Getting a Green Light from the IRS

We hear this complaint all the time.  A Main Street program files an application for 501(c)(3) status using the model application provided by the National Trust Main Street Center (NTMSC).  The organization has carefully conformed its articles of incorporation to the sample purpose statement endorsed by the NTMSC.  The application is identical to the successful application filed by an organization in the neighboring town.  And yet, the IRS turns them down.  How could this be? 

It could be that this Main Street organization talks the talk, but does not walk the walk.  IRS examiners will carefully read the newsletters and other material submitted with the tax exemption application; visit the organization's website; and ask to see the program manager's job description, façade grant application forms, and other records. The content of those materials is just as important as what you say in the application itself.

The IRS is going to question you closely if your website or other material describes your mission as:

  • promoting economic development within the commercial corridor;
  • providing residents with a "unique shopping experience; or
  • urging the public to "support your local merchants. 

Other red flags for the IRS are efforts to:

  • improve business conditions;
  • enhance  property values;
  • increase retail sales;
  • promote and market commercial, residential and civic development; or
  • coordinate publicity for businesses.

These statements suggest that the organization's purpose is business promotion.  Main Street organizations qualify for tax exemption by carrying out charitable objectives, such as combating community deterioration through downtown improvement and historic preservation, and educating the public, including the business community.  Business promotion is the work of a chamber of commerce, not a Section 501(c)(3) organization. Moreover, providing direct assistance to individual businesses is forbidden for any tax-exempt organization unless that assistance is narrowly tailored to carry out a recognized charitable objective, such as historic preservation.

It is important to understand that economic revitalization is not a recognized charitable objective. Local economic development organizations can get tax exemption if they are located in communities that have been designated as blighted. Their activities are designed to reduce poverty, relieve unemployment, or combat discrimination through targeted aid to businesses. While economic revitalization often results from a successful Main Street program, these organizations focus on improving the appearance and vitality of the downtown, even if their communities have not officially been designated as blighted, and do not specifically focus on addressing the problems of poverty, discrimination, or unemployment.

Finally, adherence to the National Trust Main Street Center's Four Point Approach® will not necessarily smooth the way to Section 501(c)(3) tax exemption. There are many ways to carry out this four-point approach, and not all of these activities are appropriate for Section 501(c)(3) organizations. 

So before you take another organization's application for tax exemption out for a test drive, obey these traffic signals:

Promotion

IRS-GreenLightIconSmallDo: Celebrate your downtown with events that include historic walking tours and information booths.

IRS-RedLightIconSmallDon't:  Promote shopping or advertise individual businesses

Design

IRS-GreenLightIconSmallDo:

  • Provide downtown property owners with grants for façade improvements that are consistent with the Secretary of the Interior's Standards for Rehabilitation.
  • Prepare streetscape plans.
  • Conduct downtown clean-up days.
  • Prepare a National Register nomination for your downtown.

IRS-RedLightIconSmallDon't:  Make grants or loans for interior or capital improvements to private property not tied to design standards.

Economic Restructuring

IRS-GreenLightIconSmallDo:

  • Sponsor educational workshops, lectures, and training programs.
  • Conduct market surveys.

IRS-RedLightIconSmallDon't: Enter into joint ventures with commercial developers. 

Organization 

IRS-GreenLightIconSmallDo:

  • Recruit members.
  • Raise funds.
  • Publish newsletters.
  • Train board members.

IRS-RedLightIconSmallDon't:

  • Sponsor joint fund-raising events with the chamber of commerce.
  • Promote local businesses in the newsletter.
  • Give special benefits to business members.
  • Conduct business with a board member.

While model applications can be useful, they may not be appropriate for your organization's specific activities. You may need to obtain the advice or services of a tax professional to help you with your application, particularly if you get questions from the IRS indicating that your application may be problematic.