Wednesday June 23, 2021
Private Letter Ruling
Exempt Status Denied to Car Promoter
Organization, an unincorporated association, exists to promote a certain model of car (C) through planning events, social gatherings and philanthropy. Organization's Articles of Association state that Organization's purpose is exclusively charitable and educational. Organization's bylaws state that Organization was formed to promote interest in C automobile ownership and encourage others to participate. Organization requires membership to participate. Members must be owners or operators of C and must pay a fee to join or be associated with a paid member. Activities of Organization include charitable purposes such as collecting food, toys and toiletry items for charitable organizations and offering scholarships for local high school graduates. A majority of Organization's events are social, including holiday events, monthly dinners and automobile shows. The primary sources of revenue are also from many of these events.
Organizations seeking tax-exempt status under Sec. 501(c)(3) must show that they are both organized and operated exclusively for a tax-exempt purpose. An organization is organized exclusively for an exempt purpose only if its articles of organization limit the purpose to one or more exempt purposes and if only an insubstantial part of its activities is not in furtherance of a non-exempt purpose. Reg. 1.501(c)(3)-1(c)(1). Here, Organization's Articles of Association did not include language limiting the purpose to one or more exempt purposes, but rather contemplated broader purposes which is prohibited under Reg. 1.501(c)(3)-1(b)(1)(i)(iv). Additionally, Organization failed the operational test because its activities substantially involve providing members with social and recreational events. Therefore, the Service determined that Organization resembles a social club rather than a charitable organization under Sec. 501(c)(3) and tax-exempt status was denied.
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.
Do you qualify for exemption under IRC Section 501(c)(3)? No, for the reasons stated below.
You are an unincorporated association formed in the state of B on D. Your Articles of Association states that your purposes are exclusively charitable and educational, including the making of distribution to organizations that qualify as exempt organization under IRC Section 501(c)(3). Additionally, your Articles state that your purpose is to promote the C, a model of car, by planning road trips, social gatherings, supporting charity events and giving back to your community. You are dedicated to having fun and driving the C.
Your Bylaws state that you were formed in order to promote the interest in C automobile ownership and operation, and to further establish an organized effort to encourage others to participate in the ownership and enjoyment connected with the use of said automobile.
You are a membership organization. Members are required to be owners or principal operators of a C. Members cannot be members in other C clubs, and they are required to attend meetings, events or social activities. Individuals are required to pay a fee to join. Primary members must own a C. Secondary members are associated with a Primary member and must be related to the Primary member. Associate members are limited to anyone who does not own a C but are interested in the C hobby. Associate members must be sponsored by an active member.
Approximately e percent of your overall activities are charitable and include collecting food, clothing and toiletry items for other charitable organizations; collecting toys for donations to organizations; offering scholarships for local high school graduates; and participating in local events like parades.
The majority of your activities are social and recreational. These activities include holiday parties, monthly dinners, automobile car shows, gatherings at local bars and restaurants, etc. At least monthly, your members take their cars on day cruises or overnight cruises. Some of the cruises are to regional car shows where your members display their cars for public viewing.
Your primary sources of revenue are from fundraising activities such as auctions, charity drives, raffles, and payments for events like the annual banquet and holiday parties. You also receive funding from annual dues paid by your members. The percentage of expenses dedicated to charitable activities vary from year to year. Approximately f percent to g percent of your annual expenditures are dedicated to charitable activities. The remaining expenditures are dedicated to social and recreational activities conducted by your members.
IRC Section 501(c)(3) exempts from federal income tax a corporation organized and operated exclusively for charitable, educational, and other purposes, provided that no part of its net earnings inures to the benefit of any private shareholder or individual.
Treasury Regulation Section 1.501(c)(3)-1(a)(1) states that to be described in IRC Section 501(c)(3) an organization must be both organized and operated exclusively for purposes specified in the regulations. If an organization fails to meet either 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 IRC Section 501(c)(3) exempt purposes only if its creating document limits the purposes of such organization to one or more exempt purposes and does not expressly empower the organization to engage, other than as an insubstantial part of its activities, in activities which themselves are not in furtherance of one or more exempt purposes.
Treas. Reg. Section 1.501(c)(3)-1(b)(1)(iv) provides 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 IRC Section 501(c)(3).
Treas. Reg. Section 1.501(c)(3)-1(c)(1) states that an organization will be regarded as operated exclusively for exempt purposes only if it engages primarily in activities which accomplish one or more of the 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.
Rev. Rul. 77-366, 1977-2 C.B. 192, provides that a nonprofit organization that arranges and conducts wintertime ocean cruises during which activities to further religious and educational purposes are provided in addition to extensive social and recreational activities is not operated exclusively for exempt purposes and does not qualify for exemption under IRC Section 501(c)(3). The organization accomplished both charitable and non-charitable purposes through its cruises.
Better Business Bureau v. United States, 326 U.S. 279 (1945), held that the presence of a single nonexempt purpose, because it was substantial in nature, precluded tax exemption under IRC Section 501(c)(3).
In St. Louis Science Fiction Limited v. Commissioner, T.C. Memo 1985-162 (1985), the Tax Court held that a science fiction society failed to qualify for tax-exempt status under IRC Section 501(c)(3). Although many of the organization's functions at its annual conventions (the organization's principal activity) were educational, its overall agenda was not exclusively educational. A substantial portion of convention affairs were social and recreational in nature.
Application of law
IRC Section 501(c)(3) and Treas. Reg. Section 1.501(c)(3)-1(a)(1) set 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). Based on the information you provided in your application and supporting documentation, we conclude that you have failed both tests.
Your organizing document does not limit your purposes to those which are exempt as required by Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i). Rather, your purposes as stated in your organizing document are broader than those contemplated for an organization described in IRC Section 501(c)(3), which is prohibited as described in Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i)(iv). Accordingly, you do not satisfy the organizational test.
You are also not described in IRC Section 501(c)(3) because you fail the operational test. Treas. Reg. Section 1.501(c)(3)-1(c)(1) provides an organization will not be regarded as exempt under Section 501(c)(3) or "operated exclusively" for one or more exempt purposes if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. Your social and recreational events are a substantial part of your overall activities. Only an insubstantial amount of your time and your resources are devoted to charity. Therefore, you have not satisfied the operational test.
You are similar to the organization described in Rev. Rul. 77-366. While you do conduct some charitable and educational activities, you have extensive social and recreational activities that are not consistent with the purposes described under IRC Section 501(c)(3).
Your social and recreational activities account for a large percentage of your time and efforts. As explained in Better Business Bureau of Washington D.C., Inc., the furtherance of substantial non-exempt purposes precludes exemption under IRC Section 501(c)(3).
You are like the organization described in St. Louis Science Fiction Limited because you have substantial social and recreational purposes, which precludes you from qualifying for exemption under IRC Section 501(c)(3).
Based on the information provided, you do not qualify for exemption because you are neither organized nor operated for exclusively for exempt purposes described in IRC Section 501(c)(3). Your organizing document does not satisfy the organizational test because your purposes are broader than those described in Section 501(c)(3). You fail the operational test because, while you may conduct some educational and charitable activities, your recreational and social events represent substantial, non-exempt activities. Therefore, you do not qualify for exemption under Section 501(c)(3).