Medical marijuana patient aid organization denied charitable exemption

Plain-English summary

An organization planned to raise funds that dispensaries would use to provide a one-month supply of medical marijuana and transportation assistance to financially needy patients in a state program. It also planned free educational, outreach, and advocacy activities. The IRS concluded that helping patients obtain marijuana and advocating for its use furthered a substantial nonexempt purpose because federal law classified marijuana as a controlled substance and prohibited its distribution outside limited research circumstances. The organization therefore failed the section 501(c)(3) operational test even though some activities could be educational or charitable and state law permitted medical marijuana.

Ruling snapshot

• Question: Does an organization assisting state-authorized medical marijuana patients qualify for exemption under section 501(c)(3)?
• Outcome: denied, because its financial assistance and advocacy promoted conduct the IRS found illegal under federal law and thus furthered a substantial nonexempt purpose
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a)(1) and (c)(1); 21 U.S.C. §§ 802, 812, and 841; Rev. Rul. 75-384; Better Business Bureau; Oakland Cannabis Buyers’ Cooperative; Mysteryboy

Full text (IRS public release)

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

Release Number: 201940008
Release Date: 10/4/2019 Employer ID number:
UIL Code: 501-03-30

Date: July 10, 2019

Contact person/ID number:
Contact telephone number:

Form you must file:

Tax years: All

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

P.O. Box 2508
Cincinnati, OH 45201

Date: May 8, 2019

Employer ID number:

Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend: UIL:

W = Date 501-03-30
X = Date

Y = State

Z = State Program

Dear

We considered your application for recognition of exemption from federal income tax under Internal Revenue
Code (IRC) Section 501(a). We determined that you don’t qualify for exemption under IRC Section 501(c)(3).
This letter explains the reasons 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 date W.

You attest that you were incorporated on date X, in the state of Y. You 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) of the Code, that your organizing document does not expressly
empower you to engage in activities, other than an insubstantial part, that are not in furtherance of one or more
exempt purposes, and that your organizing document contains the dissolution provision required under Section
501(c)(3). You also attest that you are organized and operated exclusively to further charitable purposes.
Specifically, you 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;

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

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

2

• 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.

In addition, the description of mission or most significant activities in your Form 1023EZ application states that
your goal is to fundraise for, educate, and advocate for and disseminate funds to patients of the Z which
identifies and oversees patients who have been approved to receive medicinal marijuana in the state of Y, as
well as oversee the dispensaries that distribute it. You further indicated that you aim to lessen the burden on
those patients in the program who might otherwise have no options.

Subsequently, detailed information was requested concerning your activities. You responded that you plan to
raise funds to donate to a dispensary charity care fund to assist individuals with demonstrated financial need to
offset the cost associated with medical marijuana including transportation expenses to the local dispensary.
Individuals are required to apply for this assistance and meet with a dispensary advocate. The selection process
is conducted by your executive board and relatives of your board or anyone serving on a selection committee is
not eligible to receive assistance.

The recipient once approved, will receive assistance with one month’s supply per calendar year directly from
local dispensaries who have agreed to allow your patients to receive from the charity care fund. No funds will
be given directly to the recipients.

Moreover, you will meet your stated goals through monthly educational events such as workshops and
seminars. In addition, you plan to conduct community outreach and advocacy activities on a daily basis. Your
events are free of charge and open to your executive board, patients using medical marijuana and the general
public You also stated that     % of your total overall efforts and resources will be devoted to your advocacy
and outreach efforts,     % will be toward conducting educational events, and the final     % will be spent on
conducting fundraising events.

You have a volunteer board consisting of     individuals. Finally, you currently use donated space for your
activities and if approved will seek a commercial venue

Law

Section 501(c)(3) of the Code provides for the exemption from federal income tax of corporations organized
and operated exclusively for charitable or educational purposes, provided no part of the net earnings 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 be exempt as an organization described
in Section 501(c)(3), an organization must be both organized and operated exclusively for one or more exempt
purposes. 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 operates exclusively for exempt purposes
only if it engages primarily in activities that accomplish exempt purposes specified in Section 501(c)(3) of the

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

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Code. An organization will not be operated exclusively for exempt purposes if more than an insubstantial part
of its activities is not in furtherance of an exempt purpose.

21 U.S.C. Section 802(16) defines marijuana as "all parts of the plant Cannabis Sativa L. whether growing or
not; the seeds thereof; the resin extracted from any part of such plant; and every compound, manufacture, salt,
derivative, mixture, or preparation of such plant, its seeds or resin."

21 U.S.C. Section 821(c), Sch. I(c)(10) lists marijuana as a hallucinogenic substance and includes it on schedule
I of the Schedules of Controlled Substances. A schedule I substance is a substance that (1) has a high potential
for abuse; (2) has no currently accepted medical use in treatment in the United States; and (3) there is a lack of
accepted safety for use of the drug under medical supervision.

21 U.S.C. Section 841(a), known as The Controlled Substances Act, states that it is illegal for anyone to
knowingly or intentionally manufacture, distribute, or dispense, or possess with intent to manufacture,
distribute, or dispense a controlled substance.

Rev. Rul. 75-384, 1975-2 C.B. 204, holds that a nonprofit organization, whose purpose was to promote world
peace, disarmament, and nonviolent direct action, did not qualify for exemption under Section 501(c)(3) or
(c)(4). The organization's primary activity was to sponsor antiwar protest demonstrations in which
demonstrators were urged to violate local ordinances and commit acts of civil disobedience. Citing the law of
trusts, the ruling stated that all charitable organizations are subject to the requirement that their purposes cannot
be illegal or contrary to public policy.

In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279, 283, 66 S. Ct. 112, 90 L.
Ed. 67, 1945 C.B. 375 (1945), the Supreme Court held that the "presence of a single . . . [nonexempt] purpose,
if substantial in nature, will destroy the exemption regardless of the number or importance of truly . . . [exempt]
purposes."

In Ould v. Washington Hospital for Foundlings, 95 U.S. 303, 311, 24 L. Ed. 450 (1877), the Court noted that
"[a] charitable use, where neither law nor public policy forbids, may be applied to almost anything that tends to
promote the well-doing and well-being of social man."

In Harding Hospital, Inc. v. United States, 505 F.2d 1068, 1071 (6th Cir. 1974), the court held that an
organization has the burden of proving that it satisfies the requirements of the particular exemption statute. The
court noted that whether an organization has satisfied the operational test is a question of fact.

The court case, United States v. Oakland Cannabis Buyers' Cooperative, 532 U.S. 483, 490, 121 S. Ct. 1711,
149 L. Ed. 2d 722(2001), reiterates that there is only one exception for cannabis: Government-approved
research projects. "It is clear from the text of the Act that Congress has made a determination that marijuana has
no medical benefits worthy of an exception." Id. at 493.

In Mysteryboy, Inc. v. Commissioner, T.C. Memo 2010-13 (2010), the Tax Court held that the organization
failed the operational test partly because the organization proposed to promote illegal activities.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

4

Application of law

You are not operated exclusively for exempt purposes under Section 501(c)(3) of the Code. An organization can
be recognized as exempt under Section 501(c)(3) of the Code only if it shows that it is both organized and
operated exclusively for charitable, educational, or other exempt purposes. 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(a)(1). You do
not satisfy the operational test of Treas. Reg. Section 1.501(c)(3)-1(c). Whether an organization operates
exclusively in furtherance of an exempt purpose is a question of fact. An organization seeking tax-exempt status
under Section 501(c)(3) of the Code carries the burden of proving that it satisfies the requirements of the statute.
See Harding Hospital, 505 F.2d at 1071. Only an insubstantial portion of the activity of an exempt organization
may further a nonexempt purpose. As the Supreme Court held in Better Business Bureau of Washington, D.C.,
Inc. v. United States, 326 U.S. at 283, the presence of a single nonexempt purpose, if substantial in nature, will
destroy the exemption regardless of the number or importance of truly exempt purposes.

You are providing financial assistance to patients using medical marijuana by paying for a one-month supply.
Federal law does not recognize any health benefits of marijuana and classifies it as a controlled substance. 21
U.S.C. Section 812. Furthermore, federal law prohibits the manufacture, distribution, possession, or dispensing
of a controlled substance. 21 U.S.C. Section 841(a). Congress has "made a determination that marijuana has no
medical benefits worthy of an exception" to the general rule that the manufacture and distribution of cannabis is
illegal. Oakland Cannabis Buyers' Coop., 532 U.S. at 493.

Current federal law prohibits the use of marijuana and cannabis except in limited circumstances; those limited
circumstances do not include its use for medicinal purposes. The fact that your state legalized distribution of
marijuana and cannabis to a limited extent is not determinative because under federal law, distribution of
marijuana is illegal. Because you advocate and engage in activities that contravene federal law, you serve a
substantial nonexempt purpose.

While the organization described in Revenue Ruling 75-384 had the goal of educating the public on the benefits
of topics such as world peace and disarmament, its primary means of meeting their goals precluded them from
receiving exemption under section 501(c)(3). Their activities were deemed to induce or encourage the
commission of criminal acts by means of civil disobedience by planning or sponsoring these events
intentionally. As the ruling states, highlighting the law of trusts, all charitable trusts (and by implication all
charitable organizations) are subject to the requirement that their purposes may not be illegal or contrary to
public policy. While medical marijuana may currently be legal in the state you reside, it is currently not
recognized as legal by federal law. Therefore, despite any educational or charitable purpose you may plan to
achieve through your activities, you are promoting an illegal activity under federal law. Therefore, you are not
operating for an exclusive purpose within the meaning of Section 501(c)(3) of the Code.

In addition, in the case of Mysteryboy v. Commissioner, it was found that the organization was encouraging an
activity that violated public policy as reflected in federal and state laws. Therefore, the organization was found
not to be exempt from federal income tax. Because your activity of providing funding to patients for medical
marijuana is violating public policy, you do not qualify for exemption under Section 501(c)(3) of the Code.

Also, United States v. Oakland Cannabis Buyers' Cooperative, further reiterates that federal law prohibits the
manufacture, distribution, possession, or dispensing of a controlled substance, except for government-approved
research projects. You have not provided any evidence that you are conducting, or promoting, a program of this
kind. And while medical marijuana may provide a benefit to those you plan to assist by raising funds to provide

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

5

access to those who may not be able to afford it, federal law again currently does not accept the use of
marijuana for medicinal purposes. Therefore, you do not qualify under Section 501(c)(3) of the Code.

Conclusion

Based on the information provided, you do not qualify for exemption because you are not operated exclusively
for 501(c)(3) purposes. While some of your activities may be educational and charitable in nature, and may be
considered legal by the state you are currently operating in, you are conducting substantial non-exempt
activities as you are promoting an activity that is considered illegal by federal law. Therefore, you do not
qualify for exemption under Section 501(c)(3) of the Code.

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.

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

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

• A statement of the facts, law, and arguments supporting your position

• A statement indicating whether you are requesting an Appeals Office conference

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

• The following declaration:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I have examined this request, or this modification to the
request, including accompanying documents, and to the best of my knowledge and belief, the request
or the modification contains all relevant facts relating to the request, 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 they haven’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 gave us a basis to reconsider our determination. If so,
we’ll continue to process your case considering the information you provided. If you haven’t given us a basis
for reconsideration, we’ll send your case to the Appeals Office and notify you. You can find more information
in Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status.

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

6

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

Where to send your protest
Send your protest, Form 2848, if applicable, 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
Mail Stop 6403 550 Main Street, Mail Stop 6403

P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

You can also fax your protest 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 they received it.

You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-
pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at
the top of this letter.

Contacting the Taxpayer Advocate Service

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your
taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or if you’ve tried but haven’t
been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS
will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K