Local business-promotion group denied charitable status

Plain-English summary

A local organization applied for Section 501(c)(3) status while describing its mission as promoting business activity in its community. It sponsored teacher recognition, children’s events, community celebrations, local sales promotions, and other events that encouraged business participation and local shopping. The organization submitted corrected articles, but it did not show that the state had accepted them, so the IRS found that it failed the organizational test. The IRS also concluded that the group’s primary activity served the private interests of its business members, even though some individual events may have had charitable features. Because the substantial business-promotion purpose was nonexempt, the IRS denied charitable status.

Ruling snapshot

• Question: Did a community organization qualify under Section 501(c)(3) when its primary purpose was promoting local businesses and member commerce?
• Outcome: Denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 77-111; Better Business Bureau v. United States

Full text (IRS public release)

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

Date:
07/25/2022

Employer ID number:

Person to contact:

Number: 202242012
Release Date: 10/21/2022

UIL: 501.00-00, 501.03-00, 501.03-30

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

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Letter 437

Redacted Letter 4034

Redacted Letter 4038

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

Department of the Treasury
Internal Revenue Service
PO Box 2508
Cincinnati, OH 45201

Date: 5/23/2022

Employer ID number:

Person to contact:

Name:
ID number:
Telephone:
Fax:

Legend:

B = Date

C = Date

D = State

E = City

F = Date

G = Organization

UIL:

501.00-00

501.03-00

501.03-30

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 on B.

You attest that you were incorporated on C, in the state of D. You attest that you have the necessary organizing
document, that your organizing document limits your purposes to one or more exempt purposes within the
meaning of the IRC Section 501(c)(3), that your organizing document does not expressly empower you to
engage in activities, other than an insubstantial part, that are not in furtherance of one or more exempt purposes,
and that your organizing document contains the dissolution provision required under Section 501(c)(3).

You attest that you are organized and operated exclusively to further educational purposes. You attest that you
have not conducted and will not conduct prohibited activities under IRC Section 501(c)(3). Specifically, you
attest you will:

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

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• Refrain from supporting or opposing candidates in political campaigns in any way

• Ensure that your net earnings do not inure in whole or in part to the benefit of private shareholders or
individuals

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

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

• 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 make expenditures in excess of expenditure limitations outlined in
Section 501(h)

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

Your mission on the Form 1023-EZ states that you exist for the sole purpose of promoting business activities in
E community.

Detailed information was subsequently requested. Your Articles of Incorporation state you are organized as
"civic service through the organized efforts of the members of the organization, to promote the welfare of the
community and its citizens through active constructive projects, to promote better relations among the people in
the community and to promote business and economic development within the community." You submitted
Articles of Correction on F with D agency to change the corporation type from mutual benefit to public benefit
and to include adequate purpose and dissolution clauses. However, there is no evidence that this correction was
accepted and approved by the D agency.

You described you sponsor several popular activities and events as follow during the year. You encourage the
businesses to participate in these events.

1. day - an event that recognizes the teachers in the community, fosters pride and
   encourages support for those who work with the youth.

2. Children's - an annual that usually conducts the Saturday before with
   participation of children and parents. It is an event to encourage recognition of the businesses of the
   community.

3. celebration- an annual event which includes 2 to 3 days free
   community events. Also, the celebration includes a fund raising 5K walk-run event to support school
   function decided by your members.

4. sales - you promote the sales and encourage downtown businesses to have
   sales.

5. sales -you promote this annual event which will be held first Saturday of
   . This event brings people to the community which benefits local businesses.

6. Children's -you conduct this annual event for the children in a safe or
   and you encourage businesses to participate by out and
   .

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

3

7. kick-off- this event includes local church at different businesses and
   downtown park area, of a in the park area, drawings of free motive matinees and
   throughout the . Businesses are encouraged to open on the
   before to promote buying locally.

Your website described a history remark of your organization including the previous name, G. Your website
also includes a business directory of your members, a listing of your local events and community attractions,
current at the local , and your latest newsletter.

Your revenues include dues, misc. gift cert and newsletter. Your expenses are mainly categorized by your
sponsored events and some administrative and office expenses.

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 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(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.

Treas. Reg. Section 1.501(c)(3)-1(b)(4) holds that an organization is not organized exclusively for one or more
exempt purposes unless its assets are dedicated to an exempt purpose. An organization's assets will be
considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, by reason of a
provision in the organization's articles or operation of law, be distributed for one or more exempt purposes.

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)(1)(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.

Treas. Reg. Section 1.501(c)(3)-1(d)(2) defines the term charitable as the relief the poor and distressed or 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.

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

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Revenue Ruling 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
of the United States interpreted the requirement in IRC Section 501(c)(3) that an organization be "operated
exclusively" by indicating that an organization must be devoted to exempt purposes exclusively. The presence
of a single non-exempt purpose, if more than insubstantial in nature, will destroy the exemption regardless of
the number and importance of truly exempt purposes.

Pius XII Academy, Inc. v. Commissioner, T.C. Memo. 1982-97, affd. 711 F.2d 1058 (6th Cir. 1983), provides
that an organization must establish through the administrative record that it operates as an exempt organization.
Denial of exemption may be based solely upon failure to provide information describing in adequate detail how
the operational test will be met.

In La Verdad v. Commissioner, 82 T.C. 215 (1984), the administrative record did not demonstrate that the
organization would operate exclusively in furtherance of an exempt purpose. Therefore, denial of organization's
request for tax-exempt status was reasonable.

New Dynamics Foundation v. United States, 70 Fed. Cl. 782 (2006), was an action for declaratory judgment
that the petitioner brought to challenge the denial of his application for exempt status. The court, in finding that
the actual purposes displayed in the administrative record supported the Service's denial, stated "It is well-
accepted that, in initial qualification cases such as this, gaps in the administrative record are resolved against the
applicant." The court noted that if the petitioner had evidence that contradicted these findings, it should have
submitted it as part of the administrative process. The court also highlighted the principle that exemptions from
income tax are matters of legislative grace.

Application of law

IRC Section 501(c)(3) sets forth two main tests for qualification of exempt status. As stated in Treas. Reg.
Section 1.501(c)(3)-1(a)(1), an organization must be both organized and operated exclusively for purposes
described in Section 501(c)(3).

There is no evidence that your Articles of Correction have been accepted and approved by D agency. As a
result, you have not satisfied the organizational test described in Treas. Reg. Sections 1.501(c)(3)-1(b)(1)(i)
and 1.501(c)(3)-1(b)(4).

You are not operated in accordance with Treas. Reg. Section 1.501(c)(3)-1(c)(1) because you are operated for
a substantial nonexempt private purpose. The facts show you are operated for the benefit of your business
members. Your sole purpose is to promote business and economic development in the community by serving as
a sponsor of the community events in which you encourage the businesses participation. These activities as
described does not further an exclusively charitable purpose as described in Treas. Reg. Section 1.501(c)(3)-
1(d)(2). These facts also illustrate that you are operated to serve the private interests of your member businesses
in contravention to Treas. Reg. Section 1.501(c)(3)-1(d)(ii).

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

5

You are like the organization described in Rev. Rul. 77-111 because your overall purpose is to promote
business which disqualifies you from exemption under IRC Section 501(c)(3).

In Pius XII Academy, Inc., La Verdad, and New Dynamics Foundation, it was established that an organization
must establish, through its administrative record, that it meets the requirements for exemption. The sponsoring
community events that you provided did not establish that you operate exclusively for the purposes described in
IRC Section 501(c)(3). While some of your community events, such as Day, Children's
, 5K Walk-Run, and Children's may have further
charitable purpose within the meaning of Section 501(c)(3), your primary purpose is promotion of business in
the community. As discussed in Better Business Bureau of Washington D.C., Inc., a single non-exempt purpose
if substantial in nature, will destroy the exemption regardless of the number or importance of truly exempt
purposes.

Conclusion

Based on the information submitted, you do not qualify for exemption under IRC Section 501(c)(3). You do not
meet the organizational test and operational test. You are operated for the private interests of your business
members.

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.

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

6

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:

Internal Revenue Service
EO Determinations Quality Assurance
Mail Stop 6403
PO Box 2508
Cincinnati, OH 45201

Street address for delivery service:

Internal Revenue Service
EO Determinations Quality Assurance
550 Main Street, Mail Stop 6403
Cincinnati, OH 45202

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. 01-2021)
Catalog Number 47628K