Business promotion defeats historic-preservation exemption

Plain-English summary

An organization claimed that promoting a historic commercial area would combat community deterioration and preserve the neighborhood. Its actual activities consisted mainly of advertising local businesses, maintaining a promotional website, and running festivals funded by business sponsorships and vendor fees. It did not directly preserve or maintain historic buildings, and the IRS found that its activities primarily benefited local businesses rather than the public. The IRS revoked the organization’s Section 501(c)(3) exemption for substantial private benefit.

Ruling snapshot

• Question: Did advertising businesses and running promotional festivals further charitable historic-preservation purposes under Section 501(c)(3)?
• Outcome: Revocation effective January 1 of the redacted year.
• Key authorities: IRC §§ 501(c)(3), 509(a)(2), and 7428; Treas. Reg. § 1.501(c)(3)-1; Rev. Ruls. 67-6, 74-146, 75-470, 76-147, 77-111, and 86-49

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
1100 Commerce Street, MC 4920DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Number: 202110031
Release Date: 3/12/2021
UIL: 501.03-00
Date: September 18, 2020
Taxpayer ID Number: [redacted]
Form: [redacted]
Tax Period(s) ended: [redacted]
Person to Contact: [redacted]
Identification Number: [redacted]
Telephone Number: [redacted]
Fax Number: [redacted]

CERTIFIED MAIL — Return Receipt Requested
LAST DAY FOR FILING A PETITION WITH THE TAX COURT: [redacted]

Dear [redacted]:

This is a final determination that you do not 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), effective January 1, 20XX. Your determination letter dated September 2, 20XX is
revoked.

Our adverse determination as to your exempt status was made for the following reasons:

Organizations described in IRC Section 501(c)(3) and exempt under Section 501(a)
must be both organized and operated exclusively for exempt purposes. You have not
demonstrated that you are operated exclusively for charitable, educational, or other
exempt purposes within the meaning of 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. You have not established that you have operated exclusively for

an exempt purpose.

As such, you failed to meet the requirements of IRC Section 501(c)(3) and Treasury Regulation
Section 1.501(c)(3)-1(c), in that you have not established that you were operated exclusively for
exempt purposes.

Contributions to your organization are no longer deductible under IRC Section 170.

Organizations that are not exempt under Section 501 generally are required to file
federal income tax returns and pay tax, where applicable. For further instructions, forms,
and information please visit www.irs.gov.

If you decide to contest this determination, you may file an action for declaratory judgment under
the provisions of IRC Section 7428 in one of the following three venues: 1) United States Tax
Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for the
District of Columbia. A petition or complaint in one of these three courts must be filed within 90
days from the date this determination was mailed to you. Please contact the clerk of the
appropriate court for the rules for initiating suits for declaratory judgment. Please contact the
clerk of the appropriate court for rules and the appropriate forms for filing petitions for
declaratory judgment by referring to the enclosed Publication 892. You may write to the courts
at the following addresses:

United States Tax Court
400 Second Street, NW
Washington, DC 20217

U.S. Court of Federal Claims
717 Madison Place, NW
Washington, DC 20439

U. S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, DC 20001

Processing of income tax returns and assessments of any taxes due will not be delayed if
you file a petition for declaratory judgment under IRC Section 7428.

We'll notify the appropriate state officials (as permitted by law) of our determination that you
aren't an organization described in IRC Section 501(c)(3).

You may be eligible for help from the Taxpayer Advocate Service (TAS). 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 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 1-877-777-4778.

Taxpayer Advocate assistance can’t be used as substitute for established IRS procedures,
formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or
technically correct tax determination, nor extend the time fixed by law that you have to file a
petition in Court. The Taxpayer Advocate can, however, see that a tax matter that may not
have been resolved through normal channels gets prompt and proper handling.

You can get any of the forms or publications mentioned in this letter by calling 800-TAX-
FORM (800-829-3676) or visiting our website at www.irs.gov/forms-pubs.

If you have any questions, you can contact the person listed at the top of this letter.

Enclosures:
Publication 892

Sincerely,

Sean E. O'Reilly
Director, Exempt Organizations Examinations

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities

Date: April 14, 2020
Taxpayer ID number: [redacted]
Form: [redacted]
Tax periods ended: [redacted]

Person to contact:
Name: [redacted]
ID number: [redacted]
Telephone: [redacted]
Fax: [redacted]

Manager’s contact information:
Name: [redacted]
ID number: [redacted]
Telephone: [redacted]
Response due date: [redacted]

CERTIFIED MAIL — Return Receipt Requested

Dear [redacted]:

Why you’re receiving this letter
We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we
propose to revoke your tax-exempt status as an organization described in Internal Revenue Code

(IRC) Section 501(c)(3).

If you agree

If you haven’t already, please sign the enclosed Form 6018, Consent to Proposed Action, and
return it to the contact person shown at the top of this letter. We'll issue a final adverse letter
determining that you aren't an organization described in IRC Section 501(c)(3) for the periods
above.

After we issue the final adverse determination letter, we’ll announce that your organization is no
longer eligible to receive tax deductible contributions under IRC Section 170.

If you disagree

1. Request a meeting or telephone conference with the manager shown at the top of this
   letter.

2. Send any information you want us to consider.

3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or
   send additional information as stated in 1 and 2, above, you'll still be able to file a protest
   with IRS Appeals Office after the meeting or after we consider the information.

The IRS Appeals Office is independent of the Exempt Organizations division and
resolves most disputes informally. If you file a protest, the auditing agent may ask you to
sign a consent to extend the period of limitations for assessing tax. This is to allow the
IRS Appeals Office enough time to consider your case. For your protest to be valid, it

Letter 4102 (Rev. 8-2017)
Catalog Number 48373U

must contain certain specific information, including a statement of the facts, applicable
law, and arguments in support of your position. For specific information needed for a
valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-
Exempt Status.

Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process,
generally doesn’t apply now that we’ve issued this letter.

4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt
   Government Entities) if you feel the issue hasn’t been addressed in published precedent
   or has been treated inconsistently by the IRS.

If you’re considering requesting technical advice, contact the person shown at the top of
this letter. If you disagree with the technical advice decision, you will be able to appeal to
the IRS Appeals Office, as explained above. A decision made in a technical advice
memorandum, however, generally is final and binding on Appeals.

If we don't hear from you
If you don't respond to this proposal within 30 calendar days from the date of this letter, we’ll

issue a final adverse determination letter.

Contacting the Taxpayer Advocate Office is a taxpayer right

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 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.

For additional information
You can get any of 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 shown at the top of this letter.

Sincerely,

for Maria Hooke
Director, Exempt Organizations Examinations
Enclosures:
Form 886-A
Form 6018
Form 4621-A
Publications 892 & 3498-A
Administrative File

2 Letter 3618 (Rev. 8-2019)

Catalog Number 34809F

Form 886A
Department of the Treasury - Internal Revenue Service
Explanation of Items
Schedule No. or Exhibit: [redacted]
Name of Taxpayer: [redacted]
Year/Period Ended
December 31, 20XX

Issues:

Whether [redacted] (the organization), which qualified for
exemption from Federal income tax under Section 501(c)(3) of the Internal Revenue
Code, should be revoked based on substantial private benefit activities?

Facts:

Organization applied for exemption with Form 1023-EZ, Streamlined Application for
Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, as a
Public Charity Support 509(a)(2) on August 29, 20XX.

Organization received determination, granting exempt status under Section 501(c)(3),
Public Charity Status 509(a)(2) on September 2, 20XX.

Organization's Articles of Incorporation state the purpose is “to promote and preserve the
[redacted] area located in [redacted], [redacted]. This will help stop the neighborhood and
community deterioration and lessen neighborhood tensions. The association will
promote the area to the community and tourists to attract additional businesses to the
area to refurbish the area’s deteriorating buildings. Excess funds will be distributed to
area non-profits located in the area.”

Organization membership is open to business patrons within the historic area. To be a
member within the organization, said business patrons are required to pay a monthly —
membership assessment.

Organization purchases, publishes, and/or maintains directional and advertisement signs
(billboards, pamphlets, etc.), promoting the area, and each member business, to the
community and attracting tourists. Organization states this form of advertising is
conducted 0 days per year, 0 hours per day.

Organization maintains an online website, advertising for each business within the
historical area (both member and non-member businesses). Organization states this
advertising is conducted 0 days per year, 0 hours per day.

Organization plans and executes 0 (zero) festivals annually to promote the area and
each member business to the community and attract tourists. The festivals are free to
the

Form 886-A (Rev. 4-68)
Department of the Treasury - Internal Revenue Service

Page: -1-

Form 886A
Department of the Treasury - Internal Revenue Service
Explanation of Items
Schedule No. or Exhibit: [redacted]
Name of Taxpayer: [redacted]
Year/Period Ended
December 31, 20XX

public, funded by sponsorships and vendor booth fees. Organization provided that other
local non-profit organizations conduct any activities for youth during these festivals.
Organization provides advertising online and through billboards, entertainment, and a
schedule of events for the festival. Any funds in excess of the festival expenses are
donated to local non-profit organizations.

Organization does not directly preserve or maintain any historical buildings within the
area.

Law:

Section 501(c)(3) of the Internal Revenue Code provides for recognition of exemption
from Federal income tax of organizations which are organized and operated exclusively
for, among other things, charitable or educational purposes, no part of the net earnings of
which inure to the benefit of any private shareholder or individual.

Section 1.501(c)(3)-1(a)(1) of the Income Tax Regulations provides that in order to be
exempt as an organization described in section 501(c)(3) of the Code, an organization
must be both organized and operated exclusively for one or more purposes specified in
that section. If an organization fails to meet either the organizational test or the
operational test, it is not exempt.

Section 1.501(c)(3)-1(c)(1) of the regulations 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 the exempt purposes specified in
section 501(c)(3) of the Code. An organization will not be so regarded if more than an
insubstantial part of its activities is not in furtherance of an exempt purpose.

Section 1.501(c)(3)-1(d)(1)(ii) of the regulations provides that an organization is not
organized exclusively for any of the purposes specified in section 501(c)(3) unless it
serves public, rather than private interests. Thus, an organization applying for tax
exemption under section 501(c)(3) must establish that it is not organized or operated for
the benefit of private interests.

Rev. Rul. 67-6 noted that combatting community deterioration through remedial action
leading to the elimination of the physical, economic and social causes of such
deterioration is "charitable."

Rev. Rul. 76-147 provides, in effect, that an organization with a purpose and activity of
preserving the traditions, architecture, and appearance of a community, as described in
Rev. Rul. 67-6, provides community benefit since such preservation combats community
deterioration.

Form 886-A (Rev. 4-68)
Department of the Treasury - Internal Revenue Service
Page: -2-

Form 886A
Department of the Treasury - Internal Revenue Service
Explanation of Items
Schedule No. or Exhibit: [redacted]
Name of Taxpayer: [redacted]
Year/Period Ended
December 31, 20XX

Rev. Rul. 77-111, 1977-1 C.B. 144, 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 is not
operated exclusively for charitable purposes and does not qualify for exemption
under section 501(c)(3) of the Code.

Rev. Rul. 74-146 provides, to be incidental, the private benefit must be a necessary
concomitant of the activity which benefits the public at large and accomplishes exempt
purposes. In other words, the benefit to the public cannot be achieved without necessarily
benefiting certain private individuals.

Rev. Rul 75-470, 1975-2 C.B. 207, held that a nonprofit organization formed to promote
an appreciation of history through the acquisition, restoration, and preservation of homes,
churches, and public buildings having special historical significance or architectural
significance and to open the structures for viewing by the public qualifies for exemption
under section 501(c)(3) of the Code.

Rev. Rul. 86-49, 1986-1 C.B. 243, held that an organization formed for the purpose of
preserving the historic or architectural character of a community through the acquisition
and occasional restoration of historically or architecturally significant properties, and
subsequent disposition of these properties subject to restrictive covenants qualifies for
exemption under section 501(c)(3) of the Code.

Taxpayers position:

The organization has stated their belief that the advertising activities that promote
businesses helps preserve the historical area and lessen neighborhood deterioration.

Governments position:

Based on the law stated above, to qualify under Section 501(c)(3), an organization must
be organized and operated exclusively for exempt purposes under Section 501 (c)(3).
These exempt purposes, with the specific regulations cited above, can include
combatting community deterioration and/or historic preservation. The organization has
not demonstrated, as detailed below, that their activities further the exempt purposes
described in Section 501(c)(3).

The organization’s primary activities consist of promoting a historical area through
advertising and marketing strategies, which primarily benefits the businesses within the
area. Such benefits serve a private, rather than a public, interest and are not incidental
to further one or more of your exempt purposes.

Form 886-A (Rev. 4-68)
Department of the Treasury - Internal Revenue Service
Page: -3-

Form 886A
Department of the Treasury - Internal Revenue Service
Explanation of Items
Schedule No. or Exhibit: [redacted]
Name of Taxpayer: [redacted]
Year/Period Ended
December 31, 20XX

In connection with promoting the historical area, the organization sponsored promotional
festivals to draw consumers to the business district. These events are paid for through
sponsorships of local businesses and vendor booth fees. Membership within the
organization is also local businesses. Accordingly, these events are essentially paid for
by local businesses benefitting local businesses.

Rev. Rul. 77-111 denied recognition of exemption to two organizations who, similar to the
organization, promoted business patronage and sales which did not result in benefits to
needy individuals.

Rev. Rul. 75-470 and Rev. Rul. 86-49 recognize that combatting community deterioration
through historical preservation does qualify for exemption under Section 501(c)(3).
However, the organization has failed to demonstrate that the activities conducted by the
organization revitalize the neighborhood or preserve historical or architectural
significance. The organization’s activities promote the area business patrons, attracting
new business patrons, serve a private rather than a public interest.

Accordingly, the organization has failed to establish that it is organized and operated
exclusively for exempt purposes, under section 501(c)(3) of the Code, but rather for
private interests, and therefore does not qualify for exemption under section 501(c)(3).

Conclusion:

Based on the foregoing reasons, the organization does not qualify for exemption under
section 501(c)(3) and its tax-exempt status should be revoked.

It is the IRS’s position that the organization has failed to demonstrate that their activities
further the exempt purposes described in Section 501(c)(3) of the Code. Furthermore,
Section 1.501(c)(3)-1(c)(1) state an organization will be operated exclusively for exempt
purposes if their activities are in direct furtherance of the exempt purposes and Section
1.501(c)(3)-1(d)(1)(ii) states the organization must serve a public, rather than a private,
interest.

Based on the law and regulations above, the organization’s exempt status is revoked
effective January 1, 20XX.

Form 1120, U.S. Corporation Income Tax Return, should be filed for the tax period
beginning January 1, 20XX and all periods thereafter.

Form 886-A (Rev. 4-68)
Department of the Treasury - Internal Revenue Service
Page: -4-