Family-specific orphan fundraiser denied section 501(c)(3) status

Plain-English summary

An unincorporated association applied for section 501(c)(3) status to hold a fundraiser for five children from one family after both parents died. The planned event would use all raised funds to offset that family's living expenses. The IRS denied exemption because the beneficiaries were preselected members of one family rather than an indefinite charitable class. That direct, substantial private benefit meant the association was not operated exclusively for public charitable purposes, even though the children were orphans and might be financially needy. The association did not protest the proposed denial within 30 days, so the IRS made the adverse determination final.

Ruling snapshot

• Question: Does an organization formed to raise money for the living expenses of five preselected children from one family qualify under section 501(c)(3)?
• Outcome: Denied, because the organization served the substantial private benefit of one family.
• Key authorities: IRC § 501(c)(3); Treas. Reg. §§ 1.501(c)(3)-1(a)(1), 1.501(c)(3)-1(c)(1), and 1.501(c)(3)-1(d)(1)(ii); Rev. Rul. 67-367

Full text (IRS public release)

Scanned document; transcription proofread from IRS OCR. Obvious scan misreads were corrected; wording is otherwise verbatim, and redacted identifiers appear as the IRS released them.

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

Date:
March 14, 2019
Number: 201923026 Employer ID number:

Release Date: 6/7/2019

Contact person/ID number:
Contact telephone number:
Form you must file:

Tax years:

UIL: 501.03-00, 501.03-31

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,

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:

October 22, 2018
Employer ID number:

Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:
B = date 501.03-00
C = date 501.03-31

D = family name
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 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.

Form 1023-EZ indicates you were formed as an unincorporated association on C. You attest to have the
necessary organizing document limiting your purposes to one or more exempt purposes within the meaning of
Section 501(c)(3) of the Code. You also attest your organizing document does not empower you to engage,
other than insubstantially, in activities that are not in furtherance of one or more exempt purposes. You attest
your organizing document contains the dissolution provision required under Section 501(c)(3) and the
provisions required (if necessary) by Section 508(e). You attest to be organized and operated exclusively to
further charitable purposes and you have not and will not conduct prohibited activities under Section 501(c)(3).

Further, within Form 1023-EZ you attest you will:

Refrain from supporting or opposing candidates in political campaigns in any way

• Ensure your net earnings do not inure in whole or in part to the benefit of private shareholders or
individuals

• 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 not related to
your exempt purpose(s)


2

• 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. Within Part III, where you were asked to describe your
mission and activities, you stated you were formed to host a fundraiser for the five children of the D family after
the loss of both of their parents to tragic circumstances within a year of each other. The event will offset living
expenses for these orphans.

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 Section 1.501(c)(3)-1(a)(1) states that in order to qualify under Section 501(c)(3) of the
Code, an organization must be both organized and operated exclusively for one or more exempt purposes. If an
organization fails to meet either the organizational or 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) 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. Section 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.

Revenue Ruling 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 Procedure 2018-5 provides that a favorable determination letter or ruling will be issued to an
organization only if its application and supporting documents establish that it meets the particular requirements
of the Section under which exemption from federal income tax is claimed. A determination letter or ruling on
exempt status is issued based solely upon the facts and representations contained in the administrative record.
The applicant is responsible for the accuracy of any factual representations contained in the application.

In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279, 66 S. Ct. 112, 90 L. Ed. 67,
1945 C.B. 375 (1945), the Supreme Court of the United States interpreted the requirement in Section 501(c)(3)
of the Code that an organization be “operated exclusively” by indicating that an organization must be devoted to

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


3

exempt purposes exclusively. The presence of a single non-exempt purpose, if more than insubstantial in nature,
will destroy the exemption regardless of the number and importance of truly exempt purposes.

Wendy L. Parker Rehabilitation Foundation, Inc. v. Commissioner of Internal Revenue, 855-85X.-In this case,
thirty percent of the petitioner’s income is expected to be expended for the benefit of Wendy L. Parker, the
daughter of an officer and organizer of the corporation. An adverse determination was made because “a child of
the founder and chief operating officer of the Foundation is a substantial beneficiary of the services
contemplated by the organization. This constitutes inurement which is prohibited under Code Section 501(c)(3)
and the Regulations there under.” To qualify under 501(c)(3), an organization, inter alia, must operate
exclusively for exempt purposes, and no part of its net earnings can inure to the benefit of any private
individual.

Application of law

You are not operated exclusively for one or more exempt purposes under Section 501(c)(3) of the Code as
described in Treas. Reg. Section 1.501(c)(3)-1(a)(1) because you are operated for the private benefit of one
family rather than operating to provide a public benefit. Despite the fact that funds are raised and expensed for
orphaned children the beneficiaries are pre-selected and all from one family. This serves private rather than
public purposes.

You have not established that you are operated exclusively for one or more exempt purposes as required in
Treas. Reg. Section 1.501(c)(3)-1(c)(1). Your funding will be used to pay for the living expenses of one family.
This results in a substantial private benefit to this family.

You have not established that you are organized and operated for the benefit of public rather than private
interests as required in Regulation 1.501(c)(3)-1(d)(1)(ii). Like the organization denied exemption in Revenue
Ruling 67-367, you have established a plan to award funds to members of a preselected group of individuals.
You were formed and operate to benefit one family and were formed to allow for the flow of funds directly to
the D children.

Your activities are the same as those described in Wendy L. Parker Rehabilitation Foundation, Inc. v.
Commissioner. You have set up a process whereby pre-named beneficiaries are able to collect funding.
Regardless of whether the D children are related to any board members, or meet the definition of needy, they
have been predetermined to receive your funding without documented cause, making them a direct beneficiary
and recipient of your income, resulting in inurement.

As in Better Business Bureau, a single, substantial non-exempt purpose is sufficient to prevent exemption.
Although you plan to pay for the living expenses of orphans, you have the substantial purpose of providing
funds only to a limited number of individuals from one family, which results in private benefit. Because you
failed to provide that your activities are exclusively charitable, you have not established that you meet the
requirements for exemption under Section 501(c)(3) of the Code as required by Revenue Procedure 2018-5.

Conclusion

Based on the information submitted, we conclude that you are not an organization described in Section
501(c)(3) of the Code because you are operated for the substantial private benefit of one family. Therefore, you
do not qualify for exemption under Section 501(c)(3).

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


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).

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

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


5

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