Business membership group denied charitable exemption

Plain-English summary

An organization applied for section 501(c)(3) status with a mission of promoting the future growth of a defined business community. Its activities included business workshops, member meetings and appreciation events, meetings with merchants, an annual dinner, and new-business ribbon cuttings. Members paid annual dues and received business-growth services, information, networking, and leadership opportunities. The IRS found that these activities directly benefited individual members and promoted business interests rather than serving an exclusively charitable public purpose. Because the private benefit and other nonexempt purposes were substantial, the IRS denied exemption, and the determination became final after the organization did not protest within 30 days.

Ruling snapshot

• Question: Did the business membership organization operate exclusively for exempt purposes and serve public rather than private interests?
• 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 Date:

Internal Revenue Service 10/23/2023

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

Cincinnati, OH 45201

Form you must file:

1120
Tax years:
Release Number: 202403019 All
Release Date: 1/19/2024 Person to contact:
UIL Code: 501.03-00,
501.33-00

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
Cincinnati, OH 45201
Date: 08/23/2023

Employer ID number:

Person to contact:
Name:

ID number:
Telephone:
Fax:

Legend: UIL:

X = Date of Formation 501.03-00
Y = State of Formation 501.33-00
Z = Nationality

q dollars = Dues

r percent = Percent

s percent = Percent

t percent = Percent

u percent = Percent

v percent = Percent

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 X, in the state of Y. 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:

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

• 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

Form 1023-EZ states that your mission is to serve as the leading pro-business organization to ensure all
programs and services effectively contribute to the future growth of the Z business community.

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

Your response states that your activities and percentage of time and resources spent on activities include:

• Workshops such as economic development updates, budgeting for your business, work safety, etc. —r
percent

• Member meetings / appreciation event s percent

• Meetings with local merchants t percent

• Annual dinner u percent

• New business ribbon cuttings v percent

You state participants are business owners and their employees, local city leaders, and board members. You
charge an annual membership fee of q dollars. Your membership provides particular services such as business
growth, access to information, networking opportunities and leadership opportunities that benefit individual
members.

Law

IRC Section 501(c)(3) provides for the recognition of exemption of organizations that are organized and
operated exclusively for religious, charitable, educational 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, 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(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

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

3

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 exempt purposes unless it serves a public rather than a private interest. To meet this requirement, it is
necessary for an organization to establish that it is not organized or operated for the benefit of private interests.

Rev. Rul. 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 IRC 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
held that the presence of a single non-exempt purpose, if substantial in nature, will destroy a claim for
exemption regardless of the number or importance of truly exempt purposes.

In Colorado State Chiropractic Soc. v. Comm'r, 93 T.C. 487 (1989), a Mobile Education Unit (MEU) was used
and a majority of such uses were in connection with grand openings or open houses held by petitioner's
members’ individual chiropractic practices. Such uses were closely connected to the promotion of the particular
services of petitioner's members. Such uses were not related to the general imparting of information to the
public about the importance of chiropractic health care. Because such promotion of the practices of petitioner's
members is a commercial purpose and is not a purpose exempt under IRC Section 501(c)(3), the Court held that
the MEU was primarily used for furtherance of nonexempt purposes. Such nonexempt activities by petitioner
will taint petitioner and cause it to not be an organization described by IRC Section 501(c)(3), however, only if
those activities were more than an insubstantial part of petitioner's overall activities. See Better Business Bureau
of Washington, D.C. v. United States, 326 U.S. 279 (1945).

Application of law
You are not described in IRC Section 501(c)(3) because you don't meet the operational test outlined in Treas.
Reg. Section 1.501(c)(3)-1(a)(1).

You conduct activities that provide direct benefits to members that is more than insubstantial in nature. For this
reason, you are not operating exclusively for exempt purposes as described in Treas. Reg. Section 1.501(c)(3)-1(c)(1).

You were formed to provide benefits to your members. In your case, you are providing workshops, member
meetings, appreciation events, meetings with local merchants, annual dinners, and new business ribbon cuttings.
These activities serve the private interests of your members rather than a public interest. Treas. Reg. Section
1.501(c)(3)-1(d)(1)(ii) states that an organization is not operated exclusively for one or more exempt purposes
unless it serves a public rather than a private interest.

You are like the organization described in Rev. Rul. 77-111 because your activities service the private interest
of the members. As such, your activities do not exclusively further IRC Section 501(c)(3) purposes.
Accordingly, you do not qualify for exemption under Section 501(c)(3).

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

4

You are like the organization described in Colorado State Chiropractic Soc. v. Comm'r because you provide
particular services such as workshops, appreciation events and networking opportunities that benefit your
individual members.

As explained in Better Business Bureau of Washington, D.C., Inc., a single, substantial non-exempt

purpose is sufficient to prevent exemption. You have a substantial purpose of providing programs and services
to your members to ensure their growth, which prevents you from qualifying for exemption under IRC Section
501(c)(3).

Conclusion

You do not qualify for tax exemption under IRC Section 501(c)(3) because you are not operated exclusively for
exempt purposes. You further the private interests of your members and are operating for substantial non-
exempt purposes. Therefore, you do not qualify for exemption under IRC 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
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

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

5
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