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Monday October 25, 2021

Private Letter Ruling

Tax Exempt Status Change Denied

GiftLaw Note:
Organization previously received exempt status under Sec. 501(c)(4) and applied for a change in exempt status to fall under Sec. 501(c)(3). Organization's primary activity is conducting an anime convention each year. The convention lasts a few days and participants purchase tickets and badges for entry. The convention educates attendees in the social etiquette of pop culture and in the customs, traditions, media methods and techniques of country V and certain cultures within a geographic region. Organization volunteers and promotes its own convention at other similar conventions. Organization proposes to increase cultural understanding, discussion and inclusion.

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. Under Reg. 1.501(c)(3)-1(a)(1), an organization must be both organized and operated exclusively for an exempt purpose. Under Reg. 1.501(c)(3)-1(b)(1)(i), an organization is organized exclusively for exempt purposes if its articles of organization limit the purpose of the organization to exempt purposes and do not empower the organization to engage, other than insubstantially, in activities that are in themselves not in furtherance of one or more exempt purposes. 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. Reg. 1.501(c)(3)-1(d)(3)(i) provides that the term "educational" relates to the instruction of the public on subjects useful to the individual and beneficial to the community. Here, the Service determined that Organization does not pass the organizational and operational test because it is organized and operated primarily for social and recreational purposes. Organization's articles do not limit purposes to those described in Sec. 501(c)(3). Organization does not exclusively provide education and instruction to the public as defined in Sec. 1.501(c)(3)-1(d)(2) and (d)(3)(i). As such, the Service denied Organization's application for exempt status under Sec. 501(c)(3). Organization remains exempt under Sec. 501(c)(4).
PLR 202127040 Tax Exempt Status Change Denied

7/9/2021 (2/17/2021)

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 incorporated in the State of X on Y. You are currently exempt under IRC Section 501(c)(4) and are applying to be exempt under Section 501(c)(3).

Your primary activity is to conduct an annual anime convention. The convention is a pop culture event with the focus consisting of mostly W culture and animation along with multiplatform pop and niche cultures from multimedia; such as video animation, comics, books, costuming, and music from around the world. The convention is generally held over the course of a few days and participants purchase tickets/badges for entry.

The convention educates attendees in not only the social etiquette of pop culture, but in the customs, traditions, and media methods and techniques of: V, V's media (mostly animation and music), U cultures like T, S, and R, and other culture references around the world through internet pop culture.

A typical attendee spends the following amount of time at each of the following convention events:

• participating in cosplay
• attending workshops, panel discussions and viewing exhibits on cultural and educational topics
• being part of panel submissions
• listening to guest speakers
• viewing and purchasing items from vendor stands
• playing video games
• participating in boffer, foam weapon fights
• playing arcade games
• participating in AMV contest
• participating in formal dance

You volunteer and promote your convention at other similar type conventions. Various media personalities within the genre and speakers are invited to participate at your convention and meet guests, sign autographs, etc. You also reserve space for outside vendors and artists to set up booths for merchandise and/or food sales.

Your intention is to include more cultural understanding, discussion, as well as inclusion of not only W based guests and discussion but also LGBTQ. You have also referenced topics involving mental health and even had professionals on hand for convention participants at past events.

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 that 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)(3)(i) provides that the term "educational," as used in IRC Section 501(c)(3), relates to the instruction of the public on subjects useful to the individual and beneficial to the community.

Revenue Ruling 67-216, 1967-2 C.B. 180

A nonprofit organization formed and operated exclusively to instruct the public on agricultural matters by conducting annual public fairs and exhibitions of livestock, poultry, and farm products qualified for exemption under IRC Section 501(c)(3).

Rev. Rul. 68-224,1968-1 C.B. 262

A nonprofit organization that conducted an annual festival centered around regional customs and traditions qualified for exemption under IRC Section 501(c)(4).

Rev. Rul. 71-545,1971-2 C.B. 235

An organization that conducted an international exposition commemorating certain historical events and cultural achievements, and exhibiting products of various nations, qualifies for exemption under IRC Section 501(c)(3).

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.

Application of law


To meet the requirements of IRC Section 501(c)(3), an organization must exclusively further exempt purposes and be able to show it satisfies the organizational and operational tests under Section 501(c)(3) as detailed in Treas. Reg. Section 1.501(c)(3)-1(a)(1). Specifically, an organization that fails to meet either the organizational test or the operational test, or both, is not exempt.

Your Articles of Incorporation do not limit your purposes to exclusive IRC Section 501(c)(3) purposes as described in Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i). Therefore, you do not meet the organizational test.

You do not exclusively provide education and instruction to the public as defined in Treas. Reg. Sections 1.501(c)(3)-1(d)(2) and (d)(3)(i). Instead, your annual anime convention offers a variety of entertainment and recreational events for the community. While some of your activities are educational in nature, these are not exclusive. The majority of your activities still serve social and recreational purposes. Therefore, you fail to meet the operational test as described in Treas. Reg. Section 1.501(c)(3)-1(c)(1).

Rev. Rul. 67-216 granted exemption under IRC Section 501(c)(3) to an organization putting on an educational fair. The principal activities and exhibits of the fair were educational. The purpose of the organization was to educate the public concerning agricultural matters. Unlike this organization, your convention is not exclusively educational, but rather an entertainment event for the community.

Rev. Rul. 68-224 granted exemption under Section 501(c)(4) of the Code to an organization conducting an annual festival depicting regional customs and traditions. The activities at the festival are recreational consisting of a barbecue, parade, rodeo, and various contests. Like this organization, the activities at your convention are recreational where the participants play video games, arcade events, foam weapon fights, cosplay and dance.

Rev. Rul. 71-545 granted exemption under IRC Section 501(c)(3) to an organization conducting a historical exposition. The exposition educated the general public concerning the importance of certain historical events, and cultural achievements. Unlike this organization, your events do not exclusively further educational or cultural purposes. While portions of your convention do celebrate certain cultures, these activities are not exclusively serving Section 501(c)(3) purposes. Instead, your events primarily feature entertainment and fun for the convention attendees. Further, your event, while open to the public, requires payment for entry and participation rather than providing education for the general public.

Like the organization in Better Business Bureau v. United States, you have a substantial non IRC Section 501(c)(3) exempt purpose. Your conventions are not exclusively serving an exempt purpose, but rather an entertainment event for the community.

Conclusion


To be described in IRC Section 501(c)(3), your activities must exclusively further those exempt purposes. Based on the information in your application, you are organized and operated primarily for social and recreational purposes. You have not satisfied the organizational and operational test. Therefore, you fail to qualify for exemption under Section 501(c)(3).

Your exempt status under IRC Section 501(c)(4) remains in effect.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Published July 16, 2021


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