Thursday February 22, 2018
Private Letter Ruling
Organization Supporting Businesses Denied
Organization applied for tax exempt status under Sec. 501(c)(3). Organization's Articles of Incorporation state that it was organized exclusively for charitable, educational and professional, commercial and trade association purposes, including making distributions to exempt Sec. 501(c)(3) organizations. Organization exists to support D, a group of business professionals organized to work closely with a state to assist business exports. D is exempt from taxation under Sec. 501(c)(6). Organization was established to assist with a one-time conference sponsored by the Department of Commerce. It will handle registration fees and pay providers. Organization will only distribute profits on the condition that the funds will be used in pursuit of a Sec. 501(c)(3) exempt purpose.
Organizations recognized as tax-exempt under Sec. 501(c)(3), must be organized and operated exclusively for exempt purposes. Under Reg. 1.501(c)(3)-1(b)(1), an organization is not organized exclusively for exempt purposes if its articles of organization do not limit its purposes to one or more exempt purposes. Regulation 1.501(c)(3)-1(b(1)(iv) states that an organization will not be exempt if its articles of organization state broader purposes than those in Sec. 501(c)(3). Under Reg. 1.501(c)(3)-1(c)(1), an exempt organization is not operated for exempt purposes if more than an insubstantial part of its activities do not further an exempt purpose. Revenue Ruling 62-82 allows exempt organizations to make distributions to a state or municipality in furtherance of the donor organization's exempt purpose. In Rev. Rul. 68-489, it was determined that distributions to non-exempt organizations will not jeopardize an exemption if the organization retains control and discretion over the use of the funds for exempt purposes. Here, the Service determined that Organization is not organized for an exempt purpose because its stated purposes are broader than those allowed by Sec. 501(c)(3). Furthermore, the Service determined that Organization is not operated for an exempt purpose because it supports commercial and trade entities in exporting their products.
Dear * * *:
We considered your application for recognition of exemption from federal income tax under Section 501(a) of the Internal Revenue Code (the Code). Based on the information provided, we determined that you don't qualify for exemption under Section 501(c)(3) of the Code. This letter explains the basis for our conclusion. Please keep it for your records.
IssuesDo you qualify for exemption under Section 501(c)(3) of the Code? No, for the reasons stated below.
FactsYou were incorporated on X in the State of Y. Article 4 of your Articles of Incorporation states that you were organized:
You say that because you exist to support D, your exempt purposes are the same as D's namely, to support U.S. businesses that export their products.
You were established for the specific purpose of assisting C with G, a one-time Department of Commerce sponsored conference. G will be funded from conference registration fees and conference sponsorships. You will collect these registration fees, pay the hotel where the conference will be held, and pay providers servicing the conference. This will further your purpose of educating businesses on marketing opportunities and connecting professionals exporting US goods and services. You will also split profits from G (if any remain) with C and D.
You provided a memorandum of agreement between C and D. The memorandum cites the above profit sharing agreement. However, the profit sharing portion states D is responsible for financial transactions, payments, registration fees, reimbursements, and any surplus will be divided 30% to D and 70% to C. While you stated that this memorandum was signed between you and C, you are not mentioned in the document. The purpose, venue and event date, joint activities, responsibilities, contacts and provisions of the memorandum all refer to D.
After G, you will consider other programs that will allow you to continue to assist D. You may award scholarships to students in international business programs whose primary interest is in the export of U.S. goods and services. You may present educational programs on topics related to the export of U.S. goods and services. These programs will generally be funded through registration fees and small company sponsorships. You indicated that you may occasionally distribute funds to D.
You state that you will only distribute profits to D and C on condition that both shall only use those funds in the pursuit of charitable, educational, and professional, commercial, and trade association purposes, consistent with your mission of promoting U.S. exports and of educating U.S. exporters.
You will not support or oppose candidates in political campaigns. You may encourage your members to contact their federal representatives on an issue of importance to U.S. exporters of goods and services. You and D will work with other entities, similar to D, around the country. You have not made an election to have your legislative activities measured by expenditures. You believe that the time spent on attempts to influence legislation will be less than 5% of the time spent on your activities and that costs will be zero because they will be accomplished by emails to your members.
LawSection 501(c)(3) of the Code provides for the exemption from tax of organizations organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition or for the prevention of cruelty to children or animals, no part of the net earnings of which insures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.
Treasury Regulation Section 1.501(c)(3)-1(a)(1) states: In order to qualify under section 501(c)(3) of the Code, an organization must be both organized and operated exclusively for one or more exempt purposes. 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) states: 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 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)(1)(iv) states that in no case shall an organization be considered to be organized exclusively for one or more exempt purposes, if, by the terms of its articles, the purposes for which such organization is created are broader than the purposes specified in Section 501(c)(3) of the Code.
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 Section 501(c)(3) of the Code). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.
Rev. Rul. 62-78,1962-1 CB 86 states that organizations exempt from federal income tax under Section 501(c)(3) of the Code as described in Section 501(c)(3) may make distributions of income or other unrestricted funds to a state or municipality, or to an activity which is an integral part thereof, without jeopardizing their exempt status, provided such distributions are in furtherance of the exempt purposes of the donor organizations.
Rev. Rul. 68-489, 1968-2 C.B. 210 states that an organization will not jeopardize its exemption even though it distributes funds to nonexempt organizations, provided it retains control and discretion over use of the funds for Section 501(c)(3) purposes.
In Better Business Bureau of Washington. D.C., Inc. v. United States, 326 U.S. 179 (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. The Petitioner's activities were largely animated by non-exempt purposes directed fundamentally to ends other than that of education.
Application of lawYou do not meet the organizational test for exemption as set forth in Treas. Reg. Section 1.501(c)(3)-1(a)(1), because your articles of incorporation do not limit your purposes to one or more exempt purposes under Section 501(c)(3) of the Code and as defined in Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i). Specifically, you do not meet the requirements under Treas. Reg. Section 1.501(c)(3)-1(b)(1)(iv), because the purposes stated in your articles are broader than the purposes specified in Section 501(c)(3), those being professional, commercial, and trade association purposes.
Although your articles indicate that your assets will be dedicated to purposes defined under Section 501(c)(3) of the Code, you have indicated that you will distribute a share of the profits from the event to D, exempt under Section 501(c)(6), and C, for "charitable, educational, and professional, commercial, and trade association purposes." You will provide a statement to them that the use of funds is restricted to promotional and educational purposes in support of the mutual mission to assist in the expansion of U.S. exports. Unlike the organizations in Rev. Rul. 62-78 and Rev. Rul. 68-489, these distributions lack the exercise of discretion and control as well as not being conditioned on use for public purposes. While restricting funds for charitable or educational purposes is qualifying under Section 501(c)(3), releasing funds that could potentially be used for promotional, professional, commercial or trade association purposes is not. An organization demonstrating lack of control and discretion as to the use of its funds for Section 501(c)(3) purposes does not meet the qualification for exemption.
You do not meet the operational test for exemption under Section 501(c)(3) of the Code, as required by Treas. Reg. Section 1.501(c)(3)-1(a)(1), because you, like D, whose purposes you state are the same as yours, support commercial and trade entities that export their products. These activities more than insubstantially further purposes that are not exempt within the meaning of Section 501(c)(3). Consequently you do not meet the requirement of Treas. Reg. Section 1.501(c)(3)-1(c)(1) that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish exempt purposes specified in Section 501(c)(3).
You also fail to meet the operational test in that you are formed not to carry out activities exclusively furthering charitable or educational purposes but rather to carry out activities intended to be conducted by D. The memorandum of understanding was drafted for D, instructs D to carry out the functions of G, and instructs D to receive and pay for any fees associated with G. You will be operating in the place of D in conducting these same activities. Although you have proposed future activities that are educational or charitable in nature, such as your scholarship, and although parts of G will indeed be educational in nature, this does not overcome the substantial amount of non-exempt purposes present. As seen in Better Business Bureau of Washington, the presence of non-exempt purposes, if substantial, can destroy a claim to exemption regardless of other truly exempt purposes.
ConclusionYou are not described under Section 501(c)(3) of the Code because you are not operated exclusively for exempt purposes within the meaning of Section 501(c)(3). Likewise, you are not organized exclusively for purposes within the meaning of Section 501(c)(3).
If you don't agreeYou have a right to file a protest if you don't agree with our proposed adverse determination. To do so, you must send a statement to us within 30 days of the date of this letter. The statement must include:
- Your name, address, employer identification number (EIN), and a daytime phone number
- A copy of this letter highlighting the findings you disagree with
- An explanation of why you disagree, including any supporting documents
- The law or authority, if any, you are relying on
- The signature of an officer, director, trustee, or other official who is authorized to sign for the organization, or your authorized representative
- One of the following declarations:
For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I examined this protest statement, including accompanying documents, and to the best of my knowledge and belief, the statement contains all relevant facts and such facts are true, correct, and complete.
For authorized representatives:
Under penalties of perjury, I declare that I prepared this protest statement, including accompanying documents, and to the best of my knowledge and belief, the statement contains all relevant facts 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 he or she hasn'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 provided a basis for us to reconsider our determination. If so, we'll continue to process your case considering the information you provided. If you haven't provided a basis for reconsideration, we'll forward your case to the Office of Appeals and notify you. You can find more information about the role of the Appeals Office in Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status.
If you don't file a protest within 30 days, you can't seek a declaratory judgment in court at a later date because the law requires that you use the IRS administrative process first (Section 7428(b)(2) of the Code).
Where to send your protestPlease! send your protest statement, Form 2848, if needed, and any supporting documents to the applicable address:
Internal Revenue Service
EO Determinations Quality Assurance
P.O. Box 2508
Cincinnati, OH 45201
Street address for delivery service:
Internal Revenue Service
EO Determinations Quality Assurance
550 Main Street, Room 7-008
Cincinnati, OH 45202
You can also fax your statement 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 he or she received it.
If you agreeIf 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.
You can find all forms and publications mentioned in this letter on our website at www.irs.gov/formspubs. If you have questions, you can contact the person listed at the top of this letter.
Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements