IRS denies 501(c)(3) status to a chamber of commerce because it operates for its members' common business interests

Plain-English summary

A small-town chamber of commerce applied to be recognized as a tax-exempt charity under section 501(c)(3). It had once held 501(c)(3) status through a streamlined Form 1023-EZ, but lost it automatically after failing to file Form 990 for three straight years, and was now reapplying with a full Form 1023. Its activities include networking events, workshops bringing in professionals to help small businesses, ribbon cuttings, disaster relief for local businesses, advertising campaigns, a business directory, and some scholarships. The IRS denied exemption. To qualify, a group must be both organized and operated exclusively for exempt purposes. It failed the "organizational test" because its articles of incorporation state only a broad "community organization" purpose (broader than section 501(c)(3) allows) and contain no required dissolution clause. It failed the "operational test" because its activities primarily serve the common business interests of its members (advertising, referrals, directories, networking, promotion) rather than charity or education. The IRS relied on Rev. Rul. 71-504 and 73-567 and on Better Business Bureau v. United States, which hold that a single substantial non-charitable purpose defeats exemption no matter how many charitable purposes also exist. This document combines the final adverse determination (Letter 4038) with the earlier proposed adverse determination (Letter 4034); the applicant did not protest, so the denial became final. Because the organization is not exempt, contributions to it are not deductible under section 170. It matters to chambers of commerce and business associations weighing 501(c)(3) versus 501(c)(6) status.

Ruling snapshot

• Question: Does the applicant chamber of commerce qualify for exemption under IRC § 501(c)(3)?
• Outcome: denied (fails both the organizational and operational tests)
• Key authorities: IRC § 501(c)(3); IRC § 170; Treas. Reg. § 1.501(c)(3)-1(a)(1), (b)(1)(i), (c)(1); Rev. Rul. 71-504; Rev. Rul. 73-567; Better Business Bureau, D.C., Inc. v. United States, 326 U.S. 278

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service 06/05/2023
Tax Exempt and Government Entities

IRS PO Box 2508
Cincinnati, OH 45201

Employer ID number:

Tax years:
All

Person to contact:

Release Number: 202335019
Release Date: 9/1/2023

UIL Code: 501.03-05,
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

Cincinnati, OH 45201
Date:

February 6, 2023
Employer ID number:

Person to contact:

Name:
ID number:
Telephone:
Fax:
Legend: UIL:
B = state 501.03-05
C = date 1 501.03-30
D = date 2

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 meet the organizational or operational test under IRC Section 501(c)(3)? No, for the reasons described
below.

Facts
You were incorporated under the laws of B on C. Your business purpose as stated in your Articles of
Incorporation is "community organization". Your AOI refer to your Bylaws for additional provisions.

You originally received exemption under IRC Section 501(c)(3) on D with Form 1023-EZ. However, you did
not file Form 990(s) for three consecutive years and were auto-revoked of your exempt status. You are now
applying for restatement of tax exemption under Section 501(c)(3) with this Form 1023 application.

You state on Form 1023 that you conduct the following activities:

1. Networking Events: Bringing local business together and discuss their struggling areas and find solution
with the help of professionals. Activities are held at local restaurants, the library, or city hall.
Networking events are funded by donations, sponsorships, and fees. You help local businesses better

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


2

manage and connect with the community. The time spent by your Board of Directors and volunteers on
each activity depends on event size.

2. Workshops for all: Bringing experts of different business professionals (i.e., lawyers, accountants,
marketing professionals, etc.) to help small businesses in areas they struggle with. The activities are held
at local restaurants, library, or city hall. You help local businesses succeed and serve better to
community. The time spent by your Board of Directors and volunteers on each activity depends on event
size.

You provide that you spend:

° % towards business improvement and building community power networking events

° % towards new business supporting and ribbon cutting

° % towards workshops, educational meetings, and seminar for the local businesses

° % towards helping businesses affected by disaster

° % towards helping struggling professionals on seeking efforts and provide resources to further
professional skills

% towards providing free administrative assistance including notary service and certificate of origin.

You are a small town chamber of commerce with limited funding from membership and events that needs to
raise more money to create a positive impact in the community as well as help businesses to grow and bring the
community together. You will provide a platform to small businesses, entrepreneurs, and future leaders to meet
like-minded individuals to foster growth amongst your community.

Some of your focused activities include:

Helping disadvantaged-owned, women-owned, minorities-owned small businesses
Helping small business effected by disaster

Providing free membership and services

Providing scholarships to high school and college students

Shop local project to create awareness in the community

Organizing multiple events and advertising campaigns

Sending publications to all local residents

All funds raised by you are used solely for the benefit of your local community and small businesses. No board
member will receive any benefits including salary or bonuses. You do not fund or promote political activities.

Membership is open to business owners, professionals, local community members, and students. You hold
meetings monthly, quarterly, and annually at the local library, city hall, community centers and restaurants.
Events are mostly free; some require a small entry fee. Your members common business interest is access to
resources available to them that you provide to improve their businesses.

Membership benefits include:

* Free admin support
Involvement opportunities
Advertising
Free business directory listing
Access to info to answer common questions

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

Chamber perks (specialists, discounts, coupons)
Legislative initiatives

Referrals of your business

Power networking events

SBD events and seminars

Your financial information shows that all your income for the past five years derives from membership fees.
You disbursed funds for website fees, office supplies, marketing expenses, and bank charges.

Law

IRC Section 501(c)(3) provides for the exemption from federal income tax of corporations organized and
operated exclusively for charitable or educational purposes, provided no part of the net earnings inures to the
benefit of any private shareholder or individual.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) provides that to be exempt as an organization described in
section 501(c)(3) of the Code, an organization must be both organized and operated exclusively for one or more
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 to meet the organizational test an organization must be
organized exclusively for one or more exempt purposes.

Treas. Reg. Section 1.501(c)(3)-1(c)(1) provides that an organization operates exclusively for exempt purposes
if it engages primarily in activities that accomplish exempt purposes specified in section 501(c)(3) of the Code.
An organization must not engage in substantial activities that fail to further an exempt purpose.

Revenue Ruling 71-504, 1971-2 C.B. 139, describes a city medical society, exempt under IRC Section
501(c)(6), that primarily directs its activities toward the promotion of the common business interests of its
members. The ruling provides that since the society has substantial noncharitable and noneducational purposes
and activities, it is not a charitable organization. Accordingly, it is held that this association may not be
reclassified as an organization exempt from federal income tax under Section 501(c)(3) of the Code.

Revenue Ruling 73-567, 1973-2 C.B. 178, states that by examining and certifying physicians under the
circumstances described, the board promotes high professional standards. Although some public benefit may be
derived from promoting high professional standards in a particular medical specialty, the activities of the board
are directed primarily to serving the interest of the medical profession. Under these circumstances, the board is
not organized and operated exclusively for charitable purposes and does not qualify for exemption from Federal
income tax under Section 501(c)(3) of the Code.

Better Business Bureau, D.C., Inc v. United States, 326 U.S. 278 (1945), the court held that an organization is
not operated exclusively for charitable purposes, and thus will not qualify for exemption under section
501(c)(3), if it has a single non-charitable purpose that is substantial in nature. This is true regardless of the
number or importance of the organization's charitable purposes.

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

Application of law
You are not described under IRC Section 501(c)(3) or Treas. Reg. Section 1.501(c)(3)-1(a)(1) because you do
not meet the organizational or operational tests.

Organizational Test
Your Articles of Incorporation do not contain the requisite purpose and dissolution provisions of IRC Section
501(c)(3). To demonstrate it is organized exclusively for exempt purposes, thus satisfying the organizational
test, an organization must have a valid purpose clause (Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i)) Rather, your
Articles of Incorporation state your business purpose to be "community organization"; a purpose that is broader
than the purposes specified in Section 501(c)(3). No dissolution clause was included.

Operational Test
Although you do conduct some charitable and educational activities, these are insubstantial when compared to
your non-exempt activities. You will promote and assist businesses in your local area. Your members are
mainly business owners, and they attend your meetings and events to improve their businesses. These activities
are not described in IRC Section 501(c)(3) but instead further the common business purpose of your members.
Therefore, you are not described in Section 501(c)(3). See Treas. Reg. Section 1.501(c)(3)-1(c)(1).

Similar to the organizations in Revenue Rulings 71-504 and 73-567, although some of your listed activities
further charitable and educational purposes, most of the activities listed further benefit your members. This
includes advertising, directories, promotions, networking, referrals, publicity and support. And although you
conduct charitable activities such as offering scholarships, disaster relief or the support of minority owned
businesses, when substantial, the presence of non-exempt purposes precludes exemption regardless of other
qualifying activities. As indicated in the ruling, and per the ruling in Better Business Bureau v. United States, a
substantial non-exempt purpose of promotion of businesses will preclude exemption under IRC Section
501(c)(3) regardless of the number or importance of truly charitable or educational purposes.

Conclusion
Based on the above, we find that you are not organized and operated for exempt purposes within the meaning of
IRC Section 501(c)(3). You fail both the organizational and operational tests for exemption required under
Section 501(c)(3). Accordingly, we conclude you do not qualify for exemption under Section 501(c)(3).
Contributions to you are not deductible under IRC Section 170.

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
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. 01-2021)
Catalog Number 47628K


Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

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