IRS denies 501(c)(3) status to a members' business association that promotes its members' commercial interests

Plain-English summary

An organization applied for recognition as a tax-exempt charity under section 501(c)(3), describing itself as a group that increases members' knowledge, promotes best practices and higher business standards, represents members in the community, and partners with the local Chamber of Commerce and visitor bureau to promote the area. Its members were owners, managers, and operators of local establishments (its website features an interactive map of member vacation-rental properties and links to each), and it spent most of its time on member meetings and running a website that drives customer traffic and referrals to member businesses. The IRS issued a final adverse determination denying exemption. It found the group fails the organizational test because its articles of incorporation do not limit its purposes to exempt purposes (they list advancing members' business conditions) and contain no dissolution clause dedicating assets to charity. It also fails the operational test because it is operated for the private business interests of its members rather than the public, which is not an exclusively educational or charitable purpose. The IRS compared the group to the members-serving nurses' registry in Rev. Rul. 61-170 and the business-promoting bar association in Rev. Rul. 71-505, and cited the rule from Better Business Bureau v. United States that one substantial non-exempt purpose defeats exemption. Because the taxpayer did not protest the earlier proposed adverse determination within 30 days, that determination became final. The document is the final adverse letter (Letter 4038) with the enclosed proposed adverse determination (Letter 4034).

Ruling snapshot

• Question: Does a members' association organized to advance its members' business conditions and promote their establishments qualify for exemption under section 501(c)(3)?
• Outcome: Denied (final adverse determination)
• 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. 61-170; Rev. Rul. 68-504; Rev. Rul. 71-505; Quality Auditing Company, Inc. v. Commissioner; Better Business Bureau of Washington, D.C., Inc. v. United States

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service 05/17/2023
Tax Exempt and Government Entities Employer ID number:

IRS Box 2508

Cincinnati, OH 45201

Form you must file:

Number: 202332018 Tax years:
Release Date: 8/11/2023

Person to contact:

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
IRS Cincinnati, OH 45201
Date: March 15, 2023

Employer ID number:

Person to contact:

Name:
ID number:
Telephone:
Fax:
Legend: UIL:
B = Date 501.00-00
C = Date 501.03-00
D = State 501.03-30

E = Location
F = Location

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, 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 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 Section 501(c)(3). Specifically, you attest
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

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


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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)

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

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

You described your mission or most significant activity on the Form 1023EZ is to increase the knowledge of
members to promote best practices and develop higher business standards, to represent members throughout the
community and to partner with the local Chamber/Visitor Bureau to promote the local area.

During review of your Form 1023-EZ, detailed information was requested supplemental to the above
attestations. You submitted your Articles of Incorporation which indicate your purposes as follows:

To improve and advance business conditions for E establishments,
To promote higher business standards and better business methods,
To associate members together for their mutual benefit as owners, managers, or operators of E
establishments,
To provide a forum for members,
e To represent members' point of view to legislative and regulatory agencies with respect to the common
business interests of the members,
To foster the trade, commerce, and interests of members,
To provide nonpecuniary systems and services which enhance the membership,
To promote the programs and services of the F.

In addition, the submitted Articles of Incorporation are silent concerning the disposition of assets upon
dissolution.

You explained in your response that you represent members throughout the community and partner with the
local Chamber/Visitor Bureau to promote the G area. You collaborate with local colleges and universities to
provide "real world" opportunities to apply branding, and marketing theories to improve your membership
offerings. You represent member properties with a strong social media presence for marketing and business
development.

You explained that you spend seventy percent of your time on holding in person and virtual membership
meetings. These meetings support the ongoing success of individual small businesses through like-minded
community building and education in which you discuss essential topics of interest as best practices for
adoption for your members' establishments. You discuss changes required to improve your website as well as
identify advertising and marketing opportunities.

You further explained that you spend thirty percent of your time on maintaining a website which helps with
search engine optimization and increases the collective online presence of your members. The goals of the
website are to:

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


e Generate potential customer traffic to member businesses
e Serve as a referral tool between properties
e Provide information about the local area to promote tourism and economic growth of your area

The website also contains an interactive map of your member properties available for vacation rentals and
provides a link to each member property's individual website.

You further indicated that your members provide business referrals to other member businesses in order to
collectively benefit your members. To promote yourself and members, you purchased a digital advertisement
from the local chamber of commerce.

Your membership has two categories. These consist of:

1. The Voting membership which is only available to persons, firms or corporations owning, managing, or
operating one or more J establishment(s) that do business on a regular basis in E and the immediately
surrounding counties within a mile radius of F. Only they may vote at your regular meetings.
There is one vote per establishment.

2. The Non-Voting membership which is only available to persons, firms or corporations owning,
managing, or operating one or more establishment(s) that do business on a regular basis in E and the
immediately surrounding counties within a mile radius of F. Non-voting members are
expected to attend the meetings each year. They may vote for the election of officers at the annual
meeting. There is one vote per establishment. They may attend other meetings as observers, but they
cannot vote on motions presented at the meeting other than the annual meeting. They must comply with
all requirements of membership and must pay the dues set.

You charge annual membership fees. You indicated that your fees are voted annually to balance the cost of the
expenses with making them affordable to attract new members to provide increased positive impact within the
community.

Your income is primarily generated from membership fees. Your annual expenses include the cost of hosting
your website, the cost of digital advertisements and other administrative expenses such as new checks order and
filing fees.

Finally, you maintain industry involvement by offsetting limited travel expenses for members to attend national
industry events that highlight legislative issues, regulatory issues, and industry changes. The attendee is
required to provide an educational session for all members following their return.

Law

IRC Section 501(c)(3) sets forth two main tests for qualification of exempt status. As states 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).

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

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


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(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) 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).

Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) provides an applicant must show that it serves a public rather than a
private interest and specifically that it is not organized or operated for the benefit of private interests, such as
designated individuals, the creator or his family, shareholders of the organization, or persons controlled, directly
or indirectly, by such private interests.

Rev. Rul. 61-170, 1961-1 C.B. 112 describes an association composed of professional private duty nurses and
practical nurses which supported and operated a nurses' registry primarily to afford greater employment
opportunities for its members was not entitled to exemption under IRC Section 501(c)(3). Although the public
received some benefit from the organization's activities, the primary benefit of these activities was to the
organization's members.

Rev. Rul. 68-504, 1968-2 C.B. 211 describes a nonprofit organization formed and operated to conduct an
educational program for bank employees in a particular urban area qualifies for exemption.

Rev Rul. 71-505, 1971-2 C.B. 232 describes a city bar association, exempt under IRC Section 501(c)(6), cannot
be reclassified as an organization described in Section 501(c)(3). Specifically, a substantial portion of the
organization's activities were directed at the promotion and protection of the practice of law and thus further the
common business purpose of its members. These activities were substantial and reflect noncharitable and
noneducational purposes.

Quality Auditing Company, Inc. v Commissioner, 114 T.C. 498 (2000) describes an organization whose

activities consisted of performing quality audits of steel fabricators. It was held the organization more than
incidentally served private interests of the owners and developers and therefore did not qualify for exemption
under IRC Section 501(c)(3).

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

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). You fail both tests.

You attested that your Articles of Incorporation meet the organizational test for IRC Section 501(c)(3).
However, the submitted Articles of Incorporation state in part that your purpose is "To improve and advance

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


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business conditions, provide a forum to your members and to promote higher business standards and better
business methods". 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 Section 501(c)(3). Furthermore,
your Articles of Incorporation do not contain a dissolution clause as required by Treas. Reg. Section
1.501(c)(3)-1(b)(4). 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 operated for a
substantial nonexempt private purpose. Your purposes are focused on improving and advancing business
conditions of your members business. You promote higher business standards and better business methods to
serve your members. You operate an interactive map on your website to promote members' businesses. These
activities as described do not further an exclusively educational purpose. 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)(1)(ii). You are like the organization described in Rev. Rul. 61-170 in that the primary
beneficiaries of your activities are your members and not the general public.

You are not like the qualifying organization described in Revenue Ruling 68-504. You are not operated
exclusively for educational purposes within the meaning of IRC Section 501(c)(3). Rather you are like the
organization described in Revenue Ruling 71-505. Your activities are directed toward the common business
purpose of your members. These activities are substantial and reflect noncharitable and noneducational
purposes.

Like the organization in the court case, Quality Auditing Company, you are more than incidentally serving
private interests. As explained in the court case, Better Business Bureau, although you may have some
educational and charitable purposes, you are operated for substantial nonexempt 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 because your organizing document does not limit your purposes to those described
in Section 501(c)(3). You also do not meet the operational test for Section 501(c)(3) because you are operated
to further the private interests of your members and are operated for a substantial non-exempt purpose.
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

Letter 4034 (Rev. 01-2021)
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 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


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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