IRS denies 501(c)(3) status to a group whose only activity is renting out a community center

Plain-English summary

An unincorporated association applied for § 501(c)(3) charity status using the
streamlined Form 1023-EZ, stating it maintains a community center that residents
can rent for meetings, parties, and gatherings at an affordable rate. The IRS
denied the application. To be exempt, a group must operate exclusively for
charitable or other exempt purposes; here the primary activity was operating and
renting a community meeting hall to the general public, which is not charitable
under the regulations, even though some charitable and youth groups used it for
free. Citing the Supreme Court's rule that a single substantial non-exempt
purpose defeats exemption (Better Business Bureau v. United States), the IRS
concluded the organization does not qualify. As a result, donors cannot deduct
contributions under § 170, and the group must file corporate income tax returns.
The organization did not protest the proposed denial within 30 days, so it became
final. This document bundles the final adverse determination (Letter 4038) and
the proposed adverse determination (Letter 4034). Identifying details were
redacted and replaced with LEGEND placeholders (B, C, D, E, f dollars).

Ruling snapshot

• Question: Does a group whose sole activity is renting out a community center qualify for exemption under § 501(c)(3)?
• Outcome: Denied (final adverse determination after no protest)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a)(1), (c)(1), (d)(2); Rev. Rul. 75-198; Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 179 (1945)

Full text (IRS public release)

Department of the Treasury                          Date:
Internal Revenue Service                            05/23/2022
IRS Tax Exempt and Government Entities

Employer ID number:

Form you must file:
> 1120

Tax years:
Release Number: 202233019

Release Date: 8/19/2022
UIL Code: 501.00-00, 501.03-00, 501.03-30 All

Person to contact:
Name:

ID number:
Telephone:

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.

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

Enclosures:

Letter 437

Redacted Letter 4034
Redacted Letter 4038

[_] Hide blank fields.

Sincerely,

Stephen A. Martin

Director, Exempt Organizations

Rulings and Agreements

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

Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201
Date:
December 22, 2021

Employer ID number:
Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend:                          UIL:
B = date                         501-00-00
C = state                        501-03-00
D = city                         501-03-30
E = areas
f 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 IRC Section 501(c)(3)? No, for the reasons stated below.

Facts

You submitted Form 1023-EZ, Streamlined 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 purposes. You also attested that you have not conducted and will not conduct prohibited
activities under IRC Section 501(c)(3).

During review of your Form 1023-EZ, detailed information was requested supplemental to your attestations.
You adopted Bylaws and were formed as an unincorporated association on B in C. Your Bylaws state that you
were established to maintain a meeting place that will benefit people in and around D and surrounding areas.
Your Bylaws further state that upon termination or dissolution, any assets available for distribution shall be
distributed for one or more exempt purposes within the meaning of Section 501(c)(3) of the Internal Revenue
Code, or corresponding section of any future federal tax code.

Your specific activities include providing residents of the area a community center for meetings, parties,
gatherings, etc. at an affordable rate. The center is available to all counties in E including the D area, and is used
as needed for community and family events. The facility is maintained by volunteers. Time spent varies

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

depending on season and center usage.

In a response to our request for additional information you have indicated your mission, in part, is to:
• Foster community relationships,
• Provide and encourage participation in community events for all age groups,
• Support community charitable efforts,
• Promote community educational opportunities,
• Aid community cultural development,
• Extend community communications to D area residents,
• Manage and maintain the facilities,
• Provide emergency shelter during a natural disaster and/or times of need.

Your rental fees for the building are f dollars per day. Rental fees are flat to individuals. Youth activities such as
          ;           ;           . etc. are allowed to use the building with no rental fee as needed.

Income reported for your previous tax years included rental fees and donations. Your annual expenses
includes utilities and other expenses described as repairs, maintenance and insurance.

Law
IRC Section 501(c)(3) provides, in part, for the exemption from federal income tax organizations organized and
operated exclusively for charitable, religious or educational purposes, no part of the net earnings of which 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 be exempt as an organization described
in IRC Section 501(c)(3), an organization must be both organized and operated exclusively for one or more of
the purposes specified in such section. If an organization fails to meet either the organizational test or the
operational test, it is not exempt.

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 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)(2) defines the term charitable as including the relief of the poor and
distressed or of the underprivileged, and the promotion of social welfare by organizations designed to lessen
neighborhood tensions, to eliminate prejudice and discrimination, or to combat community deterioration. The
term "charitable" also includes lessening of the burdens of government.

In Revenue Ruling 75-198 an organization that establishes a service center providing information, referral,
counseling services relating to health, housing, finances, education, and employment, as well as a facility for
specialized recreation for a particular community's senior citizens, who need not become members to obtain the
services or participate in the activities, may qualify for exemption under section 501(c)(3) of the Code.

In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 179 (1945), the Supreme Court
held that the presence of a single non-exempt purpose, if substantial in nature, will destroy a claim for exemption

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

under Section 501(c)(3) of the Code regardless of the number or importance of truly exempt purposes.

Application of Law

In order to qualify for exemption as described in IRC Section 501(c)(3), you must be both organized and operated
exclusively for one or more of the purposes as described in Treas. Reg. Section 1.501(c)(3)-1(a)(1). You are not
operating exclusively for exempt purposes described under Section 501(c)(3); rather, your primary activity is to
maintain a facility that will be used by the residents of the area for meetings, parties, gatherings, etc. for an
affordable price.

To satisfy the operational test under Treas. Reg. Section 1.501(c)(3)-1(c)(1) an organization must establish that it
is operated exclusively for one or more exempt purposes. You were formed for the purpose of maintaining and
renting a community center. Your activities are not charitable as defined in Treas. Reg. Section 1.501(c)(3)-
1(d)(2). See the organization who received exemption in Revenue Ruling 75-198, that operated exclusively for
senior citizens in offering a community center for their activities. While your community center would serve
certain charitable organizations, such as the          and          , or groups, the other individuals and groups
renting and using this facility are not all underserved or exclusively charitable. Because your activities do not
further IRC Section 501(c)(3), you do not qualify for exemption.

As stated in Better Business Bureau of Washington, D.C., Inc., the presence of a single non-exempt purpose, if
substantial in nature, will destroy a claim for exemption under IRC Section 501(c)(3). Since operating and
maintaining a community center does not exclusively further Section 501(c)(3) purposes, you do not qualify for
exemption under Section 501(c)(3).

Conclusion
Based on the information submitted, you are not operating exclusively for exempt purposes within the meaning
of IRC Section 501(c)(3). Your only activity is operating and maintaining a community center. Therefore, 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
• 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

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

• 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.

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

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

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