Operator of Building Ruled Not Fraternal Beneficiary Organization

• DOI: http://doi.org/10.1002/npc.30355
• Date: 01 August 2017
• Published date: 01 August 2017

Bruce R. Hopkins’ NONPROFIT COUNSEL

August 20176THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonprofit Counsel DOI:10.1002/npc

website (Priv. Ltr. Rul. 201721022). (This use of website

information also takes place in connection with the regu-

lar application-for-recognition processes.)

This organization’s governing instrument stated that it

exists to “encourage all legitimate business enterprises” in its

10-town area and to “disseminate relative to the advantages

of the area as a field for industrial activities.” Its membership

is provided numerous social, educational, and professional

development events. The organization holds a determina-

tion letter stating that it is recognized as a tax-exempt

organization by reason of being a qualified business league.

The organization’s purposes were changed to chari-

table, educational, and like purposes. The revised state-

ment of purposes adds that its “desire is to provide . . . as

much assistance, within the above stated purposes, as the

individual communities consider necessary in the areas of

promotion, recognition and coordination of events for the

purpose of advancing the interests of the communities in

the region” consistent with the entity’s purposes.

The organization’s activities include revitalization and

beautification of the towns; promotion of chamber business;

publication of a newsletter; publicizing community fundrais-

ers; making grants to a welcome center and for operation of

a ski tow; promotion of tourism; conduct of monthly mixers

for socialization and networking; and the provision of semi-

nars, webinars, and marketing and bookkeeping training.

The organization, on its website, lists the names,

addresses, telephone numbers, and website addresses

of area businesses. There it describes itself as the “pre-

mier business advocacy organization” in its area. It

makes referrals by providing potential customers and

clients with information about its members’ businesses.

It should not be surprising to learn that the IRS ruled

that this organization does not qualify for tax exemption

by classification as a charitable and educational entity.

The IRS stated that this organization was functioning

more in the nature of a chamber of commerce.

Thus, when applying for recognition of exemption,

an organization should be certain that the information

on its website comports with the exemption classification

it is seeking. It looks like, in this case, in trying to switch

from one category of exemption to another, it forgot to

change the website content. (One of its stated activities is

“working with other chambers” in its area.) This could be

a situation where two exempt organizations are required,

one a charitable entity, perhaps a supporting organization

with respect to the chamber of commerce. [4.5(a), 14.3] ◆

OPERATOR OF BUILDING

RULED NOT FRATERNAL

BENEFICIARY ORGANIZATION

An organization was formed as a limited liability com-

pany; its sole member is a domestic fraternal society (an IRC

§ 501(c)(10) entity). This organization maintains a building

for its member and other domestic fraternal societies.

The organization’s primary source of revenue is

rental income from the fraternal organizations. It does

not provide for the payment of life, sick, accident, or

other benefits to members. Indeed, it does not have

members. It does not operate under the lodge system.

Not surprisingly, the IRS ruled that this organization

does not qualify as a tax-exempt domestic fraternal

society (Priv. Ltr. Rul. 201721021). The IRS stated that

the organization is not operated under the lodge system

because it does “not carry on [its] activities under a form

of organization that comprises local branches, chartered

by a parent organization and largely self-governing, called

lodges, chapters, or the like.” Rather, the IRS observed,

it is an organization “of a completely different kind, a

wholly owned subsidiary of [the parent entity] formed for

the purpose of managing its real property.” In all other

respects, the IRS said, this entity’s activities “lack both

fraternal and charitable characteristics.” [19.4(b)] ◆

NETWORK OF BUSINESS-

SEEKING PROFESSIONALS

DENIED RECOGNITION

OF EXEMPTION

A nonprofit corporation was formed to operate exclu-

sively as an organization of business persons within a

community to “gather together to further the education

of [its] members as to professional development, commu-

nication and networking.” Each member has been unani-

mously voted into this network based on their expertise

and excellence. An incoming member must fill a vacant

profession or business category that is advantageous to it.

This organization’s bylaws state that its mission is

to provide education and professional development

to its “exclusive network of professionals who excel

in their field of practice.” These bylaws further state

that this organization is a “community of diverse, busi-

ness professionals dedicated to cultivating long-term

relationships through the sharing of ideas, experiences,

resources, and business referrals.”

The organization is supported by dues from its mem-

bers. It imposes fines on members who do not give a

business lead to another member at its weekly meetings.

It has a sergeant-at-arms who is responsible for enforc-

ing collection of fines; this officer has the discretion to

challenge any member whose lead is deemed inappro-

priate and inconsistent with the organization’s “spirit

and intent” of providing business tips to members.

As should be expected, the IRS denied recognition

of exemption to this organization as a business league

(Priv. Ltr. Rul. 201721020). It is not formed to promote