IRS denies 501(c)(3) status to a business networking group

Plain-English summary

A group of business owners and skilled tradespeople applied for tax-exempt charitable status under Section 501(c)(3) using the streamlined Form 1023-EZ. Its activities were running a farmers market where local vendors sell their own goods, holding quarterly professional networking meetings for members, and helping with some community events. The IRS denied the exemption on two grounds. First, the group failed the "organizational test" because, despite requests, it never submitted a complete copy of its articles of incorporation showing the required exempt-purpose and dissolution provisions. Second, it failed the "operational test" because its main activities (the farmers market and member networking) serve the private interests of vendors and members rather than a public charitable interest. The IRS compared it to a revenue ruling denying charitable status to a bar association whose activities furthered members' common business interests, and cited the Supreme Court rule that a single substantial non-exempt purpose defeats exemption. This is the final adverse determination; it became final because no protest was filed within 30 days. It reproduces both the final letter (Letter 4038) and the proposed adverse letter (Letter 4034).

Ruling snapshot

• Question: Does a business networking group that runs a farmers market and member meetings qualify for exemption under IRC § 501(c)(3)?
• Outcome: Denied (final adverse determination; fails both the organizational and operational tests; serves private interests).
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(b), (c)(1), (d); Rev. Rul. 71-505; Better Business Bureau v. United States, 326 U.S. 279

Full text (IRS public release)

Department of the Treasury Date:

Internal Revenue Service 01/23/2023

Tax Exempt and Government Entities Employer ID number:
IRS P.O. Box 2508

Cincinnati, OH 45201

Form you must file:

Number: 202316009 Tax years:
Release Date: 4/21/2023

Person to contact:

UIL: 501.00-00, 501.03-00, 501.03-05

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
IRS Cincinnati, OH 45201
Date: November 21, 2022

Employer ID number:

Person to contact:

Name:
ID number:
Telephone:
Fax:
Legend: UIL:
B=Date 501.00-00
C=State 501.03-00
D= Name 501.03-05

x 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 attest that you were incorporated on B, in the state of C. 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 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 IRC Section 501(c)(3).

You attest that you are organized and operated exclusively to further charitable 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:

• 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

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

2

• 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

During review of your Form 1023-EZ, detailed information was requested supplemental to the above
attestations.

Your bylaws state you are operating for the purpose of providing an open environment for business and skilled
tradespeople to share expertise and experiences with one another in informal networking settings and
mentorship capacities and to support the needs of the community at large. Your bylaws also state that you seek,
with the help of one another, to educate, inspire, and encourage your members and members of your community
on matters pertinent to the businesses within the D area. Your members are comprised of individuals within the
D area and surrounding areas who want to promote your purposes.

You spend % of your time operating a farmer's market. You explained that

and the event if someone to
help organize it. You then decided that your members could provide the needed support to allow the farmer's
market to continue. The market operates primarily during typically on Fridays at a

and the dates are published on social media. Local farmers and crafters attend to sell their own goods. You
request but do not require a donation of x dollars from each vendor to defray the cost of renting a portable toilet/
sink, and folding tables/chairs. A and organization supports the event with you and
provides demonstrations.

Youspend % of your time on networking events which involves conducting professional networking
meetings on a quarterly basis. Your networking meeting dates are published on social media and distributed to
an email list of approximately people. At these networking meetings, the attendees discuss upcoming
community events where you might volunteer, local nonprofit board vacancies and needs, and employment
vacancies. You also have discussed doing resume reviews and mock interviews and informally peer mentoring to
one another.

You spend % of your time on assisting other service clubs and community events. This may involve
clean up, holiday decorating and trick or treat. In the future, you hope to network with local high school clubs
and conduct mock interviews and resume reviews.

Finally, you provided a printout from C's website showing that you are a corporation. However, you did not
provide a complete copy of your Articles of Incorporation showing they were filed with C even though they
were requested.

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

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 and operated exclusively
for one or more exempt purposes of organization:
(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 purpose.

Treas. Reg. Section 1.501(c)(3)-1(b)(4) which requires the dedication of remaining assets exclusively for
purposes in IRC Section 501(c)(3).

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 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.

Revenue Ruling 71-505, 1971-2 C.B. 232 describes a city bar association, exempt under IRC Section 501(c)(6),
that could not be reclassified as an educational or charitable organization exempt under Section 501(c)(3).
Although the organization had a number of charitable and educational activities, a substantial portion of the
organization's activities were directed at the promotion and protection of the practice of law and therefore
furthered the common business purpose of its members.

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.

Application of law
IRC Section 501(c)(3) and Treas. Reg. Section 1.501(c)(3)-1(a)(1) set forth two main tests for an organization
to be recognized as exempt. An organization must be both organized and operated exclusively for purposes

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

4

described in Section 501(c)(3). Based on the information you provided in your application and supporting
documentation, we conclude that you fail both tests.

Although they were requested, you did not submit a complete copy of your Articles of Incorporation showing
that they have the required provisions to meet the organizational test for IRC Section 501(c)(3). As a result, you
have not established that you satisfy 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 do not meet the operational test under IRC Section 501(c)(3) because you are not operating exclusively for
charitable purposes as required under Treas. Reg. Section 1.501(c)(3)-1(c)(1). You are organizing a farmer's
markets for vendors to sell products. You are also conducting networking events for your members. These
activities serve the private interest of the vendors and your members rather than a public interest as required by
Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii).

You are similar to the organization in Rev. Rul. 71-505 because even though you are conducting charitable
activities, a substantial portion of the organization's activities are directed to a substantial nonexempt purpose.

As held in Better Business Bureau of Washington, D.C., Inc. v. United States, a single non-exempt purpose, if
substantial, will preclude tax exemption under IRC Section 501(c)(3). You are hosting farmers markets and
networking events, which is a substantial non-exempt purpose. Therefore, you are not operating exclusively for
an exempt purpose as described in Section 501(c)(3).

Conclusion

You do not meet the requirements for tax exemption under IRC Section 501(c)(3). You have not established
that you meet the organizational test for Section 501(c)(3). You fail the operational test because you are
operated for substantial nonexempt purposes, and you are serving private interests. 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
• 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

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

5

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

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

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