IRS denies charitable status to a recreational community festival

Plain-English summary

An organization conducted an annual community festival featuring a beauty pageant, parade, tournaments, a run, a car show, fireworks, games, vendors, children's activities, and music. Its articles said it would promote the locality and community businesses, and its dissolution clause allowed assets to go to an organization with the same general purpose rather than requiring an exempt recipient. The IRS found that the articles did not limit the organization to exempt purposes or adequately dedicate its assets. It also found that the festival served a substantial recreational purpose, unlike an educational agricultural fair whose recreation was merely incidental. After no protest was filed, the IRS finalized its denial of exemption under IRC § 501(c)(3).

Ruling snapshot

• Question: Is the festival organization 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; Rev. Rul. 67-216; Rev. Rul. 68-224

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
PO Box 2508
Cincinnati, OH 45201

Number: 202103014
Release Date: 1/22/2021
Date: October 27, 2020

UIL: 501.03-00, 501.03-30

Dear :

Date: October 27, 2020
Employer ID number:
Form you must file:
Tax years:

Person to contact:
Name:
ID number:
Telephone:

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.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Notice 437
Redacted Letter 4034
Redacted Letter 4038

Department of the Treasury
Internal Revenue Service
IRS P.O. Box 2508
Cincinnati, OH 45201
Date: August 25, 2020
Employer ID number:
Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend: UIL:

B = Date 501.03-00
C = Location 501.03-30
D = State

E= Date

F= Location
G = Organization

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 do not 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 submitted Form 1023-EZ, Streamline Application for Recognition of Exemption Under IRC Section
501(c)(3) on B. You indicated on the Form 1023 EZ that your mission is to conduct an annual festival in C.

We subsequently requested additional information as well as provided you a copy of your Articles of
Incorporation obtained from the D’s Secretary of State’s website. These were filed on E. Your purposes as
stated in the Articles of Incorporation are to:

a) Provide F with a quality festival in which it will extend and promote F and its vicinity.
b) Remain in good faith with the businesses and community of F.

They further indicated that upon the dissolution of your corporation, the remaining assets will be distributed to:
“A successive organization with the same general purpose or then to G for use as the then current Board of
Directors deems most beneficial, or then to be split between other not-for-profit charities as directed by the then
current Board of Directors”.

Information that you provided shows you conduct a -day festival which includes a beauty pageant, parade,
corn hole and fishing tournaments, run event, car show, fireworks, game booths, art and craft booths, kids’
activities and musical entertainment. No admission fees are charge. Your income is from registration fees to
participate in some of your events and booth rental fees received from the art, craft, food, and commercial

vendors.

Your expenditures include expenses associated with pageant t-shirts, sashes, prize money and food; parade
trophies and prizes; games and sports related expenses; printing supplies; fireworks supplies and contracts; car
show supplies, trophies and prizes; entertainment expenses for bands and advertising; fun run t-shirts and food;
and security related expenses.

You are operated by a volunteer board of directors. Your event is promoted primarily through social media.

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) provides that in order to be exempt under IRC Section
501(c)(3) an organization must be organized and operated exclusively for one or more of the exempt purposes
specified in that section. If an organization fails to meet either the organizational test or the operational test, it

does not qualify for exemption.

Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i) provides that an organization is organized and operated exclusively
for one or more exempt purposes of organization:
(a) Limit the purpose of such organization to one or more exempt purposes; and
(b) Do not expressly empower the organization to engage, otherwise than as an insubstantial part of its
activities, in activities that in themselves are not in furtherance of one or more exempt purpose.

Treas. Reg. Section 1.501(c)(3)-1(b)(4) which requires the dedication of remaining assets exclusively for
purposes in IRC Section 501(c)(3).

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 that accomplish one or more 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. 18 describes a nonprofit organization that was formed and operated
exclusively to instruct the public on agricultural matters by conducting annual public fairs and exhibitions of
livestock, poultry, and farm products. It qualified for exemption from federal income tax under IRC Section
501(c)(3). The organization's activities and exhibits were planned and managed by or in collaboration with
persons whose business it was to inform and instruct farmers and the general public on agricultural, and the
resulting displays were designed to be instructive. The presence at the fair of recreational features such as
midway shows, refreshment stands, and a rodeo were incidental to the fair's overall educational purpose.

Rev. Rul. 68-224,1968-1 C.B. 262, describes an organization that conducted an annual festival centered around

regional customs and traditions. It was determined to qualify for exemption under IRC Section 501(c)(4). The
festival took place in an agricultural region where interest in horses and Western traditions ran high and enjoyed
the broad involvement of local citizens. It typically featured a banquet or barbecue, a parade made up of local
organizations and floats depicting community history, various contests relating to dress and costumes traditional
of the area, and a rodeo. The revenue ruling held that, in carrying on these activities, the organization provided
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
determined the activities of that organization were aimed at promoting the prosperity and standing of the
business community and therefore, served a substantial private purpose. It concluded that the presence of a
single nonexempt purpose, if substantial in nature, will preclude exemption regardless of the number or

importance of statutorily exempt purposes.

Application of law

You do not meet the two main tests set forth in of IRC Section 501(c)(3) and Treas. Reg. Section 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). You have failed to meet both requirements, as explained below.

The purposes in your Articles of Incorporation state that you provide a quality festival that promotes F and its
vicinity, and fosters good faith among the businesses and community of F. Because your Articles of
Incorporation do not limit your purposes to those described in Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i), you
fail the organizational test under IRC Section 501(c)(3). Furthermore, your Articles of Incorporation do not
contain an adequate dissolution clause as required by Treas. Reg. Section 1.501(c)(3)-1(b)(4). Your dissolution
clause provides that any remaining assets would be distributed to an organization with the same general purpose
as yours. Any remaining assets must be dedicated exclusively for purposes described in IRC Section 501(c)(3).
Therefore, this also causes you to fail the organizational test under IRC Section 501(c)(3).

You are not operating in accordance with Treas. Reg. Section 1.501(c)(3)-1(c)(1) because you are not primarily
engaged in activities that accomplish exempt purposes specified in IRC Section 501(c)(3). Your primary
activity of conducting a festival for the benefit of F serves a substantial recreational purpose. Therefore, you are
precluded from exemption under IRC Section 501(c)(3).

You are not similar to the organization that qualified for 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 are operated exclusively for educational and charitable purposes within the meaning of
IRC Section 501(c)(3). You are primarily 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).

You are like the organization described in Better Business Bureau. Although you may have some educational
and charitable purposes, you are operated for a substantial nonexempt purpose. The presence of this substantial
non-exempt purpose prevents exemption under IRC Section 501(c)(3).

Conclusion
Based on the information submitted, you do not qualify for exemption under IRC Section 501(c)(3). You are

not organized and operated exclusively for exempt purposes within the meaning of Section 501(c)(3). You do

not meet the organizational test because your organizing document does not limit your purpose or dedicate
remaining assets upon dissolution to one or more exempt purposes described in IRC Section 501(c)(3). You
also do not meet the operational test for IRC Section 501(c)(3) because you are operated for substantial
nonexempt purposes. Accordingly, you do not qualify for exemption under IRC 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.

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