A nonprofit that sells discounted branding and marketing consulting to startups and nonprofits does not qualify for 501(c)(3) exemption

Plain-English summary

To be exempt under Section 501(c)(3), an organization must pass both an
"organizational test" (its founding documents must limit it to exempt purposes) and
an "operational test" (it must actually operate mainly for exempt purposes and serve
the public rather than private interests). Here, an organization applied for 501(c)(3)
status to provide branding, marketing, and business-growth consulting to
social-impact startups and nonprofits at discounted or occasionally free rates. The
IRS denied exemption. It failed the organizational test because its articles of
incorporation described a broad purpose (amplifying the brand and marketing of
startups and nonprofits) that is not limited to exempt purposes. It failed the
operational test for two reasons: it provides ordinary commercial consulting services
for fees, which is a trade or business normally carried on for profit (an unrelated
trade or business), and it serves the private interests of its clients, including
for-profit companies, rather than the public. The IRS noted that simply charging
below standard rates does not make the work charitable unless the fee is
substantially below the cost of providing the service (the "donative element"), and
the applicant did not show that. Because providing commercial services to for-profit
and nonprofit clients was a substantial non-exempt purpose, exemption was denied.

Ruling snapshot

• Question: Does a nonprofit that provides discounted commercial branding and marketing consulting to startups and nonprofits qualify for exemption under IRC § 501(c)(3)?
• Outcome: Denied (fails both the organizational and operational tests; serves private interests)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a)(1), (b)(1)(i), (c)(1), (d)(1)(ii), (e)(1); § 513; Rev. Rul. 69-528; Rev. Rul. 71-529; Rev. Rul. 72-369; Better Business Bureau v. United States, 326 U.S. 279 (1945); § 7428(b)(2)

Full text (IRS public release)

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
Enclosures:
Letter 437
Redacted Letter 4034
Redacted Letter 4038
cc:




                                                                                         Letter 4038 (Rev. 11-2021)
                                                                                         Catalog Number 47632S
           Department of the Treasury
           Internal Revenue Service



                                                                                Date:
                                                                                07/29/2025
                                                                                Employer ID number:


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




Legend:                                                                       UIL:
B = Date                                                                      501.03-00
C = State                                                                     501.03-05
D = Program                                                                   501.33-00
e percent = Percent                                                           501.35-00
F = Program
g percent = Percent
h percent = Percent
K = Name

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 were incorporated on B, in the state of C. Your Articles of Incorporation stated that you are dedicated to
providing holistic support aimed at amplifying the brand and marketing effectiveness of tomorrows leading
social-impact-focused non-profit and start-up organizations. They further state that, upon dissolution, your
assets will be distributed for one or more exempt purposes within the meaning of IRC Section 501(c)(3).

You are dedicated to empowering and elevating the impact of purpose-driven startups and non-profit
organizations through strategic branding initiatives. Your goal is to help non-profits and startups articulate their
vision, enhance their visibility, and amplify their voice. To accomplish this you conduct a Brand Strategy
Development Program, and Business Growth Consulting Program.

Your D program assists non-profits and startups with developing a strong brand strategy that will enable them
to differentiate themselves from other organizations working in similar fields. Your board members, volunteers,
and branding and marketing agency partners negotiate costs of services, deliverables and personnel with these
                                                                                         Letter 4034 (Rev. 01-2021)
                                                                                         Catalog Number 47628K
                                                         2

non-profits and startups. This includes research, creation of a visual identity design, production of outreach and
communication materials, development of integrated branding campaigns and activation strategies, and
provision of training and support to internal teams or stakeholders to ensure consistent implementation of the
strategy. You allocate e percent of your total time and resources to this program.

Your F program is allocated g percent of your total time and resources, and offers tailored guidance, strategic
insights, and practical tools to accelerate the growth of non-profit and startups, enhance impact, and ensure
long-term sustainability. This program is delivered through a series of interactive workshops, one-on-one
consultations, and customized resources, including:
    x In-depth market research and analysis services,
    x Assessments by your board members and volunteers of the clients’ strategies, and provision of
        recommendations for optimizing resources, reducing costs, and improving overall efficiency,
    x Development of long-term sustainability plans, identification of revenue diversification opportunities,
        and creation of strategies for future growth and expansion,
    x Development of strategies to nurture existing client relationships and encourage repeat business and
        referrals, and
    x Establishment of key performance indicators to track the success of growth initiatives and ensure
        accountability.

Your services are provided to not-for-profit organizations, startups, or any organization that promotes social
impact initiatives. Your ideal candidates are small, local, non-profit organizations that attempt to do community
revitalization projects but cannot afford marketing costs. As long as the clients promote job creation, improved
access to education and healthcare, environmental conservation efforts, or cultural preservation initiatives, you
will volunteer to provide marketing and branding services at a very low cost.

Your volunteers will determine the cost of your marketing and branding services, utilizing their experience and
various tools to generate accurate and customized pricing estimates for the services, as if these entities were for-
profit entities. The fees actually charged will be discounted by at least h percent for organizations promoting
social impact initiatives.

Ideally you would like to offer your services completely for free, but in order to maintain financial stability, fees
will be charged to at least half of your clients. In determining which clients get free services, you look at a
number of factors, including:
    x Will the marketing services enhance the effectiveness of the clients’ programs or initiatives?
    x How will the marketing service benefit the people or communities the organization serves?
    x Can the organization afford the discounted marketing services within its current budget?
    x Are there specific grants or donor funds available that could cover the cost of marketing services?
    x Are these services necessary to meet long-term goals, or do they address immediate, but less critical,
        needs?
    x Will outsourcing services allow staff and volunteers to focus on more important work?
    x Does the client have the internal skills or resources to perform these services in-house?
    x If the client doesn’t pay for services, will it miss out on opportunities for growth, efficiency, or
        improved impact?




                                                                                        Letter 4034 (Rev. 01-2021)
                                                                                        Catalog Number 47628K
                                                          3

You spend approximately half of your total time and services dedicated to organizations that are exempt under
IRC Section 501(c)(3). The other half of your time and services will be dedicated to non-Section 501(c)(3)
organizations. All of your services will be heavily discounted at least f percent regardless of their exempt status.

You serve as the non-profit arm of K and will be wholly aimed at providing heavily discounted or pro bono
professional services that align with your target social impact areas or outcomes. You will share resources with
G only when it amounts to delivering more cost effective or higher value outcomes to your social impact areas.

You will be primarily funded by donations and fees-for-services. Your expenses include fundraising expenses
and compensation of officers, directors, and trustees.

Law
IRC Section 501(c)(3) provides for the recognition of exemption of organizations that are organized and
operated exclusively for religious, charitable 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, in order 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(b)(1)(i) provides that an organization is organized exclusively for one or
more exempt purposes only if its articles of organization:

   (a) Limit the purposes of such organization to one or more exempt purposes; and
   (b) Do not expressly empower the organization engage, otherwise than as an insubstantial part of its
       activities, in activities which in themselves are not in furtherance of one or more exempt purposes.

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)(l)(ii) provides that an organization is not organized or operated exclusively
for exempt purposes unless it serves a public rather than a private interest. It must not be operated for the
benefit of designated individuals or the persons who created it.

Treas. Reg. Section 1.501(c)(3)-1(e)(1) provides that an organization may meet the requirements of IRC
Section 501(c)(3) although it operates a trade or business as a substantial part of its activities if the operation
of such trade or business is in furtherance of the organization’s exempt purpose or purposes and if the
organization is not organized or operated for the primary purpose of carrying on an unrelated trade or business
(as defined in Section 513).

Revenue Ruling 69-528, 1969-2 C.B. 127, concerns an organization formed to provide investment services
for a fee exclusively to organizations exempt under IRC Section 501(c)(3). The ruling states that providing
investment services on a regular basis for a fee is a trade or business ordinarily carried on for profit. If the



                                                                                        Letter 4034 (Rev. 01-2021)
                                                                                        Catalog Number 47628K
                                                         4

services were regularly provided by one tax-exempt organization for other tax-exempt organizations, such
activity would constitute unrelated trade or business. Thus, the ruling holds that the organization is not
described in Section 501(c)(3) since it is regularly carrying on the business of providing investment services
that would be unrelated trade or business if carried on by any of the tax-exempt organizations on whose
behalf it operates.

Rev. Rul. 71-529,1971-2 C.B. 234, states that a nonprofit organization that provides assistance in the
management of participating colleges’ and universities’ endowment or investment funds for a fee
substantially below the cost of providing such service, qualifies for exemption under IRC Section 501(c)(3).

Rev. Rul. 72-369, 1972-2 C.B. 245, held that an organization formed to provide managerial and consulting
services at cost to unrelated exempt organizations does not qualify for exemption under section 501(c)(3) of the
Code. The fact that the services in this case are provided at cost and occasionally for exempt organizations is
not sufficient to characterize this activity as charitable within the meaning of section 501(c)(3) of the Code.
Furnishing the services at cost lacks the donative element necessary to establish this activity as charitable.

In Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279 (1945), the Supreme Court
determined that the presence of a single non-exempt purpose, if substantial in nature, will destroy exemption
under IRC Section 501(c)(3) regardless of the number or importance of any other exempt purposes.

Application of law
IRC Section 501(c)(3) and Treas. Reg. Section 1.501(c)(3)-1(a)(1) set forth two main tests to qualify for exempt
status. An organization must be both organized and operated exclusively for purposes described in Section
501(c)(3). You have failed to meet both requirements, as explained below.

Your Articles of Incorporation indicate that your purpose is to provide holistic support aimed at amplifying the
brand and marketing effectiveness of tomorrows leading social-impact-focused non-profit and start-up
organizations. Accordingly, you fail the organizational test because you do not satisfy the requirements stated
in Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i).

As described in Treas. Reg. Section 501(c)(3)-1(e)(1), the operation of a trade or business, if it is in
furtherance of the organization’s exempt purpose(s), may meet the requirements of Section 501(c)(3). Your
consulting services are offered to both non-profit and for-profit organizations. Offering consulting services,
even at a discount, to for-profit organizations does not further Section 501(c)(3) purposes. Similar to the
organization described in Rev. Rul. 69-528, the provision of these services to non-profit and for-profit
organizations for a fee shows that you are organized and operated for the primary purpose of carrying on an
unrelated trade or business.

You are like the organization described in Rev. Rul. 72-369, and unlike the organization in Rev. Rul. 71-529.
You are furnishing commercially available services to non-profit and for-profit organizations. You have
indicated that you determine the cost of your services by discounting the standard cost of these services by f
percent. You have not provided if this final cost is substantially below the cost of providing the service.

Although providing these consulting services may be considered charitable, if they are offered to other
nonprofit organization below the cost of providing the service, you are also serving the private interests of the
for-profit organizations that you provide services to as described in Treas. Reg. Section 1.501(c)(3)-1(d)(l)(ii).



                                                                                       Letter 4034 (Rev. 01-2021)
                                                                                       Catalog Number 47628K
                                                          5

Accordingly, you do not meet the operational test of IRC Section 501(c)(3) because you are not operating
exclusively for charitable purposes as required under Treas. Reg. Section 1.501(c)(3)-1(c)(1).

You are like the organization described in Better Business Bureau. Although you may serve some charitable
purposes when providing these consulting services to nonprofits, you also serve the private interests of the for-
profit organizations that you provide services to. Providing these services constitutes a substantial non-exempt
purpose that would preclude exemption under Section 501(c)(3).

Conclusion
You are neither organized nor operated exclusively for exempt purposes within the meaning of IRC Section
501(c)(3). Your formation document does not limit your purposes to those described in Section 501(c)(3).
Additionally, you fail the operational test because you were formed to serve the private interests of your
participating businesses as opposed to those of the public. 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
    • 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.



                                                                                        Letter 4034 (Rev. 01-2021)
                                                                                        Catalog Number 47628K
                                                         6

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.

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