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Thursday September 21, 2023

Private Letter Ruling

Business Group Denied Tax-Exempt Status

GiftLaw Note:
Organization applied for exempt status under Sec. 501(c)(3). Organization’s Articles of Incorporation state that its purpose is for its employers to provide discounts to member businesses. The Articles are silent with respect to disposition of Organization’s assets upon dissolution. Organization’s resources are dedicated to working with local area businesses in supporting the local economy by primarily encourage local shopping. Organization’s membership consists of Employer members and Business members. Employer members pay an annual fee for their employees to access an electronic membership card that provides discounts at Business members’ local shops. The activities bring Business members more shoppers and help Employer members strengthen their family finances. Organization’s income consists exclusively of membership dues. Expenses include website and administrative fees.

To be exempt under Sec. 501(c)(3), an organization must be both organized and operated exclusively for charitable, religious or educational purposes and no part of the earnings may inure to the benefit of any private shareholder or individual. Regulation 1.501(c)(3)-1(d)(1)(ii) states that an organization is not organized or operated exclusively for one or more 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 such as designated individuals. Under Reg. 1.501(c)(3)-1(c)(1), an organization is operated exclusively for an exempt purpose only if it engages primarily in activities which accomplish an exempt purpose. Here, the Service determined that Organization fails the operational test under Reg. 1.501(c)(3)-(1)(a)(1) because providing benefits to your member businesses constitutes a substantial non-exempt purpose and serves the private interests of Organization’s members. Therefore, tax-exempt status was denied.
PLR 202302017 Business Group Denied Tax-Exempt Status

1/17/2023 (8/24/2022)

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, Streamline Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. You attested that you are organized and operated exclusively to further charitable purposes and that you have not conducted and will not conduct prohibited activities under Section 501(c)(3).

Your mission on the Form 1023-EZ states, "we are a group of employers that work with local businesses to offer discounts to our members. Our goal is to support the local area businesses and families by shopping local." You were formed as a corporation in B on C.

During review of your Form 1023-EZ, we sent a request for information regarding your activities to supplement the above information. You responded that you are a group of local businesses that have joined together to support the local economy. Your Articles of Incorporation state that you were organized to provide discounts to member businesses. Your Articles are silent regarding the disposition of your assets upon dissolution.

Your membership consists of Employer members and Business members. Employer members will pay an annual fee for their employees to have access to an electronic membership card that will provide discounts at local businesses (provided by Business members). This activity will bring your Business members more shoppers and help Employer members strengthen their family finances. Revenues consist of membership dues. Expenses include website and other administrative fees.

Law


IRC Section 501(c)(3) provides for the exemption from federal income tax of organizations that are organized and operated exclusively for charitable, religious, educational, or other purposes as specified by 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 qualify under IRC Section 501(c)(3), an organization must be both organized and operated exclusively for one or more exempt purposes specified in such section. If an organization fails to meet either the organizational or 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 limit the purposes of such organization to one or more exempt purposes; and do not expressly empower the organization to 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(b)(4) provides that an organization is not organized exclusively for one or more exempt purposes unless its assets are dedicated to an exempt purpose. An organization's assets will be considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, by reason of a provision in the organization's articles or operation of law, be distributed for 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)(1)(ii) provides that an organization is not organized or operated exclusively for one or more 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.

Revenue Ruling 76-366, 1976-2 C.B. 144, held that an association of investment clubs formed to enable members and prospective investors to make sound investments by the mutual exchange of investment information that carries on not only educational activities but other activities to support and promote the economic interest of its members doesn't qualify for exemption under IRC Section 501(c)(3). The activities, directed in whole or in part, to support and promote member economic interests are not in furtherance of charitable or educational purposes; instead, they serve private interests.

Rev. Rul. 77-111, 1977-1 C.B. 144, 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 didn't qualify for exemption under IRC Section 501(c)(3). The overall thrust of the organization's activities was to promote business rather than to accomplish exclusively IRC Section 501(c)(3) objectives. Similarly, an organization whose purpose is to revive retail sales in an area of economic decline by constructing a shopping center doesn't qualify for exemption. The activities resulted in major benefits to businesses within the shopping center rather than exclusively to accomplish Section 501(c)(3) purposes.

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.

Application of law


IRC Section 501(c)(3) sets forth two main tests for qualification of exempt status. Per Treas. Reg. Section 1.501(c)(3)-(a)(1), an organization must be both organized and operated exclusively for purposes described in Section 501(c)(3).

You do not meet the organizational test as explained in Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i) and 1.501(c)(3)-1(b)(4). Your organizing document contains a broad purpose statement that does not limit your purposes to one or more exempt purposes. Further, your organizing document does not dedicate your assets to an exempt purpose.

You do not meet the operational test because you are not operated "exclusively" for exempt purposes as required by Treas. Reg. Section 1.501(c)(3)-1(c)(1). More than an insubstantial part of your activities includes providing benefits to your member businesses. These benefits serve the private interests of your members, rather than a public interest as required by Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii). Like Better Business Bureau. this substantial, non-exempt purpose precludes exemption under IRC Section 501(c)(3).

You are similar to the organization described in Rev. Rul. 76-366 because your activities (in whole or in part) support and promote member economic interests. These substantial activities are not in furtherance of charitable purposes and, also, serve private interests.

You are also like the organization described in Rev. Rul. 77-111 because your activities, overall, promote business and provide substantial benefits to businesses rather than accomplish exclusively IRC Section 501(c)(3) purposes.

Conclusion


Based on the information submitted, you do not qualify for exemption under IRC Section 501(c)(3). You do not meet the organizational test because your articles do not limit your purposes to one or more exempt purposes and your assets are not dedicated to an exempt purpose. You do not meet the operational test because you are operated for substantial, non-exempt purposes.

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:

U.S. mail:

Internal Revenue Service
EO Determinations Quality Assurance
Mail Stop 6403
PO Box 2508
Cincinnati, OH 45201

Street address for delivery service:
Internal Revenue Service
EO Determinations Quality Assurance
550 Main Street, Mail Stop 6403
Cincinnati, OH 45202

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

Published January 20, 2023
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