Winery association denied 501(c)(3) status because promotion served member businesses

Plain-English summary

A regional winery association applied for recognition as an educational organization under Section 501(c)(3). It promoted member wineries through signs, brochures, maps, a website that directed consumers to each winery, and passport weekends offering tastings and food. It was also pursuing an official wine-growing-region designation for the mutual benefit of wineries and consumers. The IRS denied exemption because these substantial activities promoted the businesses of the association's members and served their private interests. Any wine education or charitable wine donations did not overcome the substantial non-exempt purpose, so the association failed the operational test for 501(c)(3) status.

Ruling snapshot

• Question: Does a regional winery association whose education is combined with extensive promotion of member wineries qualify under IRC § 501(c)(3)?
• Outcome: denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a), (c), (d); Rev. Rul. 71-504; Better Business Bureau of Washington, D.C., Inc. v. United States; Colorado State Chiropractic Society v. Commissioner

Full text (IRS public release)

Department of the Treasury                              Date:
Internal Revenue Service                                05/09/2024
Tax Exempt and Government Entities                      Employer ID number:

                                                        Form you must file:

Release Number: 202431013                               Tax years:
Release Date: 8/2/2024                                  All
UIL Code: 501.03-00,                                    Person to contact:
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

Date: March 4, 2024

Employer ID number:

Person to contact:
Name:
ID number:
Telephone:
Fax:

Legend:                         UIL:
B = Date                        501.03-00
C = State                       501.03-05
D = Location
E = City
F = Name
j = Number
k 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 Section 501(c)(3) of the Code, 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) of the
Code.

You attest that you are organized and operated to further educational purposes. You attest that you have not
conducted and will not conduct prohibited activities under Section 501(c)(3) of the Code. Specifically, you
attest you will:

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

2

* 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 nonexempt 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 to 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.

You stated on your 1023-EZ application that your mission is to raise the awareness of vineyards and wineries in
the D region. You support both the winery members and the grower members.

During review of your Form 1023-EZ, detailed information was requested supplemental to your attestations.
You are an association of j wineries in the D region located in northern E county. Your activities promote the
region and each specific winery to increase awareness among wine consumers. You use road signage, freeway
signage, and regional brochures and maps for promotional purposes. Your regional website directs wine
consumers to each of your j wineries. You conduct D wine country passport weekends whereby you sell
passports which grant wine consumers access to wine tasting events at all your j wineries, and the passport also
covers food. You conduct wine pouring activities for nonprofit social events to help them with fundraising. No
money is charged to the nonprofit organizations and all wine is donated for these events.

You are in the process of applying with the F for the D region to be designated as an official wine grape-
growing region. This will provide an official appellation for the mutual benefit of wineries and consumers. The
application process will cost k dollars that is being shared by your members.

Your Articles of Incorporation were obtained from the website of state C and shared with you. They state you
are organized for public purposes and that your specific purpose is wine education.

Law

IRC Section 501(c)(3) provides, in part, for the exemption from federal income tax of organizations organized
and operated exclusively for charitable, religious, or educational purposes, in which 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, for an organization to be exempt and described
in IRC Section 501(c)(3), that 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
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.

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

3

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. 71-504, 1971-2 C.B. 231, describes a city medical society, which had been recognized as exempt from
federal income tax under IRC Section 501(c)(6), and then asked the Service to be reclassified as an educational
organization exempt under Section 501(c)(3). While some of its activities were charitable, the organization had
substantial noncharitable and noneducational purposes and activities, which precluded it from qualifying 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 exclusively devoted to exempt purposes. 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.

In Colorado State Chiropractic Soc. v. Commissioner, 93 T.C. 487 (1989), it was held that many of the
organization's activities were promoting individual members' businesses and thus the organization failed to
qualify for exemption under IRC Section 501(c)(3). These include grand openings or open houses held by
organization's members' individual chiropractic practices. Such activities were not related to the general
imparting of information to the public about the importance of chiropractic health care.

Application of law

IRC Section 501(c)(3) sets forth two main tests for an organization to be recognized as exempt. An organization
must be both organized and operated exclusively for purposes described in Section 501(c)(3) as specified in
Treas. Reg. Section 1.501(c)(3)-1(a)(1). You are not operated exclusively for purposes described in Section
501(c)(3). You are primarily promoting your member wineries in the D region. For example, you have created
signage and regional brochures and maps for promotional purposes. Your regional website directs wine
consumers to each of your j wineries. These activities are substantial and therefore, you are not operating
exclusively for an exempt purpose as described in Treas. Reg. Section 1.501(c)(3)-1(c)(1). Further, your
activities are designed to serve the private interests of your member wineries which is in contravention to Treas.
Reg. Section 1.501(c)(3)-1(d)(1)(ii).

You are like the organization in Rev. Rul. 71-504 since your activities are serving the private interests of your
member wineries. You are promoting the businesses of your members. This is evidenced by the fact that you are
obtaining an official designation which serves the private interests of your members. While you may carry on
some educational activities, you are conducting substantial non-exempt activities for your members which
precludes exemption under IRC Section 501(c)(3).

Like the organization in Better Business Bureau, you have a substantial non-exempt purpose of promoting the
wineries in the D region, and that destroys exemption under IRC Section 501(c)(3) regardless of the number and
importance of truly exempt purposes.

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

4

Like the organization described in Colorado State Chiropractic Soc., your activities promote the businesses of
your members which is a substantial nonexempt purpose. Therefore, you are not exempt under Section
501(c)(3).

Conclusion

Based on the information you have provided, you are not operated exclusively for exempt purposes. You are
serving 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
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:

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

5

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