Two recent private letter rulings highlight the need to carefully consider an organization's stated purposes and the provision under Code Section 501(c) that best fits those purposes before applying for exempt status.
In Private Letter Ruling 202102013, the IRS denied exempt status under Code Section 501(c)(3) for an organization whose stated purposes were to promote recreation and preserve/restore historic cars. The organization's articles of incorporation also included a clause that stated that notwithstanding any other provision, the organization would not carry on any other activities not permitted to be carried on by a corporation exempt under Code Section 501(c)(3). The IRS pointed out that the specific stated purposes of recreation and preserving/restoring historic cars was broader than the purposes specified in Code Section 501(c)(3), and that the notwithstanding clause included in the organizational document could not cure the non-exempt statement of purpose.
Similarly, in Private Letter Ruling 202102011, the IRS denied exempt status for an adult soccer league whose stated purpose was "recreation and fun" exclusively for "charitable purposes." The IRS noted that although the organizing document stated that the league was organized exclusively for charitable purposes, the stated purposes of "recreation and fun" were inherently incompatible with Code Section 501(c)(3) purposes. Therefore, the organization was not operated exclusively for exempt purposes within the meaning of Code Section 501(c)(3).
Code Section 501(c)(3) applies to entities organized for religious, charitable, scientific, testing for public safety, literary, and educational purposes, as well to entities organized to foster national or international amateur sports competition or for the prevention of cruelty to children or animals. Accordingly, neither of the rulings discussed above is surprising. But the rulings underscore the need for potential applicants to think about their organization's exempt purposes and consider that subsection (3) of Code Section 501(c) is not the only provision that confers tax-exempt status. For example, Code Section 501(c)(4) exempts social welfare organizations, 501(c)(6) exempts trade groups and business leagues, and, of particular relevance to the organizations in the rulings discussed above, 501(c)(7) permits exempt status for "clubs organized for pleasure, recreation, and other nonprofitable purposes." A variety of considerations will come into play when determining which status best suits an organization, including not just an organization's purposes, but also the deductibility of charitable contributions (which is not available to all types of exempt organizations).
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