Text Resize
Subsribe to RSS Feed

Thursday March 4, 2021

Private Letter Ruling

Exempt Status Denied to Car Promoter

GiftLaw Note:
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.
PLR 202107012 Exempt Status Denied to Car Promoter

2/19/2021 (9/29/2020)

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).

Published February 26, 2021
Subsribe to RSS Feed

Previous Articles

IRS Approves Foundation's Educational Grant Procedures

Exemption Denied for Softball Team

Foundation's Grant Procedures Approved

Set-Aside Request Approved

Organization's Exempt Status Denied


Maria Poimenidou, 2020
Theodore Diamandopoulos
Memorial Scholarship

"I am currently a senior double majoring in biochemistry and economics and minoring in Innovation & Entrepreneurship. I cannot express enough how much I appreciate the Theodore Diamandopoulos Memorial Scholarship, without it, my Lawrence experience would not be possible. I have enjoyed being a mentor in the CORE freshman mentorship program, playing and working for the Women's Basketball team, competing in Model United Nations, interning as a lab assistant at the MD Anderson Cancer Center in Houston, hosting a pilot STEM program for young unaccompanied refugees in Greece, and volunteering through KidsGive during a field trip to Sierra Leone. Thank you so much for supporting me in doing the things I dream to do."

Jelani Jones, 2021
Marie Dohr Memorial Scholarship

"Being at Lawrence has and continues to be a joy for me. I feel that I have grown so much as a musician, a teacher, and a friend through the awesome community of professors and friends I have met here. I feel that I am blessed to have such an awesome violin professor, and all the faculty members in the education department are so amazing. I have come to see Lawrence and the state of Wisconsin as my home, and I wouldn't change a thing."

Maggie Wright, 2021
Margaret S. and W. Paul Gilbert Memorial Scholarship

The scholarships I receive at Lawrence allow me to experience anything that I want to. I can pursue my love of Biology and Chemistry in classes that are engaging, with professors who care individually about their students. These scholarships also give me the freedom to participate in numerous extracurriculars that Lawrence offers as well, like the Fencing Team and the American Medical Students Association. All of the opportunities Lawrence offers me remind me how grateful I am to have received the Margaret S. and W. Paul Gilbert Memorial Scholarship."

Molly Chadwick Reese, 2020
Anne Prioleau Jones Tuition Scholarship in French

"Attending Lawrence is a privilege few are granted. Every moment spent at Lawrence solidifies a lifelong membership in a special group of peers, known as Lawrentians. The esprit de corps that Lawrence fosters makes the connection between students and mentors new and challenging, with both parties in a constant state of curiosity, respect, and encouragement. My experience as a language learner at Lawrence has not only helped my comprehension of the French language, but has enhanced my ability to communicate and connect with people in ways I never expected before attending Lawrence. As a French major and a student following a pre-medicine track, I have been afforded the privilege of diving into the sumptuous depths of the humanities, while satiating my hunger for scientific knowledge in concert. From this, I am able to fully appreciate the wonders of a liberal arts education. If not for the Anne Prioleau Jones Scholarship in French, I would be unable to join my peers in this quest for knowledge. I am very grateful for the donors' generosity."

Milwaukee-Downer Scholarships and Professorships

Some of the many recipients of Milwaukee-Downer scholarships gather for a photo with Carolyn King Stephens M-D'62 and Marlene Crupi-Widen M-D'55 in January 2014 at the annual scholarship luncheon.

Rosamund Victoria Bille Adler Scholarship
Dr. Charles E. Albright Scholarship
Helen Daniels Bader Scholarship
James G. and Ethel M. Barber Scholarship
Catharine Beecher Endowed Fund for Downer Women
Bessie A. Bell Scholarship
Berk Scholarship
Frederick C. Best Scholarship
Beta Study Club Scholarship
Lynde Bradley Scholarship
Lucia R. Briggs-Alumnae Scholarship
Edith Lange Brooks Scholarship
Anne Barman Caldwell Scholarship
Alice Miller Chester Scholarship
City of Milwaukee Student Funds Scholarship
Milwaukee-Downer Class of 1940 Fund
Milwaukee-Downer Class of 1942 Fund
College Endowment Association Scholarship
Janet Cope Crawford Scholarship
Jessie Mabbott Daniels Scholarship
F. T. Day Scholarship
Rufus Dodge Scholarship
Julia P. Ely and Hannah R. Vedder Memorial Scholarship
General Endowed Scholarship - M-D College
Dr. Alfred W. and Mrs. Ada F. Gray Scholarship
Berenice E. Hess Scholarship Endowment
Lucille Ray Hibbard Scholarship
Belle Austin Jacobs Scholarship
Helen McDermott Jurack and Ronald J. Mason Scholarship
Marjorie S. Logan Scholarship
Nellie Maxwell Scholarship
S. Annabelle & Paul McGuire Scholarship
Memorial Scholarship Fund - Milwaukee-Downer
Milwaukee-Downer Class of 1953 Scholarship
Milwaukee-Downer Class of 1955 Scholarship
Milwaukee-Downer Class of 1956 Scholarship
Milwaukee-Downer Class of 1957 Scholarship
Milwaukee-Downer Class of 1958 and 1959 50th Reunion Scholarship
Milwaukee-Downer Club Scholarship
Milwaukee-Downer/Lawrence College Consolidation 50th Anniversary Scholarship
Francis Evelyn Kelley Morgan Memorial Scholarship
O'Neill-Anderson Family Scholarship Endowment
Elizabeth A. Olson Scholarship
Gilbert Haven Peirce, Sr. and Emma Elizabeth Manor Peirce Milwaukee-Downer Scholarship
Aleida J. Pieters Scholarship
Matilda Siefert Puelicher Scholarship
Elizabeth Ann Richardson Scholarship
William M. Ross Memorial Scholarship
Elizabeth Rossberg Scholarship
Charles Frederic Sammond Scholarship
Mildred L. Schroeder Scholarship
Sivyer Educational Fund for Women
Marion Merrill Smith Scholarship
Dr. Elizabeth A. Steffen Scholarship
W. Mead and Elizabeth McKone Stillman Scholarship
Strzelczyk Family Scholarship
Clare Scherf Sweetman Scholarship
Raymond H. and Jane K. Taylor Scholarship
Jerline E. Walfoort Memorial Scholarship
Barbara E. Wehr Fund
Harmony Weissbach Scholarship
Martha and Frances Wheelock Scholarship
James G. and Ethel M. Barber Professorship of Theatre and Drama
T. A. Chapman Professorship in Music
Alice G. Chapman Professorship in Physics
Alice G. Chapman Librarianship
Milwaukee-Downer College and College Endowment Association Professorship

Angela Small Fry Intia, 2019
Maurine Campbell Scholarship

"Thanks to the Maurine Campbell scholarship, I have been able to attend the amazing school that is Lawrence University. With the help from this scholarship, I have been able to pursue my dream career in chemistry working with the outstanding and extremely helpful faculty here. Even outside of chemistry I take the time for exploration into my interests and want to give back through my work as a resident life advisor, stock room assistant, and student supervisor at Bon Appetit. Everything I have learned here, academically or not has forever molded the person I am today."

LarryU Facebook Twitter Instagram YouTube

© Copyright 2021 Crescendo Interactive, Inc. All Rights Reserved
This site is informational and educational in nature. It is not offering professional tax, legal, or accounting advice.
For specific advice about the effect of any planning concept on your tax or financial situation or with your estate, please consult a qualified professional advisor.