IRS Revokes School's Exempt Status

Person to Contact: * * *

This is a final adverse determination regarding your exempt status under section 501(c)(3) of the Internal Revenue Code. Our favorable determination letter to you dated November 19XX is hereby revoked and you are no longer exempt under section 501(a) of the Code effective January 1, 20XX.

The revocation of your exempt status was made for the following reason(s):

Organizations described in IRC 501(c)(3) and exempt under section 501(a) must be both organized and operated exclusively for exempt purposes. If an organization fails to meet either the organizational test or the operational test, it is not exempt.

You were not organized for an exempt purpose under your current bylaws. You are not operating exclusively for an exempt purpose under IRC section 501(c)(3). Your primary activity is offering short term lodging to the public for payment in a way that is similar to commercial enterprises. By operating in the manner described, you are furthering a substantial nonexempt purpose.

Contributions to your organization are no longer deductible under IRC § 170 after January 1, 20XX.

You are required to file income tax returns on Form 1120. These returns should be filed with the appropriate Service Center for the tax year ending December 31, 20XX, and for all tax years thereafter in accordance with the instructions of the return.

Processing of income tax returns and assessments of any taxes due will not be delayed should a petition for declaratory judgment be filed under section 7428 of the Internal Revenue Code.

If you decide to contest this determination under the declaratory judgment provisions of section 7428 of the Code, a petition to the United States Tax Court, the United States Claims Court, or the district court of the United States for the District of Columbia must be filed before the 91^st Day after the date this determination was mailed to you. Please contact the clerk of the appropriate court for rules regarding filing petitions for declaratory judgments by referring to the enclosed Publication 892. You may write to the United States Tax Court at the following address:

After we issue the final revocation letter, we'll announce that your organization is no longer eligible for contributions deductible under section 170 of the Code.

For your protest to be valid, it must contain certain specific information including a statement of the facts, the applicable law, and arguments in support of your position. For specific information needed for a valid protest, please refer to page one of the enclosed Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status, and page six of the enclosed Publication 3498, The Examination Process. Publication 3498 also includes information on your rights as a taxpayer and the IRS collection process. Please note that Fast Track Mediation referred to in Publication 3498 generally doesn't apply after we issue this letter.

You also may request that we refer this matter for technical advice as explained in Publication 892. Please contact the individual identified on the first page of this letter if you are considering requesting technical advice. If we issue a determination letter to you based on a technical advice memorandum issued by the Exempt Organizations Rulings and Agreements office, no further IRS administrative appeal will be available to you.

Thank you for your cooperation.

* * * * *

 

 

 

 

ISSUES

 

The organization was originally incorporated on November 1, 19XX with the name * * *. ("Organization"). The original Form 1023 showed the Organization intended to operate as a school when it checked "yes" in Part III Question 15 of Form 1023.

Part III Question 15 asks: "Is the organization, or any part of it, a school?" If "Yes" complete Schedule B.

The Organization completed Schedule B and answered "yes" to Question 1 on page 16 of Form 1023, Schedule B Schools, Colleges and Universities.

Question 1 on page 16 asks:

"Does or will the organization regularly have a) regularly scheduled curriculum, b) faculty of qualified teachers, c) regularly enrolled student body, and d) facilities where educational activities are regularly carried on?"

Additionally, the original Form 1023 showed the Organization's source of support was as follows (in order of size):

The founder of the Organization is * * * is a voting board member and the Executive Director. He has a master's degree in education.

Program Service Accomplishments on December 31, 19XX

The Organization filed its Form 990 for the year ending December 31, 19XX. Part III Statement of Program Service Accomplishments stated: "Presented seminars and lectures; maintained site and educational materials for self-study courses."

Program Service Accomplishments on December 31, 20XX

The Organization filed its Form 990 for year ending December 31, 20XX. Part III Program Service Accomplishments stated: "Provides facilities * * * for people of all backgrounds. It offers facilities for cultural and social events for the community."

The Organization submitted amended articles of incorporation and bylaws to the Service with its Form 990 for December 31, 20XX.

The amended bylaws read as follows:

Article 1 of the BYLAWS of this corporation reads now as follows:

The purpose of this Corporation (* * *) is to provide the following services:

Name Change

The name of the Organization was changed to * * * in 20XX. In 20XX, the organization changed its name to * * *.

Location and Guest Rooms

* * * (The * * *) is located in * * *. The * * * has 0 guest rooms on a five acre property. These rooms include four cottages and four main houses. All 0 guest rooms are offered as lodging for payment to the general public 24 hours a day/7 days a week. The grounds also include a kitchen, Quiet Room and patio gardens. The * * * also rents out its facilities to groups and holds classes/workshops/seminars and community events. The * * * is also available for weddings. The * * * allows public charities to use its facilities free of charge.

Advertising

Website Advertising

The * * * website at www.* * *.com advertises the * * * as a * **

Telephone book Advertising

The * * * paid to advertise in the 20XX * * * Directory white pages. The * * * contact information was listed in the Directory under the following headings: Bed and Breakfasts; Hotel and Motel; Lodging; and * * *

Guides and Directories

In 20XX, The * * * was listed in the * * * News supplemental guide as being voted: "Best lodging in the * * * 20XX."

The * * * is listed in the * * * Chamber of Commerce business directory as "* * * -- * * * under the heading * * */Lodging."

Anyone may reserve a room online at the * * *, website, www.* * *.com. and pay online with their credit card. Potential guests may also book a room on www.hotel.com and www.breadandbreakfast.com.

Sources of Revenue

The following chart shows the source of The * * * revenue for three years:

 

 

The * * * offered the facility free of charge for non-profit organizations to use for fundraisers or at a 50% discount for other uses.

The * * * has a verbal arrangements with a yoga instructor and a massage instructor that hold classes every week. The classes are open to * * * guests as well as to the public. Guests are not required to attend. The classes are not part of a scheduled curriculum at * * *. Class attendees pay the instructors directly. The instructors pay a percentage of the fees collected from class attendees to * * *, usually * * *% of gross proceeds.

Expenses

The chart below shows The * * * expenses for three years:

 

 

Wages were the * * * largest expense. The * * * had 0 employees in the examination year. The founder of * * * was employed full-time as Executive Director. The * * * employed housekeepers; * * * gardeners and * * * maintenance workers; * * * breakfast workers, and * * * clerical workers. The * * * did not employ any teachers.

Please see the chart below for employee hours per position:

 

 

The Executive Director is responsible to prepare educational activities for the * * *. However, the Executive Director was unable to invest much time in preparing an educational program because the * * * was struggling financially and has been struggling almost since inception. A major donor did not agree with * * * direction and stopped contributing, so the Executive Director used his inheritance and also obtained loans to help finance The * * * The Executive Director's duties were primarily to manage The * * * and the employees. He also worked sporadically as the night manager.

The * * * has a secondary issue for employment taxes for its Executive Director who was allowed to stay in empty rooms at * * * most nights. The FMV of the rooms were not included in compensation.

Other Employee Positions

The office manager checks guests in and out and receives guest payments, issues keys, maintains the office and The * * * website. The housekeepers maintained the rooms. Gardening and maintenance personnel maintain the grounds and make facility repairs. Breakfast workers prepared and served the continental breakfasts. Clerical workers included a night manager, and weekend receptionist. None of theses employees were involved in preparing, presenting or publishing educational programs during the examination year or subsequent years.

Educational Activities

Actual Educational Program Hours

 

 

Guest Room Rates

The * * * website www.* * *.com, shows that its current room rates range from $0 to $0 per night depending on which day of the week the room is used. A room rate list for 20XX was not available during the examination. A room rate list from November 20XX showed the room rates were similar to the current rates.

The chart below shows a price comparison between The * * * and three local hotels for similar rooms. * * * rooms with a price range of $0 - $0 per night share bathrooms, refrigerator and microwave. The * * * in * * * also offers rooms with shared bathrooms. Their rates are $0 - $0. These lower priced rooms are not included in the comparison below.

 

 

 

LAW

 

Generally, an organization that is described in Code § 501(c)(3), is exempt from income tax. These organizations include corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

In order to be exempt as an organization described in Code § 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section.

An organization will be regarded as "operated exclusively" for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such exempt purposes specified in Code § 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. The existence of a substantial nonexempt purpose, regardless of the number or importance of exempt purposes, will cause failure of the operational test.

An organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than private interest. Thus, an organization must establish that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or creator's family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests.

Operating for the benefit of private parties who are not members of a charitable class constitutes a substantial nonexempt purpose.

Code § 501(c)(3) exempts from Federal income tax organizations organized and operated exclusively for charitable, educational, and other exempt purposes, provided that no part of the organization's net earnings inures to the benefit of any private shareholder or individual.

Treas. Reg. section 1.501(c)(3)-1(a) provides that in order to be exempt as an organization described in Code § 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(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 Code § 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. describes organizations exempt from tax under section 501(c)(3) as organizations organized and operated for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or for the prevention of cruelty to children or animals.

The term "charitable" is used in section 501(c)(3) in its generally accepted legal sense and includes relief of the poor and distressed or of the underprivileged as well as the advancement of education. Treas. Reg. section 1.501(c)(3)-1(d)(2).

In Better Business Bureau of Washington, D.C., the Supreme Court held that the presence of a single non-exempt purpose, if substantial in nature, will prevent exemption regardless of the number or importance of truly exempt purposes. The Court held that a trade association had an "underlying commercial motive" that distinguished its educational program from that carried on by a university.

An organization is not described in I.R.C. section 501(c)(3) if it operates a trade or business that primarily furthers a nonexempt purpose. Treas. Reg. Section 1.501(c)(3)-1(e) Similarly, the courts have denied exempt status under what is generally known as the commerciality doctrine. See, e.g., B.S.W. Group v. Commissioner, 70 T.C. 352 (1978); Airlie Foundation v. Commissioner, 283 F. Supp.2^nd 58 (D.D.C. 2003). Courts have found that, due to the "commercial" manner in which an organization conducts its activities, the organization is operated for nonexempt commercial purposes rather than for exempt purposes. Among the major factors courts have considered in assessing commerciality are competition with for profit commercial entities; extent and degree of below cost services provided; pricing policies; reasonableness of financial reserves; whether the organization uses commercial promotional methods; and the extent to which the organization receives charitable contributions. Airlie Foundation, and cases cited therein.

Competition with commercial firms is strong evidence of the predominance of nonexempt commercial purposes. See American Institute for Economic Research v. United States, 302 F.2d 934 (Ct.Cl. 1962); Scripture Press Foundation v. United States 285 F.2d 800, 806 n 11 (Ct. Cl. 1961); United Hospital Services, Inc. v. United States, 384 F. Supp. 776, 780 (S.D. Ind. 1974). In Airlie Foundation, the organization operated a conference center that was not limited to tax-exempt entities. The Court found that the fact that the organization's conference center derived substantial income from events that competed with commercial and non-commercial entities constituted strong evidence of a commercial nature and purpose. In B.S.W Group, the Tax Court found that a corporation formed to provide consulting services in the area of rural-related policy and program development to tax-exempt and not-for-profit clients was not entitled to section 501(c)(3) status because it was primarily engaged in an activity that was characteristic of a trade or business. The Court found that the organization's planned service areas were of the sort normally carried on for profit by commercial businesses and the organization's financing was not typical of section 501(c)(3 organizations. The organization did not provide any free or below-cost services; its clientele was not limited to section 501(c)(3) exempt organizations; its support came from fees for services, and it did not receive or solicit charitable contributions.

In Easter House v. United States. 12 Cl.Ct. 476 (1987), aff'd. 846 F.2d 78 (Fed. Cir. 1988), the Court determined that the organization was not exempt because its conduct of adoption services was in furtherance of a non-exempt commercial purpose.

In The Schoger Foundation v. Commissioner, 76 T.C. 380, a not-for-profit corporation owns and operates a mountain lodge that it characterizes as a religious * * * facility. The lodge makes available to its guests numerous activities, religious, recreational, and social, none of which are regularly scheduled or required. The record does not show the extent to which the guests participated in any of the activities, religious or otherwise.

Although the organization's mountain lodge offered guests religious, recreational, and social activities; however, none were regularly scheduled or required. The court concluded that the organization had not met its burden of proof to show that the lodge was operated primarily for an exempt religious purpose and that the recreational and social activities at the lodge were only incidental to a religious purpose. In making that finding the court stated:

Wholesome family recreation or just sitting on a rock contemplating nature way well provide a family or individual with a religious, or at least a spiritually uplifting experience, but it is difficult to see how that experience differs, if it does, from the same experience one can have at any quiet inn or lodge in the beautiful mountains of Colorado.

In Living Faith, Inc. v. Commissioner, 950 F. 2d 365 (7^th Cir. 1991) aff'g 70 T.C. 352(1978), the court held that a vegetarian restaurant and health foods store that adhered to the principles of the Seventh Day Adventist Church was not operated exclusively for exempt religious purposes, but rather for a substantial commercial purpose. The court examined the method of operations to infer the purposes. The court found substantial evidence to support a conclusion that the organization's activities furthered a substantial nonexempt purpose, including:

In American Institute for Economic Research v. United States, 302 F.2d 934, 157 Ct. Cl. 548 (Ct. Cl. 1962), the Court considered the status of an organization that provided analyses of securities and industries and of the economic climate in general. The organization sold subscriptions to various periodicals and services providing advice for purchases of individual securities. Although the court noted that education is a broad concept, and assumed for the sake of argument that the organization had an educational purpose, it held that the organization had a significant non-exempt commercial purpose that was not incidental to the educational purpose and was not entitled to be regarded as exempt. The court found that the corporation's sales of its publications were more analogous to commerce than to education. The court concluded that the business purpose was primary and not incidental to any educational purpose which might have been present.

In United Missionary Aviation, Inc. v. Commissioner, T.C.M. (CCH) 1990-566, the Tax Court held an organization formed to support religious missionary work not exempt under IRC 501(c)(3) because it had a substantial nonexempt commercial purpose. The court focused on how the organization carried on its primary activity, a tape and equipment supply division. No one factor was determinative, but the court considered the following operations particularly relevant:

In Forest Press, Inc. v. Commissioner of Internal Revenue 'as long as the corporation was created to further an exempt purpose and its activities are consistent with that purpose, it is irrelevant that other for-profit enterprises engage in the same activity.'

In Peoples Translation Service, on the surface the entity's activities were conducted in an ordinary commercial manner, the operation was not sufficiently like a commercial enterprise because there was no intent to make a profit.

In Hawaii, Inc. v. Commissioner, 71 T.C. 1067 (1979) 'an organization may engage in trade or business as long as its operation furthers an exempt purpose and its primary objective is not a production of profits and provided it serves a public rather than a private interest.'

In Colorado State Chiropractic Society v. Commissioner, 93 T.C. 487, at 496 (1989), the Court stated, "Petitioner's original articles of incorporation are not the only evidence from which petitioner's purposes might be determined. Rather, petitioner's bylaws are also indicative of the 'objects motivating' petitioner and, therefore, must also be considered."

In Copyright Clearance Center, Inc. v. Commissioner, 79 T.C. 798, 807-808 (1982), the "potential" for a substantial profit driving operations and organization are good enough to show a nonexempt purpose.

The details of the taxpayer's written correspondences are shown below in chronological order.

1) Taxpayer Correspondence dated June 13, 20XX

In correspondence dated June 13, 20XX, The * * * stated the following:

In correspondence dated June 16, 20XX, The * * * included the following:

In correspondence dated July 11, 20XX, The * * * stated the following:

In correspondence dated July 15, 20XX, The * * * stated the following:

In correspondence dated July 21, 20XX and July 29, 20XX, The * * * sent a tentative schedule for educational programs for August, September, October & November 20XX and asked for a review. The * * * wants to know if the revised schedule meets the Service's criteria.

September 20XX -- 16 days of classes/workshops/seminars and two events

October 20XX -- 13 days of classes/seminars/workshops and a community event on environmental achievements & ecological projects

November 20XX -- 15 days of workshops and 5 days for an artistic center & gallery/seminars

6) Taxpayer Correspondence on July 29, 20XX

In correspondence dated July 29, 20XX, The * * * sent their schedule for educational programs for August 20XX and asked for a review. The * * * wants to know if the revised schedule meets the Service's criteria.

July 29 - August 20XX -- 9 events that include three film showings/discussion; one fundraiser; and five teacher/speakers.

Based upon the amended bylaws, the * * * is not organized for an exempt purpose. In relevant part, I.R.C. section 501(c)(3 limits charitable exemption to an organization organized and operated "exclusively for exempt purposes." The organizational test, formulated in Treas. Reg. Section 1.501(c)(3)-1(b)(1), provides in relevant part:

The Service has incorporated its position on Issue 2 into its responses to the taxpayer's correspondences, as shown below, and as requested by the taxpayer.

Issue 3. The * * * was operated primarily for commercial purposes.

The Service has incorporated its position on Issue 3 into its responses to the taxpayer's correspondences, as shown below, and as requested by the taxpayer.

Government Response to correspondence dated June 13, 20XX

2) Not informed about educational requirements: The * * * was informed of the educational requirements of Section 501(c)(3) of the Internal Revenue Code.

 

 

6) Designed as a * * *: The * * * stated its facility is designed and operated as a * * * and not as a motel or hotel. A hotel is not required to have all of the same characteristics as * * * to be comparable. Commercial enterprises each compete in the free market with their own version of a * * *. Potential guests select lodging depending on individual tastes. The Service responds to The * * * distinction below:

1) Welfare exemption: The * * * received its original determination letter dated August 2, 19XX that approved its federal exemption. The * * * approval for property tax exemption dated 4/24/20XX was after the date the Service approved The * * * Form 1023 Application for Exemption. The * * * requested the federal exemption letter as part of its process to determine that The * * * was tax exempt from property taxes. The argument that * * * used the approval for property tax exemption to determine whether it was in compliance with federal exemption is erroneous.

3) Nonprofit support: The * * * listed seven (7) charitable organizations as a partial list of organizations that it has provided meeting space free of charge or at a 50% discount. The Service agrees that providing free or discounted meeting space to nonprofits is a charitable activity. However, whether these organizations contributed to the educational requirement significantly is not shown. It seems that each event may be a few hours long and not more than a few days each. Thus, providing facilities for educational events combined with other classes and workshops are not primary activities. Additionally, there are for-profit entities that offer free or discount space to charities.

1) "51% Clause" The * * * states that when they sent in their change of name and orientation, they never heard anything about the "51% clause" and that they always followed all the rules they were informed about.

3) Planned * * */workshops: The * * * workshops/* * * and classes are merely additional amenities instead of primary activities. As previously, noted for-profit hotels such as The Standard also have * * * and workshops as well as a significant amount of yoga class hours each week which exceed those at

Government Response to correspondence dated July 15, 20XX

1) Definition of education: As stated above in our response to correspondence dated June 13, 20XX, The Service does not address a specific meaning in the Code for "educational * * *"; however, it does define educational as noted in Regulations § 1.501(c)(3)-1. This Regulation is quoted above.

2) Samples of educational programs and examples of how education relates to tax-exempt status:

4) Welfare exemption: As shown above, the * * * partially relied on the Federal exemption letter that was dated 8/2/19XX for its determination to grant * * * welfare exemption in April 20XX. As discussed above, this federal exempt status letter was issued for the activity shown in the original application for exemption. The letter was not reliable for the change in activities that were not covered by the letter. Additionally, educational programs, relevance of community and charitable aspects, non-profit status, educational facility (conference room, library/Quiet Room, etc.), and zoning are examined against federal law for federal tax exemption.

5) Flow of people exceeds 50% of traffic: The * * * advertises in a similar manner to a hotel; charges similar rates as hotels, and its income, expenses, and employee duties are similar to hotels. Income as well as these other factors are determining factors. In Living Faith, Inc. v. Commissioner. 950 F. 2d 365 (7th Cir. 1991) aff'g 70 T.C. 352 (1978), the court held that a vegetarian restaurant and health foods store was operated for substantial commercial purpose. The court examined the method of operations to infer the purposes. The organization operated in competition with commercial entities, charging competitive prices set by formulas common in the retail food business, and using commercial promotional methods. Like Living Faith * * * is operated in competition with commercial entities and operates in a similar commercial manner.

7) The differences the taxpayer listed between * * * and hotels or motels are addressed below:

In correspondence dated July 21, 20XX The * * *sent a tentative schedule for educational programs for September, October, & November 20XX and asked for a review. The * * * wants to know if the revised schedule meets the Service's criteria.

The agent prepared the chart below of proposed educational hours and percentage of facility use and assumed an eight (8) hour day to give consideration to * * * proposal. How many actual hours are included and whether each day is an eight (8) hour day was not stated in the taxpayer's correspondence.

 

 

Classes are offered, but are not mandatory to visitors. The adjustments to * * * schedule do not negate unfair competition to taxable entities that provide similar location, layout, experience, amenities and as many or more classes. The * * * has no activities that can be deemed educational in nature for guests that would distinguish it or demonstrate an exclusively educational or charitable purpose. The * * * operates in a manner consistent with a commercial business.

Likewise, as in United Missionary Aviation, Inc. v. Commissioner, the particular manner in which an organization's activities are conducted, the commercial hue of those activities, competition with commercial firms are all relevant evidence in determining whether an organization has a substantial nonexempt purpose. This Court and others have consistently held that an organization's purposes may be inferred from its manner of operations.

Government Response to Correspondence dated July 29, 20XX

In correspondence dated July 29, 20XX, The * * * sent their schedule for educational programs for August 20XX and asked for a review. The * * * wants to know if the revised schedule meets the Service's criteria.

The * * * correspondence showed July 29 - August 20XX -- 9 events that include three film showings/discussion; one fundraiser; and five teacher/speakers.

July 29 - August 20XX -- None of the events appear to be longer than a few hours. Event hours are in addition to regular classes. Regular classes include yoga five days a week for 1.5 hours each day and a weekly dialogue for 2 hours a week. This is a total of 9.5 hours of regular classes.

Taxpayer's Response to Government's Preliminary Report:

On October 24, 20XX, the examining agent issued a preliminary report proposing revocation of The * * * exempt status under section 501(c)(3) for the tax years ended December 31, 20XX; December 31, 20XX, and December 31, 20XX.

The * * * representative replied to The Service's preliminary report on January 16, 20XX with a 31 page letter and 119 pages of attachments. (See attached 31 page letter.)

The follow up response stated that * * * satisfied the requirements for the organizational and operational tests of Treasury Regulations section 1.501(c)(3)-1(a)(1). The * * * representative also raised arguments that The * * * activities further an exempt purpose and are fundamentally different from for-profit entities such as hotels and inns.

Government's Rebuttal to Taxpayer's Response:

The * * * response does not alter the Government's position.

The Tax Court has stated that original articles of incorporation are not the only evidence from which an organization's exempt purposes might be determined. In Colorado State Chiropractic Society v. Commissioner, 93 T.C. 487, at 496 (1989), the Court stated, "Petitioner's original articles of incorporation are not the only evidence from which petitioner's purposes might be determined. Rather, petitioner's bylaws are also indicative of the 'objects motivating' petitioner and, therefore, must also be considered."

The Court further stated:

The examination is based on the bylaws in effect during the examination as shown in Form 886-A page 2; page 15; page 22 and page 27. As we previously discussed with your representative, amendments to bylaws made after the examination must be evaluated by the filing of a new Form 1023 Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code.

In Goldsboro, the organization operated two art galleries which exhibited and sold artworks without a written contract in a county where there were no other galleries or similar facilities in competition with it. Conversely, * * * is in competition with other for profit establishments as evidenced by its own advertisements and monitoring of its reviews on travel websites. (Exhibit 1 shows the * * *'s letter to the * * * Chamber of Commerce to protest not being included in the Visitor's Guide under "places to stay" and the * * * subsequent ad.) Additionally, the letterhead The * * * used for its letter to the Chamber is different than that used in its ad. The described itself as "* * * A non-profit corporation 501(c)(3)" to the Chamber in its correspondence. However, in its ads * * * described itself as "* * *!" (See Exhibit 1 and Exhibit 2.) Nothing in the ad would attract guests to the * * * for educational purposes. This is the same way * * *described itself on its website.

The * * * is unlike Goldsboro, in which the purpose of the art gallery and art market was primarily to foster community awareness and appreciation of contemporary artists. It also provided a constant flow of art for students to study art and painting techniques. The fact that there were no other art museums or galleries in the area and that works were chosen for representation of modern trends, not salability, significantly influenced the court to conclude the petitioner's purpose was primarily to educate rather than to sell. Conversely, the * * * board of director discussions on occupancy rates in comparison with other local entities, profit and loss discussions, and commercial advertising, and emphasis on gaining market share of the industry show that had a substantial nonexempt purpose.

Excerpts from * * * Board Reports, set forth below, demonstrate the commercial manner in which The * * * was operated.

In Forest Press, the Tax Court determined that an organization "devoted to developing and propagating the use of the Dewey Decimal Classification System and Related Index" was a charitable organization. Forest Press' primary activity was the ongoing development of the system, which required continuous revision. To this end, Forest Press regularly employed an editor-in-chief and four editorial assistants and an additional two to three editorial assistants as publication dates approached. By the time Forest Press was formed, the System had "been adopted by more than 90 percent of the libraries in the United States to classify and index their collections" and was "in use in 42 countries." Thus, the court concluded that the System was "an important aid to education and research and not a commercial enterprise."

In Forest Press, the organization did not fix prices with any intent to make a profit over and above the expenses involved in the corporation and publishing the system. Additionally, the organization in the Forest Press case did not advertise its publications in the conventional sense. The * * * organization's creation as well as the activities it engaged in was for educational purposes. This is not true of the * * *. The * * * board reports and meeting minutes show that the board regularly monitored its position in the industry and was in competition with other inns for guest room occupancy. The board also made adjustments in guest room rates to maximize profitability. (See Exhibit 2 for sample * * * advertising and Exhibit 3 board meeting minutes.)

As shown above and in Form 886-A pages 15 and 16, the examination determined that fails the organizational test due to nonexempt purposes included in its bylaws. Unlike Forest, * * * was not created to further an exempt purpose. Additionally, * * * activities are inconsistent with a charitable purpose. Instead they show a substantial nonexempt purpose.

Likewise, even if the agent counted all of * * * activities in 20XX as charitable, literary, or educational, the total is still insignificant in comparison to its promotion and maintenance of its lodging activity. Additionally, subsequent changes to * * * calendar and whether the organization offers a significant amount of charitable programs were previously discussed with * * * representative. The representative was referred to Rulings and Agreements to file a new Form 1023 Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code.

The * * * states that its teachers are for the most part volunteers, however, the primary teachers at * * * were paid directly by class participants. The yoga and massage teachers were the primary teachers during the examination years, as they taught weekly classes for about 7.5 hours a week. The teachers usually paid the * * *% of the fees collected from participants. As shown in Form 886-A pages 4-5, * * * had verbal payment agreements with its yoga and massage teachers.

The * * * has suggested the Service review the websites of three organizations that it considers similar to The * * * and which hold 501(c)(3) recognition of exemption. These websites are for: * * *, * * * Institute , and * * * Educational Center. The Service reviewed these websites and a significant difference is that all three organization's websites emphasize workshops/programs more than lodging. The * * * website emphasizes a certain philosophy and encourages lodging for inquiry into this philosophy. The * * * website clearly emphasizes its workshops and boasts 600 workshops and programs per year. Lodging is offered primarily to those who first find a workshop they wish to attend. The website shows that it has specific dates for personal however, no personal * * * dates were available when the Service accessed its website. The Educational Center has several large group events during the year and a staff of educators. It also customizes * * *. Individual lodging seems to be incidental if at all, as the majority of its accommodations are for large groups.

The new information presented in the * * * response on pages 14 through page 31 is primarily based on changes the * * * has made or plans to make subsequent to the audit. The amended its bylaws, is revising its website to emphasize educational programs more than guest rooms; and revised its calendar subsequent to the examination. The Service previously notified the * * * representative that changes to * * * structure should be evaluated by Rulings and Agreements by following formal procedures. Formal procedures entail completing Form 1023 Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code and submitting it to Rulings and Agreements for evaluation.

The proposed revocation of The * * * exempt status applies to its organization and operation in the examination years of 20XX through 20XX. The Service's position is based on * * * activities during the exam years, not subsequent changes made after the examination and future intentions.

During the examination, the Service received permission from * * * to take pictures. The agent took photographs of the libraries on * * * grounds on June 13, 20XX. One photograph shows one bookcase, which is the local author's library. The second photograph partially shows the Quiet Room that included three bookcases consisting of the spiritual and educational library. (See Exhibit 5 for photographs of the bookshelves.) The * * * exaggerates the library component.

Additionally, participation in educational events was incidental. At * * *, guests could participate in yoga, massage, Quiet Room, gardens, and occasional events. However, * * * primarily emphasized its quiet and beautiful location and serene atmosphere as reasons to stay at the location.

The * * * relies on est of Hawaii v. Commissioner, 71 T.C. 1067 (1979) and concludes that "an organization may engage in trade or business as long as its operation furthers an exempt purpose and its primary objective is not a production of profits and provided it serves a public rather than a private interest." The Service takes the position that * * * promotion, reservation, and maintenance of its guest rooms for overnight guests is a substantial disqualifying nonexempt purpose. As stated in Copyright Clearance Center, Inc. v. Commissioner 79 T.C. 793, 804(1982):

The * * * tax exemption should be revoked because Treas. Reg. section 1.501(c)(3)-1(a) provides that in order to be exempt as an organization described in Code § 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.

The * * * was not organized for an exempt purpose under its current bylaws. The * * * is not operating exclusively for an exempt purpose under IRC section § 501(c)(3). The * * * primary activity is offering short term lodging to the public for payment in a way that is similar to commercial enterprises. This activity should not be treated as unrelated business income because the activity is substantial. By operating in the manner described, * * * is furthering a substantial nonexempt purpose.