts
You were incorporated in R on S. Your Articles of Incorporation state that your purpose is to facilitate
construction plan exchange. Upon your dissolution your assets will be distributed for one or more exempt
purposes within the meaning of IRC Section 501(c)(3).

You were formed to take over the operations of a for-profit, T, in order to convert it to a non-profit. T was
established in V and is the largest member-owned and only in W. You will take over T’s
location and operations.

You have members. You offer three different membership levels. Members get access to plan rooms at your
facility to accommodate their plan review and estimating needs. Your location offers air-conditioned estimating
rooms and accommodations to make plans, prints, specification copies, and scans. A computer workstation with

                                                                                  Letter 4034 (Rev. 11-2018)
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internet access is also available. Your location is open Monday-Friday from 8:00am to 5:00pm but closed on
major holidays. In order for your members to network, you host summer picnic and a Christmas social.

Membership levels are as follows:
 Associate Membership (Level 1): x dollars/year - The Associate Membership level is the basic
membership level. Members receive a weekly bulletin, by mail and/or email.
 Active Membership (Level 2): y dollars/year - The Active Membership level grants all the benefits of
the Associate level and also allows access to the building and plan rooms. Members can also view all
plan and specification documents and use your special tables and the like. Active members also have
access to your printers, scanners, and copiers (available for use at additional cost per copy/scan). The
Active membership level also allows members to check out plans and specifications overnight or over
the weekend.
 Online Membership (Level 3): z dollars/year - The Online Membership level offers all of the benefits of
Level 1 and Level 2 memberships and are also allowed access to your newly designed online Plan
Room. Online members may view all plans, specifications, and addendums that are available, online,
without ever having to leave the comfort of their home or office. Online members are also allowed
building and plan room use at your location, as well as printer/copier/scanner use (available for use at
additional cost per copy/scan).

You stated that there is little to no change in the day-to-day operations since you have taken over T’s
operations, but your vision has changed. Now there is no desire to return profits to owners. Any excess revenue
is intended to be used to further assist the construction industry as a whole and give back to the community.
Giving back to the community would not be just monetarily but could include an educational component which
would involve introducing the public to opportunities in the construction industry.

Your primary source of revenue will be membership fees and the rest will come from services provided to
members. Proposed expenses include wages, occupancy costs, professional fees, and other administrative
expenditures. Your budgets are based on the financial records of T. You anticipate taking over all of T’s assets
and liabilities, but no transfers have taken place to date.

Law
IRC Section 501(c)(3) provides for the recognition of exemption of organizations that are organized and
operated exclusively for 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) 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)(i) provides that an organization is organized exclusively for one or
more exempt purposes only if its articles of organization:
(a) Limit the purposes of such organization to one or more exempt purposes; and
(b) Do not expressly empower the organization engage, otherwise than as an insubstantial part of its
activities, in activities that in themselves are not in furtherance of one or more exempt purposes.

                                                                                    Letter 4034 (Rev. 11-2018)
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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(d)(l)(ii) provides that an organization is not organized or operated exclusively
for one or more exempt purposes unless it serves a public rather than a private interest. Thus, the organization
must establish that it is not organized or operated for the benefit of private interests such individuals.

Revenue Ruling 71-395, 1971-2 C.B. 228, held that a cooperative art gallery did not qualify for exemption
under IRC Section 501(c)(3). The gallery was formed and operated by a group of artists for the purpose of
exhibiting and selling their works. Even though the exhibition and sale of paintings may be an educational
activity in other respects in this situation it served the private purposes of its members.

Rev. Rul. 77-111, 1977-1 C.B. 144, Situation 1, held that an organization formed to increase business patronage
in a deteriorated area by providing information on the area's shopping opportunities, local transportation, and
accommodations was not operated exclusively for charitable purposes and did not qualify for exemption under
IRC Section 501(c)(3). The overall thrust is to promote business rather than to accomplish Section 501(c)(3)
objectives exclusively.

In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945), the Supreme Court
held that the presence of private benefit, if substantial in nature, will destroy an organization's tax-exempt status
regardless of the organization's other charitable purposes or activities.

Application of law
As stated in Treas. Reg. 1.501(c)(3)-1(a)(1), an organization must be both organized and operated exclusively
for purposes described in IRC Section 501(c)(3). Your formation document states that your purpose is to
facilitate construction plan exchange, which is not a recognized exempt purpose. Therefore, you do not meet the
organizational test as noted in Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i).

You provide services to your members for a fee, which serves their private interests. This activity does not
further an exempt purpose. Thus, you do not meet the operational test as noted in Treas. Reg. Section
1.501(c)(3)-1(c)(1).

You also do not meet the requirements of Treas. Reg. Section 1.501(c)(3)-1(d)(l)(ii) because you serve the
substantial private interests of your members and not a public interest.

You are like the organization denied exemption in Rev. Rul. 71-395. You provide a place for your members to
do their work, which serves their private purposes. Accordingly, you are operated for the private benefit of your
members rather than for a public purpose.

You are like the organization denied exemption in Rev. Rul. 77-111 because your overall thrust is to promote
your members’ businesses rather than to accomplish exclusively charitable or educational purposes.

Although you indicated you may conduct some educational activities in the future, your primary purpose is to
provide a workspace for your members. Like the organization in Better Business Bureau of Washington, D.C.,

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Inc., you have a substantial non-exempt purpose. Therefore, you are precluded from exemption under IRC
Section 501(c)(3).

Conclusion
You are neither organized nor operated exclusively for an exempt purpose as described in IRC Section
501(c)(3). Your formation document does not limit your purposes to those described in Section 501(c)(3). Your
activities provide for the substantial private benefit of your members and do not exclusively further an exempt
purpose. Accordingly, you are not exempt 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

• 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.

                                                                                    Letter 4034 (Rev. 11-2018)
                                                                                      Catalog Number 47628K
                                                     5

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
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