Local business group denied 501(c)(3) status for serving members' private interests

Plain-English summary

A local business group applied for recognition as a tax-exempt educational organization under Section 501(c)(3). It offered networking events, professional-development programs, online listings, social-media promotion, and other opportunities for participating businesses to gain recognition and grow. The IRS denied exemption because those activities provided substantial direct benefits to the group's members and promoted their businesses. Under the operational test, a 501(c)(3) organization must primarily further exempt purposes and serve public rather than private interests. The IRS concluded that the group's substantial non-exempt purpose of serving member businesses prevented it from qualifying, even if some activities also benefited the wider community.

Ruling snapshot

• Question: Does a local business group that provides networking, development, listings, and promotional opportunities to its members 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. 61-170; 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: 202431015                               Tax years:
Release Date: 8/2/2024                                  All
UIL Code: 501.03-00,                                    Person to contact:
501.33-00, 501.35-00

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
Date: February 15, 2024

Employer ID number:

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

Legend:                         UIL:
X = Date                        501.03-00
Y = State                       501.33-00
q 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 are an unincorporated association formed 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 educational 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

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* 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

The Form 1023-EZ states that your mission is to bring local business leaders together to grow their businesses,
support local commerce, and interact with local government, encouraging growth within your community.

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

Your response states that your activities include the provision of:

* Networking opportunities with local business leaders in your area,
* A platform for participating businesses to highlight and share information about their businesses in-
  person with other local business leaders and village representatives,
* Professional development opportunities in which each event will provide opportunities to hear from
  speakers or learn from other business leaders that share valuable information,
* A listing of participating businesses on your website,
* Opportunities for growth and recognition in the community.

There is a one-time fee of q dollars for participating businesses which includes events, online promotions, and
business listings on your website and other social media platforms where the businesses may share information
on special events and news about their business.

You explained that state your activities further your exempt purpose by allowing business owners to promote
and grow their business within your community with no fundraising and only a one-time membership fee.

Your website states you are a group of local business leaders whose purpose is to grow their businesses and
support other local commerce and interact with your local government to encourage and build a strong
foundation for your community. Your website also includes a business directory providing a list of members'
businesses.

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

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

3

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.

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.

Revenue Ruling 61-170, 1961-C.B. 112, describes a nurses' association which maintained an employment
registry primarily for the employment of its members, which was not entitled to exemption as a charitable
organization under IRC Section 501(c)(3). Specifically, the organization was serving the private interests of its
members by providing employment opportunities for members.

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. 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
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 are 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).

The organization described in Rev. Rul. 61-170 provided a service for its members and thus served the
members' private interests. Like that organization, you were formed to provide benefits to your members. In
your case, you are providing networking and professional development opportunities to your members and
various platforms to promote the businesses of your members. 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.

As explained in Better Business Bureau, a single, substantial non-exempt purpose is sufficient to prevent
exemption. You have a substantial nonexempt private purpose of providing services to your members to allow
them to promote and grow their businesses, which prevents you from qualifying for exemption under IRC

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

4

Section 501(c)(3).

Like the organization described in Colorado State Chiropractic Soc., your activities promote individual
members' businesses. The promotion of your members' businesses is a substantial nonexempt purpose.
Therefore, you are not exempt under 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 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

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

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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.

We sent a copy of this letter to your representative as indicated in your power of attorney.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

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