Medical aid charity reserved half its funds for one family

Plain-English summary

An organization sought section 501(c)(3) status to raise money for medical expenses of children with cancer or other life-threatening illnesses. It was originally formed to assist one named child and that child's family, and it later expanded its stated activities to other families in the area. Even after that expansion, up to half of all funds raised would remain available to the original family. The IRS found that this substantial private benefit meant the organization did not operate exclusively for charitable purposes. It denied exemption, and the denial became final when the organization did not protest within 30 days.

Ruling snapshot

• Question: Did the organization qualify under section 501(c)(3) when up to half of its funds would benefit one preselected family?
• Outcome: denied
• Key authorities: IRC §§ 170 and 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 67-367; Better Business Bureau of Washington, D.C., Inc. v. United States; Wendy L. Parker Rehabilitation Foundation, Inc. v. Commissioner

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201

Date: September 21, 2016

Release Number: 201651016
Release Date: 12/16/2016
UIL Code: 501.33-00

Employer ID number:

Contact person/ID number:

Contact telephone number:

Form you must file:

Tax years:

Dear

This letter is our final determination that you don’t qualify for tax-exempt status under Section 501(c)(3) of the
Internal Revenue Code (the Code). Recently, we sent you a proposed adverse determination in response to your
application. The proposed adverse determination explained the facts, law, and basis for our conclusion, and it
gave you 30 days to file a protest. Because we didn’t receive a protest within the required 30 days, the proposed
determination is now final.

Because you don’t qualify as a tax-exempt organization under Section 501(c)(3) of the Code, donors can’t
deduct contributions to you under Section 170 of the Code. You must file federal income tax returns for the tax
years listed at the top of this letter using the required form (also listed at the top of this letter) within 30 days of
this letter unless you request an extension of time to file.

We’ll make this final adverse determination letter and the proposed adverse determination letter available for
public inspection (as required under Section 6110 of the Code) after deleting certain identifying information.
Please read the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that
show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Notice
437 on how to notify us. If you agree with our deletions, you don’t need to take any further action.

We’ll also notify the appropriate state officials of our determination by sending them a copy of this final letter
and the proposed determination letter (under Section 6104(c) of the Code). You should contact your state
officials if you have questions about how this determination will affect your state responsibilities and
requirements.

Letter 4038 (Rev. 7-2014)
Catalog Number 47632S

If you have questions about this letter, you can contact the person listed at the top of this letter. If you have
questions about your federal income tax status and responsibilities, call our customer service number at
1-800-829-1040 (TTY 1-800-829-4933 for deaf or hard of hearing) or customer service for businesses at
1-800-829-4933.

Sincerely,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Notice 437

Redacted Letter 4036, Proposed Adverse Determination Under IRC Section 501(c)(3)
Redacted Letter 4038, Final Adverse Determination Under IRC Section 501(c)(3) - No Protest

Letter 4038 (Rev. 7-2014)
Catalog Number 47632S

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201

Date: July 29, 2016

Employer ID number:

Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend:
M = Name
N = Last Name
P = Location
W = Date
X = State
Y = Date
z dollars = Amount

UIL:
501.33-00

Dear

We considered your application for recognition of exemption from federal income tax under Section 501(a) of
the Internal Revenue Code (the Code). Based on the information provided, we determined that you don’t qualify
for exemption under Section 501(c)(3) of the Code. This letter explains the basis for our conclusion. Please
keep it for your records.

Issues
Do you qualify for exemption under section 501(c)(3) of the Internal Revenue Code? No, for the reasons

described below.

Facts
You were formed as a nonprofit corporation on Y in the state of X. Although you formed as a nonprofit

corporation, you repeatedly referred to yourself as an LLC in your application and responses.

You were originally formed to provide financial assistance solely to the N family. Your activities consist of
raising funds to assist the family of M, a child diagnosed with cancer, with medical expenses related to cancer
preventive treatments that are not covered by the family’s medical insurance. Your board reviews the medical
expenses and distributes funds to the medical provider administering care. One of your board members shares
the same last name as the recipient, M. Although you indicated on Form 1023 that your officers or directors are
related through family or business relationships, you did not provide an explanation of the relationships.

You revised your activities during the processing of your application by stating you will provide financial
assistance to other families in the P area with children that have been diagnosed with cancer or other life
threatening illnesses. You will provide financial support to several families annually to help defer medical
expenses including hospital visits/stays not covered by medical insurance. Families must submit a request for

2

assistance in writing and include the name and age of the dependent child, the nature of the child’s medical
condition, the treatments the child is undergoing at the time of the request, and proof of residence in the P area.
The families must also provide proof that all qualified insurance claims have been exhausted and/or denied for
coverage of medical expenses, treatments, or stays incurred in the treatment of the child. All medical expenses
will be reviewed by your board and funds will only be distributed in the name of the medical provider
administering care. You will advertise the availability of these funds during all of your fundraising events and
on social media.

Your revenue comes from public donations as well as fundraisers that are attended by family, friends, and the
general public. Your fundraising activities include year round t-shirt sales and football pools during football
season. You also hold blood drives.

As of W, you had raised z dollars that was distributed among M and two other recipients. A breakdown of the
amount of funds distributed to each recipient was not provided. However, you stated that up to 50% of your
total funds raised will be made available to the N family for M and the other 50% will be available to other
qualifying families who request assistance.

Law

Section 501(c)(3) of the Internal Revenue Code (“Code”) provides for the exemption from federal income tax of
organizations organized and operated exclusively for charitable and educational purposes, including the
prevention of cruelty to children or animals provided that no part of the net earnings inure to the benefit of any
private shareholder or individual.

Treasury Regulations Section 1.501(c)(3)-1(a)(1) provides that in order to be exempt as an organization
described in section 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) states 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 section 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(d)(1)(ii) of the Income Tax Regulations provides that an organization is not
organized or operated exclusively for an exempt purpose unless it serves a public rather than a private interest.
The organization must demonstrate that it is not organized or operated for the benefit of private interests such as
designated individuals, the creator or his family, shareholders of the organization, or persons controlled directly
or indirectly by such private interests.

Treas. Reg. Section 1.501(c)(3)-1(d)(2) provides that the term charitable is used in its generally accepted legal
sense. The term includes, among other activities, organizations established to assist in the advancement of
education, promotion of health and the promotion of social welfare.

Revenue Ruling 67-367, 1967-2 C.B. 188 describes a nonprofit organization whose sole activity was the
operation of a ‘scholarship’ plan for making payments to pre-selected, specifically named individuals. The

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

organization did not qualify for exemption from federal income tax under section 501(c)(3) of the Code because
it was serving private rather than public or charitable interests.

In Better Business Bureau of Washington, D.C. Inc. v. United States, 326 U.S. 279 (1945), the Supreme Court
held that the presence of a single non-exempt purpose, if substantial in nature, will destroy a claim for
exemption regardless of the number of importance of truly exempt purposes.

In Wendy L. Parker Rehabilitation Foundation, Inc. v. Commissioner, T.C. Memo. 1986-348, the tax court
upheld the Service's position that a foundation formed to aid coma victims, including a family member of the
founders, was not entitled to recognition of exemption. Approximately 30% of the organization's net income
was expected to be distributed to aid the family member of the founders who was a coma victim with medical
and rehabilitative. The court found that the family coma victim was a substantial beneficiary of the foundation's
activities.

Application of law

You are not described in section 501(c)(3) of the Code because you do not meet the operational test as
described in Treas. Reg. Section 1.501 (c)(3)-1 (a)(1). You have failed to establish that you exclusively further a
charitable purpose as defined in Treas. Reg. Section 1.501(c)(3)-1(d)(2).

You are like the organization described in Revenue Ruling 67-367 because you were formed and are operated to
benefit a preselected individual. You were formed to provide financial assistance to the N family for M’s
medical expenses. You expanded your activities to include providing assistance to other families whose
children have been diagnosed with cancer or other life threatening illnesses. However, up to 50% of your funds
raised will still be given to the N family for M, thereby resulting in substantial private benefit to the N family.
Per Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii), you are not operated exclusively for an exempt purpose because
you serve a private rather than a public interest.

Similar to Wendy L. Parker Rehabilitation Foundation, Inc., Petitioner v. Commissioner of Internal Revenue, a
substantial amount of your funds will be expended for the benefit of the N family for M. While the extent of
your board’s relationship to the N family and M is not clear, one of your board members does share the same
last name as the N family and M and you clearly indicate that you were formed for the sole purpose of
providing financial assistance to the N family for M.

You are similar to the organization in Better Business Bureau of Washington, D.C. Inc. v. United States in that
you are not operated exclusively for exempt purposes. While you did expand your activities to include
providing financial assistance to other families whose children have been diagnosed with cancer or another
medical illness, you still have the non-exempt purpose of raising funds for and providing funds to the N family
for M. Up to 50% of your funds will go to the N family for M. Per Treas. Reg. Section 1.501 (c)(3)-1 (c)(1),
you are not operated exclusively for one or more exempt purposes because more than an insubstantial part of
your activities is not in furtherance of an exempt purpose.

Conclusion

Based on the facts presented above, you have failed the operational test because more than an insubstantial
amount of your activities is not in furtherance of an exempt purpose. You are operated for the substantial
private benefit of the N family rather than for public benefit. Accordingly, you do not qualify for exemption as

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W


an organization described in section 501(c)(3) of the Code and you must file federal income tax returns.
Contributions to you are not deductible under section 170.

If you don’t agree
You have a right to file a protest if you don’t agree with our proposed adverse determination. To do so, you
must send a statement to us within 30 days of the date of this letter. The statement must include:

• Your name, address, employer identification number (EIN), and a daytime phone
number

• A copy of this letter highlighting the findings you disagree with
• An explanation of why you disagree, including any supporting documents
• The law or authority, if any, you are relying on

• The signature of an officer, director, trustee, or other official who is authorized to sign for the
organization, or your authorized representative

• One of the following declarations:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I examined this protest statement, including

accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts and such facts are true, correct, and complete.

For authorized representatives:

Under penalties of perjury, I declare that I prepared this protest statement, including
accompanying documents, and to the best of my knowledge and belief, the statement contains all
relevant facts and such facts are true, correct, and complete.

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if he or she hasn’t
already done so. You can find more information about representation in Publication 947, Practice Before the
IRS and Power of Attorney.

We'll review your protest statement and decide if you provided a basis for us to reconsider our determination. If
so, we'll continue to process your case considering the information you provided. If you haven’t provided a
basis for reconsideration, we’ll forward your case to the Office of Appeals and notify you. You can find more
information about the role of the Appeals Office in Publication 892, How to Appeal an IRS Decision on Tax-
Exempt Status.

If you don’t file a protest within 30 days, you can’t seek a declaratory judgment in court at a later date because
the law requires that you use the IRS administrative process first (Section 7428(b)(2) of the Code).

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W


Where to send your protest
Please send your protest statement, Form 2848, if needed, and any supporting documents to the applicable

address:
U.S. mail: Street address for delivery service:
Internal Revenue Service Internal Revenue Service
EO Determinations Quality Assurance EO Determinations Quality Assurance
Room 7-008 550 Main Street, Room 7-008
P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

You can also fax your statement and supporting documents to the fax number listed at the top of this letter. If
you fax your statement, please contact the person listed at the top of this letter to confirm that he or she received
it.

If you agree

If you agree with our proposed adverse determination, you don’t need to do anything. If we don’t hear from you
within 30 days, we’ll issue a final adverse determination letter. That letter will provide information on your
income tax filing requirements.

You can find all forms and publications mentioned in this letter on our website at www.irs.gov/formspubs. If
you have questions, you can contact the person listed at the top of this letter.

Sincerely,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W