A members-only funeral benefit society is denied 501(c)(3) status

Plain-English summary

A mutual-aid society applied for tax-exempt charitable status using the streamlined Form 1023-EZ, and the IRS denied it under § 501(c)(3) after a technical review. The group works like a members-only death benefit pool: when a member or a member's family member dies, every other member contributes a fixed amount (fourteen dollars, of which ten goes to the bereaved family and the rest covers administration), and the society also helps arrange the funeral, religious service, reception, and novena. Nobody is compensated. The IRS concluded the organization flunks the operational test because it serves the private interests of its own members rather than the public. It compared the group to Rev. Rul. 69-175 (parents cooperating to benefit themselves) and Rev. Rul. 67-367 (payments to pre-selected beneficiaries on a specified event), and distinguished Rev. Rul. 79-359 (religiously mandated burial services open to all adherents of a faith), noting these benefits are reserved for subscribed members and triggered simply by a death. Even if some religious or charitable aspect exists, mutual assistance is a substantial non-exempt purpose, and under Better Business Bureau one substantial non-exempt purpose defeats exemption. Because the society did not protest within 30 days, the denial became final: no charitable deductions under § 170, and it must file income tax returns. The takeaway: a cooperative that pays benefits only to its own members, however worthy, is generally not a public charity.

Ruling snapshot

• Question: Does a members-only mutual-aid society that pools contributions to pay death benefits to member families operate exclusively for exempt purposes under § 501(c)(3)?
• Outcome: Denied (final adverse determination; fails the operational test because it serves members' private interests).
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(c)(1), (d)(1)(ii); Rev. Rul. 69-175; Rev. Rul. 67-367; Rev. Rul. 79-359; Better Business Bureau v. United States.

Full text (IRS public release)

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

May 10, 2018
Employer ID number:

Number: 201831015
Release Date: 8/3/2018 Contact person/ID number:

Contact telephone number:
Form you must file:

Tax years:

UIL: 501.32-01, 501.33-00

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.

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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,

Stephen A. Martin
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
Cincinnati, OH 45201
Date:

February 22, 2018
Employer ID number:

Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:
B = Application date 501.32-01
C = Formation date 501.33-00

D = State of formation

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 meet the operational test under Section 501(c)(3) of the Code? No, for the reasons stated below.

Facts
You submitted Form 1023-EZ Streamline Application for Recognition of Exemption Under Section 501 (c)(3) of
the Internal Revenue Code on B.

You attest that you were incorporated on C in D. You also attest that you have the necessary organizing
document, that your organizing document limits your purposes to one or more exempt purposes within the
meaning of Section 501(c)(3), that your organizing document does not expressly empower you to engage,
otherwise than as an insubstantial part of your activities that in themselves are not in furtherance of one or more
exempt purposes, that your organizing document contains the dissolution provision required under Section
501(c)(3), and that your organizing document contains the provisions required by Section 508(e) or that your
organizing document does not need to include the provisions required by Section 508(e) because you rely on the
operation of state law in your particular state to meet the requirements of Section 508(e).

You attest that you are organized and operated exclusively to further charitable purposes and that you have not
conducted and will not conduct prohibited activities under Section 501(c)(3).

Specifically, attest you will:

• Refrain from supporting or opposing candidates in political campaigns in any way
• Ensure that your net earnings do not inure in whole or in part to the benefit of private shareholders or
individuals


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• Not further non-exempt purposes (such as purposes that benefit private interests) more than
insubstantially

• Not be organized or operated for the primary purpose of conducting a trade or business that is not related
to your exempt purpose(s)

• Not devote more than an insubstantial part of your activities attempting to influence legislation or, if you
made a Section 501(h) election, not normally make expenditures in excess of expenditure limitations
outlined in Section 501(h)

• Not provide commercial-type insurance as a substantial part of your activities

Your Form 1023-EZ was identified for technical review, and detailed information was requested supplemental
to the above attestations.

You are a mutual aid organization. When a member or a one of his family has died, each of the other members
contributes a fixed amount of money to help defray funeral expenses. The current contribution amount is set by
agreement of the members at fourteen dollars per member, of which ten dollars is given to the family and the
remainder kept for administrative expenses.

You also assist the survivors of the deceased by organizing the funeral service, the religious service, the
reception after the funeral, and the novena for the departed soul.

None of the officers or members of the organization are compensated for their services.

Law

Section 501(c)(3) of the Code provides, in part, for the exemption from federal income tax of organizations
organized and operated exclusively for charitable, religious or educational purposes, no part of the net earnings
of which inures to the benefit of any private shareholder or individual.

Treasury Regulation 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) of the Code. 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. 1.501(c)(3)-1(d)(1)(ii) states that an organization is not operated exclusively for one or more
exempt purposes unless it serves a public rather than a private interest. It must not be operated for the benefit of
designated individuals or the persons who created it.

Rev. Rul. 67-367, 1967-2 C.B. 188, describes an organization whose sole activity was the operation of a
scholarship plan for making payments to pre-selected, specifically named individuals. The organization
established a plan whereby it entered into agreements with subscribers. The subscribers deposited a certain
amount of money with a designated bank. The subscriber also named a specific child to be the recipient of the
scholarship money. The recipient received the scholarship around the time he or she were to begin college. The
organization did not qualify for exemption under Section 501(c)(3) of the Code because it was serving the
private interests of its subscribers rather than serve public charitable and educational interests.

Revenue Ruling 69-175, 1969-1 C.B. 149, describes an organization which was formed by parents of pupils
attending a private school. The organization provided bus transportation to and from the school for those

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

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children whose parents belong to the organization. The organization did not qualify for exemption under
Section 501(c)(3) of the Code because it served a private rather than public interest

Rev. Rul. 79-359, 1979-2 C.B. 226, describes organization whose purpose was to provide traditional burial
services that directly support and maintain basic tenets and beliefs of a religion regarding burial of its members.
Through the provision of burial services to members of a religion in compliance with the detailed requirements
of religious laws, the described organization is preserving and perpetuating traditional religious customs and
obligations. In this manner, the organization is accomplishing a charitable purpose by contributing to the
advancement of religion.

In Better Business Bureau of Washington. D.C. v. United States, 326 U.S. 279 (1945), the Supreme Court
determined that the presence of a single non-exempt purpose, if substantial in nature, will destroy exemption
under Section 501(c)(3) regardless of the number or importance of any other exempt purposes.

Application of law

You conduct an activity that provides direct benefits to members that is more than insubstantial in nature. You
are like the organization described in Rev. Rul. 67-175. There a group of parents provided a cooperative service
for themselves and thus served their own private interests. You were also formed to provide on a cooperative
basis death benefits to one another. The payment of these benefits thus serves your members’ private interest,
rather than the public interest.

You are like the organization described in Rev. Rul. 67-367. That organization made predetermined payments
to a preselected beneficiary based on the occurrence of a specified event, the beneficiary’s commencing post-
secondary education. You also collect funds for specific named beneficiaries. You do not select beneficiaries
from a pool of eligible persons based on charitable criteria. You also pay these benefits to member families
based solely on the occurrence of a specific event, namely, the death of a family member. In so doing you also
serve private rather than public interests.

You are distinguishable from the organization described in Rev. Rul. 79-359. Although you organize the funeral
and religious service, the reception and the novena, you do not, like that organization, have a religious
obligation to perform these services for the deceased. Furthermore, your services are exclusively reserved for
subscribed members of your society, while the services of the organization in Rev. Rul. 79-359 were available
to all adherents of a certain religion.

Even if there is a religious or charitable aspect to your activities, it is clear the primary purpose for which you
have been formed is mutual assistance. This single nonexempt purpose would preclude exemption under
Section 501(c)(3) for you no matter many or how important the other, truly exempt purposes for which you
were also formed, as the Supreme Court held in Better Business Bureau of Washington. D.C. v. United States.

Because you are not operating exclusively for exempt purposes as Treas. Reg. 1.501(c)(3)-1(c)(1) requires, you
do not satisfy the operational test requirement of Section 501(c)(3) of the Code, and consequently are not
exempt under this Section of the Code.

Conclusion

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

4

Based on the above facts and analysis, you do not qualify for exemption under Section 501(c)(3) of the Code.
You are not operated exclusively for a 501(c)(3) purpose. You further the interests of your members which
serves private interests. Therefore, you do not qualify for exemption under Section 501(c)(3) of the Code.

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,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

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