501(c)(3) application denied to a for-profit corporation that funds and advises businesses for "repayment fees"

Plain-English summary

An organization applied for recognition as a 501(c)(3) charity, describing its mission as creating opportunities for the underprivileged and helping entrepreneurs grow their businesses. The IRS denied the application. To qualify under section 501(c)(3), an applicant must pass both an "organizational test" (its charter has to limit it to exempt purposes and dedicate its assets to charity) and an "operational test" (it must actually operate primarily for exempt purposes and serve the public rather than private interests). This applicant failed both. It was still incorporated as a for-profit "profit corporation" authorized to issue stock, and even its amended articles kept that form with no purpose or dissolution clauses. In operation, it selected entrepreneurs (any entrepreneur with growth potential could apply) to fund and coach, and it charged "repayment fees" ranging from one percentage of income to another based on how much help it provided. The IRS concluded this promotes private businesses and the private interests of their owners, not a charitable class, and that a substantial non-exempt purpose defeats exemption (citing Better Business Bureau and contrasting the case with the depressed-area economic-development charity in Rev. Rul. 74-587). Because the applicant did not file a protest within 30 days, the proposed denial became final; it must file Form 1120 corporate returns, and donors cannot deduct contributions to it.

Ruling snapshot

• Question: Does an organization that is incorporated for profit and funds/advises entrepreneurs' businesses in exchange for repayment fees qualify for exemption under IRC § 501(c)(3)?
• Outcome: Denied (application; proposed adverse became final for lack of a timely protest)
• Key authorities: IRC § 501(c)(3); Treas. Reg. §§ 1.501(c)(3)-1(a)(1), (b)(1)(i), (b)(4), (c)(1), (d)(1)(ii); Rev. Rul. 74-587; Rev. Rul. 77-111 (Situation 1); Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945)

Full text (IRS public release)

(Scanned document; OCR-proofread. Obvious scan misreads were corrected; wording is preserved verbatim. Letter 4034 uses a LEGEND for redacted items: B = State, C = Date, D = number, E = Date, X percent / y percent = amounts.)

Department of the Treasury
Internal Revenue Service                                   Date: 11/09/2022
IRS Tax Exempt and Government Entities
PO Box 2508
Cincinnati, OH 45201

Form you must file: 1120
Tax years: All

Release Number: 202305015
Release Date: 2/3/2023
UIL Code: 501.00-00, 501.03-00, 501.03-30, 501.33-00, 501.35-00

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                                   Date: September 19, 2022
IRS PO Box 2508
Cincinnati, OH 45201

Legend:                        UIL:
B = State                      501.00-00
C = Date                       501.03-00
D = number                     501.03-30
E = Date                       501.33-00
X percent = amount             501.35-00
y percent = 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 incorporated in the state of B on C. Your Articles of Incorporation state that you were organized as a
"profit" corporation authorized to issue D shares of stock.

Per your Form 1023 application, you were formed to create opportunities for the underprivileged. Your founder
is the sole member of your board of directors.

More detailed information regarding your formation and activities was subsequently requested. You indicated
you were mistakenly set up as a profit corporation but should have been set up as a non-profit corporation and
should be recognized as such going forward. However, the Articles of Amendment dated E that you provided
still show your type as a profit corporation with authorized shares. No purpose or dissolution clauses are
included within.

Your purpose is to connect with entrepreneurs to grow and expand their businesses. Your specific activity is
looking for people to fund, educate, and help grow their business while also bringing in funding.
Any entrepreneur who is looking to grow their business may participate, and you advertise as such.

You will select entrepreneurs to help based on their drive, passion, and income potential. Specifically, you will
interview individuals about their business and vision, analyze the business to determine the best education and
funding needs, create a plan for the business to be implemented, and then launch or re-launch the business. You
will select using the following criteria:

   Must be an emerging market or profitable industry
   Must have a passionate owner or founder
   Must agree to repayment fees
   Must have integrity and a teachable individual

You require "repayment fees" after you help the business launch or re-launch. These fees will range from x to y
percent of income and will be based on how much you do directly to help the business in their day-to-day
operations and their needs going forward.

Your revenues consist of repayment fees and net unrelated business income. No expenses were noted.

Law
IRC Section 501(c)(3) provides for the exemption from federal income tax of organizations that are organized
and operated exclusively for charitable, religious, educational, or other purposes as specified by 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 qualify under IRC Section 501(c)(3), an
organization must be both organized and operated exclusively for one or more exempt 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 will be regarded as organized
exclusively for one or more exempt purposes only if its articles of organization limit the purposes of such
organization to one or more exempt purposes; and do not expressly empower the organization to engage,
otherwise than as an insubstantial part of its activities, in activities which in themselves are not in furtherance of
one or more exempt purposes.

Treas. Reg. Section 1.501(c)(3)-1(b)(4) provides 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, 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 operated exclusively for one or
more exempt purpose unless it serves a public rather than a private interest. It must not be operated for the
benefit of designated individuals or the persons who created it.

Revenue Ruling 74-587, 1974-2 C.B. 162, describes an organization that provided funding only to businesses
located in a deteriorated area whose owners could not obtain conventional financing. The organization devoted
its resources to programs to stimulate economic development in economically depressed, high-density, urban
areas, inhabited mainly by low-income minority or other disadvantaged groups. Many of the businesses located
in these areas had declined or fallen into disrepair, and others had ceased to operate. The organization's
program was determined to be operated in a way that the law regards as charitable because it was lessening
prejudice and discrimination, relieving poverty, reducing neighborhood tensions, and combatting community
deterioration.

Rev. Rul. 77-111, 1977-1 C.B. 144, in Situation 1, described an organization formed to increase business
patronage in a deteriorated area mainly inhabited by minority groups. It accomplished this purpose by providing
information on the area's shopping opportunities and potential, local transportation, and accommodations.
Although its activities may contribute to the achievement of the purposes described in IRC Section 501(c)(3),
the overall thrust is to promote business rather than to accomplish exclusively Section 501(c)(3) objectives. The
organization does not limit its activities like that of Rev. Ruling 74-587. Thus, it did not qualify for exemption
under Section 501(c)(3).

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.

Application of law
IRC Section 501(c)(3) sets forth two main tests for qualification of exempt status. Per 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).

You do not meet the organizational test as explained in Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i) and
1.501(c)(3)-1(b)(4). You are organized as a profit corporation and your articles do not limit your purposes to
one or more exempt purposes or dedicate your assets to an exempt purpose.

You do not meet the operational test because you are not operated "exclusively" for exempt purposes as
required by Treas. Reg. Section 1.501(c)(3)-1(c)(1). More than an insubstantial part of your activities includes
providing funding and advice to individuals to further their for-profit businesses. Your program is not limited
for charitable purposes or to a charitable class. Instead, it serves the private interests of individuals and
businesses, rather than a public interest as required by Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii). Like Better
Business Bureau, this substantial, non-exempt purpose precludes exemption under IRC Section 501(c)(3).

You are dissimilar to Rev. Rul. 74-587 because you do not limit your program to devote your resources to
benefit the community in a way that the law regards as charitable. You help any entrepreneur that demonstrates
growth potential, and you receive fees in return for this assistance. You are instead similar to Rev. Rul. 77-111,
Situation 1, because your overall thrust is to promote business rather than accomplish "exclusively" exempt
purposes.

Conclusion
Based on the facts and information submitted, you do not qualify for exemption under IRC Section 501(c)(3).
You do not meet the organizational test because you are formed for profit, your articles do not limit your
purposes to one or more exempt purposes, and your assets are not dedicated to an exempt purpose. You do not
meet the operational test because you are operated for the substantial, non-exempt purpose of furthering
businesses and private interests.

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 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
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