IRS Denies Tax Exempt Status

In PLR 201143020, the IRS determined that ORG, a state nonprofit membership corporation, did not qualify for exemption from Federal income tax under Section 501(c)(3) of the Internal Revenue Code.

Organizations that are organized and operated exclusively for exempt purposes are exempt from federal income tax under Section 501(c)(3). If more than an insubstantial part of an organization’s activities are not in furtherance of an exempt purpose, then the IRS will not consider the organization to be operating exclusively for an exempt purpose.

ORG is primarily a professional society that advanced the career and professional development of its members through networking, scholarships, and social events. ORG offers activities consisting of mixers, picnics, volleyball, wine tasting, networking, and dodge ball. None of these events or activities raise money to fund activates which further an exempt purpose. ORG members also volunteer at community events, help build homes, and help clean-up after local floods.

The IRS determined that more than an insubstantial part of ORG’s activities consisted of social and professional events rather than events that furthered an exempt purpose. The IRS also determined that ORG members received a private benefit from these activities and that this benefit was not incidental to furthering an exempt purpose.

See Private Letter Ruling, Episcopal Church Foundation, Nov. 7, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.