State chapter of a professional association denied 501(c)(3) status for serving members rather than exclusively educational purposes

Plain-English summary

A state chapter of a national professional association applied for 501(c)(3) charity status using the streamlined Form 1023-EZ, and the IRS denied it. The chapter serves professionals in a particular field by offering certification, continuing education, resource sharing, networking, mentoring, and recognition, and is funded mainly by member dues. The IRS found the group failed both tests for exemption. On the organizational test, its articles of incorporation did not limit its purposes to those allowed under 501(c)(3) and its dissolution clause sent remaining assets to the national parent organization rather than to a 501(c)(3) purpose. On the operational test, the group's activities were aimed primarily at the professional advancement of its members, a substantial nonexempt purpose, rather than being exclusively educational. Citing revenue rulings on professional associations and the Supreme Court's Better Business Bureau decision that a single substantial nonexempt purpose defeats exemption, the IRS concluded the chapter did not qualify under 501(c)(3).

Ruling snapshot

• Question: Does a state chapter of a professional association qualify for exemption under IRC § 501(c)(3) when its purposes are not limited to exempt purposes and it operates mainly to advance its members professionally?
• Outcome: denied (proposed adverse determination; failure of both the organizational and operational tests)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a)(1), (b)(1), (b)(4), (c)(1); Rev. Ruls. 59-6 and 71-504; Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279 (1945)

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service February 28, 2022
IRS Tax Exempt and Government Entities Employer ID number:

Box 2508
Cincinnati, OH 45201

Form you must file:
Tax years:

Person to contact:

Release Number: 202221019 Name:

Release Date: 5/27/2022 ID number:

UIL: 501.03-00, 501.03-30 Telephone:
XX] Check if 501(c)(3) denial
[_} Check if valid POA

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 Letter 437, Notice of Intention to Disclose - Rulings, and review the two attached letters that show our
proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Letter 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,

Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Letter 437

Redacted Letter 4034
Redacted Letter 4038

Letter 4038 (Rev. 11-2021)
Catalog Number 47632B

Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201

Date: January 11, 2022

Employer ID number:

Person to contact:
Name:
ID number:
Telephone:
Fax:

Legend: UIL:
B = State 501.03-00

C = Date 501.03-30
D = Name

E = 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 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 submitted Form 1023-EZ Streamline Application for Recognition of Exemption Under Section 501(c)(3) of
the Internal Revenue Code.

You attested on Form 1023-EZ that you are organized and operated exclusively to further charitable and
educational purposes. You also attested that you have not conducted and will not conduct prohibited activities
under IRC Section 501(c)(3). Specifically, you attested you will:
e Refrain from supporting or opposing candidates in political campaigns in any way.
e Ensure that your net earnings do not inure in whole or in part to the benefit of private shareholders or
individuals.

e Not further non-exempt purposes (such as purposes that benefit private interests) more than
insubstantially.

e Not be organized or operated for the primary purpose of conducting a trade or business that is not related
to your exempt purpose(s).

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

e Not devote more than an insubstantial part of your activities attempting to influence legislation or, if you
made a Section 501(h) election, not normally made expenditures in excess of expenditures limitations
outlined in Section 501(h).

e Not provide commercial-type insurance as a substantial part of your activities.

You indicated in the mission statement on the Form 1023 EZ that you are the B State Chapter for E and that
your purpose is to share knowledge and provide educational opportunities for public D professionals in B.

During review of your Form 1023-EZ, detailed information was requested supplemental to your attestations.
We also provided you a copy of your Articles of Incorporation obtained from the B’s Secretary of State’s
website that were filed on C. These state you provide education, certification, resource and information sharing,
and networking opportunities for professionals in the field of D. Additionally, they state “Should your
organization dissolve you will give all net assets to your headquarters”.

Your response indicated that you:
e Recognize professionals in D
Encourage research and development in D
Promote excellence on the ethical standards and development in D
Promote best practices in D
Mentor new professionals in D
Provide a forum for professionals in D to discuss challenges to overcome
Promote networking for professionals in D

You explained that membership is open to any person within the chapter area who is a member of E or to any
non-member of E that supports the objectives and programs of your chapter. Members pay annual dues that are
established by the Board of Directors. New member dues will be prorated on a quarterly basis.

You have numerous committees which include the following:

e The Membership Committee which lists, tracks members interest, implements strategies to
increase membership as well as advises other programs about what members find most valuable
in your offerings.

¢ The Communications and Marketing Committee which develops your brand. This consists of
developing an online presence for information sharing such as your website with current
information as well as assembling information into your newsletter template.

e The Certifications Committee which develops the priorities for which certification trainings are
made available at which frequency and location. This committee also helps coordinate
programming that allows people to get continuing education credits to maintain their
certifications.

e The Educational and Networking Committee which develops the annual schedule of events for
your members to create opportunities to learn about relevant topics and share knowledge and
experiences. This committee also prepares the content for your newsletter.

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

You indicated that you are governed by an elected Board of Directors from among your membership of up to
several members and five officers. You will also have additional directors who will serve as co-leads of your
committees.

You will be supported by membership dues. You also anticipate receiving a donation from E to help conduct
your programs once you are officially established and receive your business license. These funds were left over
from a previously established chapter in your state.

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)(i) provides that an organization is organized and operated exclusively
for one or more exempt purposes of organization, if they:
(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 purposes.

Treas. Reg. Section 1.501(c)(3)-1(b)(4) which requires the dedication of remaining assets upon dissolution
exclusively for purposes described 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 59-6, 1959-1 C.B. 121, describes a professional association that was not entitled to exemption
under IRC Section 501(c)(3) because its educational program was only an incidental part of its total activities. It
had as its principal purpose the professional advancement of its membership

Rev. Rul. 71-504, 1971-2 C.B. 231, describes an organization exempt under IRC Section 501(c)(6) that
primarily directed its activities to the promotion of the common business purposes of its members. The
organization could not be reclassified as an organization described in Section 501(c)(3). The activities were
directed primarily at the promotion of the medical profession and thus further the common business purpose of
its members It was held that the presence of a single noncharitable or noneducational purpose, if substantial in
nature, precluded exemption under Section 501(c)(3) regardless of the number or importance of truly charitable
or educational purposes.

In Better Business Bureau of Washington D.C., Inc. v. United States, 326 U.S. 279 (1945), the Supreme Court
stated that the presence of a single nonexempt purpose, if substantial in nature, will preclude exemption under
IRC Section 501(c)(3) regardless of the number or importance of statutorily exempt purposes.

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

Application of law

IRC Section 501(c)(3) and Treas. Reg. Section 1.501(c)(3)-1(a)(1) set forth two main tests to qualify for exempt
status. An organization must be both organized and operated exclusively for purposes described in Section
501(c)(3). You have failed to meet both requirements, as explained below.

Your Articles of Incorporation state that you are organized to provide education, certification, resource and
information sharing, and networking opportunities for public sector D professionals. 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, Treas. Reg. Section 1.501(c)(3)-1(b)(4)
requires the dedication of remaining assets upon dissolution for purposes exclusively described in IRC Section
501(c)(3). However, the dissolution clause in your Articles of Incorporation provides that net assets will be
given to E. This also causes you to fail the organizational test under Section 501(c)(3).

You are not operated 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). Similar to the
organizations described in Revenue Rulings 59-6 and 71-504, your activities are not exclusively educational
within the meaning of IRC Section 501(c)(3). Your purpose and your activities appear to be directed towards
the professional advancement of your members in the field of D rather than being exclusively educational. For
example, you are engaged in recognizing professionals in the field of D, promoting excellence on the ethical
standards and development in the field of D and promoting best practices in the field of D as well as promoting
networking in the field of D. The fact that you engage in a substantial amount of nonexempt activities,
precludes you from being described as an organization in Section 501(c)(3).

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

Conclusion

Based on the information submitted, you are not organized and operated exclusively for exempt purposes within
the meaning of IRC Section 501(c)(3). You do not meet the organizational test because your organizing
document does not limit your purposes to those described in Section 501(c)(3) or dedicate remaining assets
upon dissolution to one or more exempt purposes described in 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 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

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

5

« 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 Determination 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

PO 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

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

6

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. 01-2021)
Catalog Number 47628K