Thursday March 30, 2023
Private Letter Ruling
Tourism Organization's Exempt Status Denied
GiftLaw Note:
Organization applied for exempt status under Sec. 501(c)(3). Organization's purpose is hosting events to promote economic development and tourism in a particular city (City). Organization was formed in the hopes of attracting new businesses and residents to City by fostering existing businesses and supporting local area events to promote tourism. Organization's most significant activities includes holding events on behalf of City to help combat community deterioration. Organization hosts various events including a fish fry, an equestrian event and feeding a number of attendees at these events through donations received by Organization. These activities are intended to help the community by increasing sales tax revenue from new businesses, residents and tourism. Additional information regarding Organization's activities was requested regarding the equestrian event, but not returned by Organization. These promotional activities constitute Organization's only activities and Organization plans on offering additional annual promotional events for the benefit of City.
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 Organization's activities are intended to attract new businesses and residents by supporting for-profit businesses and privately owned events. These activities constitute a substantial non-exempt purpose and serves the private interests of Organization. Therefore, Organization's tax-exempt status was denied.
Organization applied for exempt status under Sec. 501(c)(3). Organization's purpose is hosting events to promote economic development and tourism in a particular city (City). Organization was formed in the hopes of attracting new businesses and residents to City by fostering existing businesses and supporting local area events to promote tourism. Organization's most significant activities includes holding events on behalf of City to help combat community deterioration. Organization hosts various events including a fish fry, an equestrian event and feeding a number of attendees at these events through donations received by Organization. These activities are intended to help the community by increasing sales tax revenue from new businesses, residents and tourism. Additional information regarding Organization's activities was requested regarding the equestrian event, but not returned by Organization. These promotional activities constitute Organization's only activities and Organization plans on offering additional annual promotional events for the benefit of City.
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 Organization's activities are intended to attract new businesses and residents by supporting for-profit businesses and privately owned events. These activities constitute a substantial non-exempt purpose and serves the private interests of Organization. Therefore, Organization's tax-exempt status was denied.
PLR 202310011 Tourism Organization's Exempt Status Denied
3/10/2023 (12/13/2022)
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.
Do you qualify for exemption under IRC Section 501(c)(3)? No, for the reasons stated below.
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 were incorporated 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 the 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 Section 501(c)(3).
You attest that you are organized and operated exclusively to further charitable 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:
Detailed information was subsequently requested. You were formed to facilitate events for the promotion of the city B. You have hosted a fish fry for attendees of the C. an equestrian event held in the area. You fed an estimate of * * * attendees though donations received by your organization. Additional information was requested about C and a response was not submitted. This is currently your only activity, and you hope to add other annual promotional events for the benefit of B.
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, 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. Sec. 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. Sec. 1.501(c)(3)-1(d)(2) defines the term charitable as used in section 501(c)(3) in its generally accepted legal sense and is, therefore, not to be construed as limited by the separate enumeration in section 501(c)(3) of other tax-exempt purposes which may fall within the broad outlines of 'charity' as developed by judicial decisions. Such term includes: Relief of the poor and distressed or of the underprivileged; advancement of religion; advancement of education or science; erection or maintenance of public buildings, monuments, or works; lessening of the burdens of Government; and promotion of social welfare by organizations designed to accomplish any of the above purposes, or (i) to lessen neighborhood tensions; (ii) to eliminate prejudice and discrimination; (iii) to defend human and civil rights secured by law; or (iv) to combat community deterioration and juvenile delinquency.
Revenue Ruling 70-585, 1970-2 C.B. 115, situation 3 states an organization that formulated plans for the renewal and rehabilitation of an area of a city where the median income is lower than other sections and the housing is old and deteriorated, and which sponsors a renewal project in that area of the city is exempt under section 501(c)(3). The membership of the organization is composed of residents, businesses and community organizations in the area, and as part of its activities it purchased an apartment house to rehabilitate and rent to low and moderate families. The organization's activities combat community deterioration by assisting in the renovation of a rundown area.
Revenue Ruling 74-361, 1974-2 C.B. 159 states a volunteer fire company which provides fire protection and ambulance services for a community qualifies for exemption as a charitable organization under IRC 501(c)(3).
Revenue Ruling 76-419, 1976-2 C.B. 146 describes a nonprofit organization that purchases blighted land in an economically depressed community, converts the land into an industrial park, and encourages industrial enterprises to locate new facilities in the park in order to provide employment opportunities for low income residents of the area, is operated exclusively for charitable purposes and qualifies for exemption under section 501(c)(3) of the Code.
Revenue Ruling 77-111, 1977-1 C.B. 144 describes an organization formed to increase business patronage in a deteriorated area by providing information on the area's shopping opportunities, local transportation, and accommodations is not operated exclusively for charitable purposes and does not qualify for exemption under section 501(c)(3) of the Code. Similarly, an organization whose purpose is to revive retail sales in an area of economic decline by constructing a shopping center does not qualify for exemption.
Revenue Ruling 81-284, 1981-2 C.B. 130. states a nonprofit small business investment company licensed under section 301(d) of the Small Business Investment Act of 1958, which was formed to relieve poverty, eliminate prejudice and discrimination, reduce neighborhood tensions, and combat community deterioration. and that provides low-cost or long-term loans to businesses not able to obtain funds from conventional commercial sources. with preference given to businesses that provide training and employment opportunities for the unemployed or under-employed residents of economically depressed areas, may qualify for exemption.
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 Easter House v. United States, 12 CL Ct. 476 (1987), aff'd, 846 F.2d 78 (Fed. Cir. 1988), the U.S. Court of Federal Claims stated: "a taxpayer cannot premise its right to an exemption by showing that others have been treated more generously, leniently, or erroneously by IRS."
Your activities are to attract new businesses and residents by supporting for-profit businesses and privately owned events. Your activities do not serve a charitable purpose described in IRC 501(c)(3). You are not operating exclusively for an exempt purpose described in Treas. Reg. Section 1.501(c)(3)-1(a)(1), Section 1.501(c)(3)-1(c)(1), and Section 1.501(c)(3)-1(d)(2).
Your activities of feeding participants at an * * * event and platform to increase tourism in the hopes of increasing more businesses and residents do not combat community deterioration, increase economic development, and lessen the burden of government as described in Rev. Rul. 74-361 and Rev. Rul. 81-284. Therefore as described in Better Business Bureau of Washington, D.C., Inc. v. United States, you cannot be exempt under IRC 501(c)(3).
You stated you have struggled to attract new businesses and residents. You created a platform to promote economic development and tourism in B. You will foster existing businesses and support local area events and programs to promote tourism. You state this will result in combating community deterioration in your depressed community because it will increase sales tax revenue.
You provided supplemental information showing B is higher in state and national average poverty levels and lower in median household income.
You plan to support and promote an annual event "D," which is organized though the city of B and private citizens and business owners. D is lighting of the * * * during the holiday season.
You included that you share the same vision as another non-profit organization that has 501(c)(3) exemption.
You are not similar to the organizations described in Rev. Rul. 70-585 and 76-419 because your activities are not assisting in the rehabilitation of an old and run-down residential area or increasing employment opportunities for low-income residents, but rather to attract potential new residents and businesses for the purpose of increasing sales tax revenues.
You created a platform to promote economic development and tourism; therefore, similar to the organization described in Rev. Rul. 77-11, you are not operating exclusively for a charitable purpose described in 501(c)(3) because your activities' purpose is to increase sales tax revenue from new businesses, new residents, and tourism.
Each application requesting exemption is reviewed on its own merits. You cannot use another organization topremise your right for exemption as described in Easter House v. United States.
We have determined you do not qualify for tax-exemption under IRC 501(c)(3) Your current activity of hosting a * * * for attendees at an annual * * * event does not meet the definition of charitable as described in Treas. Reg. Sec. 1.501(c)(3)-1(d)(2). Per Treas. Reg. Sec. 1.501(c)(3)-1(c)(1), you are not engaging primarily in activities that accomplish one or more exempt purposes specified in IRC Section 501(c)(3). More than an insubstantial part of your activities is not in furtherance of an exempt purpose.
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.
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 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)).
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 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.
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 taxpayeradvocate.irs.gov or call 877-777-4778.
Sincerely,
Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements
3/10/2023 (12/13/2022)
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.
Issue
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 were incorporated 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 the 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 Section 501(c)(3).
You attest that you are organized and operated exclusively to further charitable 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
- 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
Detailed information was subsequently requested. You were formed to facilitate events for the promotion of the city B. You have hosted a fish fry for attendees of the C. an equestrian event held in the area. You fed an estimate of * * * attendees though donations received by your organization. Additional information was requested about C and a response was not submitted. This is currently your only activity, and you hope to add other annual promotional events for the benefit of B.
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, 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. Sec. 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. Sec. 1.501(c)(3)-1(d)(2) defines the term charitable as used in section 501(c)(3) in its generally accepted legal sense and is, therefore, not to be construed as limited by the separate enumeration in section 501(c)(3) of other tax-exempt purposes which may fall within the broad outlines of 'charity' as developed by judicial decisions. Such term includes: Relief of the poor and distressed or of the underprivileged; advancement of religion; advancement of education or science; erection or maintenance of public buildings, monuments, or works; lessening of the burdens of Government; and promotion of social welfare by organizations designed to accomplish any of the above purposes, or (i) to lessen neighborhood tensions; (ii) to eliminate prejudice and discrimination; (iii) to defend human and civil rights secured by law; or (iv) to combat community deterioration and juvenile delinquency.
Revenue Ruling 70-585, 1970-2 C.B. 115, situation 3 states an organization that formulated plans for the renewal and rehabilitation of an area of a city where the median income is lower than other sections and the housing is old and deteriorated, and which sponsors a renewal project in that area of the city is exempt under section 501(c)(3). The membership of the organization is composed of residents, businesses and community organizations in the area, and as part of its activities it purchased an apartment house to rehabilitate and rent to low and moderate families. The organization's activities combat community deterioration by assisting in the renovation of a rundown area.
Revenue Ruling 74-361, 1974-2 C.B. 159 states a volunteer fire company which provides fire protection and ambulance services for a community qualifies for exemption as a charitable organization under IRC 501(c)(3).
Revenue Ruling 76-419, 1976-2 C.B. 146 describes a nonprofit organization that purchases blighted land in an economically depressed community, converts the land into an industrial park, and encourages industrial enterprises to locate new facilities in the park in order to provide employment opportunities for low income residents of the area, is operated exclusively for charitable purposes and qualifies for exemption under section 501(c)(3) of the Code.
Revenue Ruling 77-111, 1977-1 C.B. 144 describes an organization formed to increase business patronage in a deteriorated area by providing information on the area's shopping opportunities, local transportation, and accommodations is not operated exclusively for charitable purposes and does not qualify for exemption under section 501(c)(3) of the Code. Similarly, an organization whose purpose is to revive retail sales in an area of economic decline by constructing a shopping center does not qualify for exemption.
Revenue Ruling 81-284, 1981-2 C.B. 130. states a nonprofit small business investment company licensed under section 301(d) of the Small Business Investment Act of 1958, which was formed to relieve poverty, eliminate prejudice and discrimination, reduce neighborhood tensions, and combat community deterioration. and that provides low-cost or long-term loans to businesses not able to obtain funds from conventional commercial sources. with preference given to businesses that provide training and employment opportunities for the unemployed or under-employed residents of economically depressed areas, may qualify for exemption.
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 Easter House v. United States, 12 CL Ct. 476 (1987), aff'd, 846 F.2d 78 (Fed. Cir. 1988), the U.S. Court of Federal Claims stated: "a taxpayer cannot premise its right to an exemption by showing that others have been treated more generously, leniently, or erroneously by IRS."
Application of law
Your activities are to attract new businesses and residents by supporting for-profit businesses and privately owned events. Your activities do not serve a charitable purpose described in IRC 501(c)(3). You are not operating exclusively for an exempt purpose described in Treas. Reg. Section 1.501(c)(3)-1(a)(1), Section 1.501(c)(3)-1(c)(1), and Section 1.501(c)(3)-1(d)(2).
Your activities of feeding participants at an * * * event and platform to increase tourism in the hopes of increasing more businesses and residents do not combat community deterioration, increase economic development, and lessen the burden of government as described in Rev. Rul. 74-361 and Rev. Rul. 81-284. Therefore as described in Better Business Bureau of Washington, D.C., Inc. v. United States, you cannot be exempt under IRC 501(c)(3).
Your position
You stated you have struggled to attract new businesses and residents. You created a platform to promote economic development and tourism in B. You will foster existing businesses and support local area events and programs to promote tourism. You state this will result in combating community deterioration in your depressed community because it will increase sales tax revenue.
You provided supplemental information showing B is higher in state and national average poverty levels and lower in median household income.
You plan to support and promote an annual event "D," which is organized though the city of B and private citizens and business owners. D is lighting of the * * * during the holiday season.
You included that you share the same vision as another non-profit organization that has 501(c)(3) exemption.
Our response to your position
You are not similar to the organizations described in Rev. Rul. 70-585 and 76-419 because your activities are not assisting in the rehabilitation of an old and run-down residential area or increasing employment opportunities for low-income residents, but rather to attract potential new residents and businesses for the purpose of increasing sales tax revenues.
You created a platform to promote economic development and tourism; therefore, similar to the organization described in Rev. Rul. 77-11, you are not operating exclusively for a charitable purpose described in 501(c)(3) because your activities' purpose is to increase sales tax revenue from new businesses, new residents, and tourism.
Each application requesting exemption is reviewed on its own merits. You cannot use another organization topremise your right for exemption as described in Easter House v. United States.
Conclusion
We have determined you do not qualify for tax-exemption under IRC 501(c)(3) Your current activity of hosting a * * * for attendees at an annual * * * event does not meet the definition of charitable as described in Treas. Reg. Sec. 1.501(c)(3)-1(d)(2). Per Treas. Reg. Sec. 1.501(c)(3)-1(c)(1), you are not engaging primarily in activities that accomplish one or more exempt purposes specified in IRC Section 501(c)(3). More than an insubstantial part of your activities is not in furtherance of an exempt purpose.
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:
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 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 taxpayeradvocate.irs.gov or call 877-777-4778.
Sincerely,
Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements
Published March 24, 2023
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