IRS denies exemption to a fund benefiting preidentified employees

Plain-English summary

An organization used profits from sales in a workplace lunchroom to make fixed payments to employees who belonged to a particular union and experienced a redacted event. The IRS found that its organizing document did not limit it to exempt purposes and lacked an acceptable dissolution provision. It also found that the payments benefited a preselected group of identifiable individuals rather than a charitable class, creating a substantial private benefit. Proposed bylaw changes would not cure that operational problem. After the organization did not protest the proposed adverse determination, the IRS finalized its denial of exemption under IRC § 501(c)(3).

Ruling snapshot

• Question: Is the organization organized and operated exclusively for exempt purposes rather than for the private benefit of identified employees?
• Outcome: Denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 57-449; Rev. Rul. 67-367

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
PO Box 2508
Cincinnati, OH 45201

Number: 202103017
Release Date: 1/22/2021
Date: October 27, 2020

UIL: 501.32-00, 501.32-01

Dear :

This letter is our final determination that you don’t qualify for exemption from federal income tax
under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section
501(c)(3). 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 IRC Section 501(c)(3), donors
generally can’t deduct contributions to you under IRC Section 170.

We may notify the appropriate state officials of our determination, as required by IRC Section 6104(c),
by sending them a copy of this final letter along with the proposed determination letter.

You must file the federal income tax forms for the tax years shown above within 30 days from
the date of this letter unless you request an extension of time to file. For further instructions,
forms, and information, visit www.irs.gov.

We'll make this final adverse determination letter and the proposed adverse determination letter
available for public inspection after deleting certain identifying information, as required by IRC
Section 6110. 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.

If you have questions about this letter, you can call the contact person shown above. If you have
questions about your federal income tax status and responsibilities, call our customer service

number at 800-829-1040 (TTY 800-829-4933 for deaf or hard of hearing) or customer service for
businesses at 800-829-4933.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Notice 437
Redacted Letter 4034
Redacted Letter 4038

Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201
Date: August 25, 2020
Employer ID number:
Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend: UIL:

B = Date 501.32-00
C = Date 501.32-01
D = State

E = Organization
f dollars = Amount

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.

Issue
Do you qualify for exemption under IRC Section 501(c)(3)? No, for the reasons stated below.

Facts

You submitted Form 1023-EZ, Streamline Application for Recognition of Exemption Under IRC Section

501(c)(3) on B. You indicated on the Form 1023 EZ that your mission is to use the funds you generate from
sales to give employees at your who from the E union, one single payment of f

dollars upon their

Detailed information was subsequently requested. Information that you provided shows that you were
incorporated in D on C for benevolent and elemenosary purposes. There were no provisions for the disposition
of assets if you are dissolved or terminated.

You further stated that you are providing needed assistance to retiring or E union members from your

. You are using the profits from sales in the work lunchroom to give these employees at
the time of their a payment of f dollars. You are also strengthening interaction and communication
between and current E union members.

You have a volunteer board of directors. You are supported by the net proceeds from sales.
Your expenses are for the payment to the employees of E union at your when they . You do not
anticipate any one within the next year.

Law

IRC Section 501(c)(3) provides for the recognition of exemption of organizations that are organized and
operated exclusively for religious, charitable or other purposes as specified in the statute. No part of the net
earnings may inure 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 IRC 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(b)(1)(i) provides that an organization is organized exclusively for one or
more exempt purposes only if its articles of organization:

(a) Limit the purposes of such organization to one or more exempt purposes; and
(b) Do not expressly empower the organization engage, otherwise than as an insubstantial part of its
activities, in activities that in themselves are not in furtherance of one or more exempt purposes.

Treas. Reg. Section 1.501(c)(3)-1(b)(4) holds that an organization is not organized exclusively for one or more
exempt purposes unless its assets are dedicated to an exempt purpose. An organization’s assets will be
considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, by reason of a
provision in the organization’s articles or operation of law, be distributed for one or more exempt purposes

Treas. Reg. Section 1.501(c)(3)-1(c)(1) provides 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 IRC 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) provides that an organization is not organized or operated
exclusively for one or more exempt purposes unless it serves a public rather than a private interest. To meet the
requirement of this subsection, the burden of proof is on the organization to show 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.

Revenue Ruling 57-449, 1957-2 C.B. 622 held that a trust formed to pay a certain sum to all the individuals
enrolled in a certain school on a particular date was held to be a private trust, not a charitable trust. The
beneficiaries were a group of identifiable individuals.

Revenue Ruling 67-367, 1967-2 C.B. 307 describes an organization that provided educational assistance to pre-
selected specifically-name individuals, which did not qualify for exemption under IRC Section 501(c)(3).

In Carrie A. Maxwell Trust, Pasadena Methodist Foundation v Commissioner 2 TCM 905 (1943), the court
determined a trust created for the benefit of an aged clergyman and his wife was not entitled to recognition of

exemption under IRC Section 501(c)(3). The court concluded that the trust was a private trust rather than a
charitable trust because it served private interests rather than charitable interests even though the elderly
gentleman had financial need.

Application of law

You do not meet the two main tests set forth in of IRC Section 501(c)(3) and Treas. Reg. Section 1.501(c)(3)-
1(a)(1). An organization must be both organized and operated exclusively for purposes described in IRC
Section 501(c)(3). You have failed to meet both requirements, as explained below.

Your Articles of Incorporation state you are formed for benevolent and elemenosary purposes. Because your
Articles of Incorporation do not limit your purposes to those described in Treas. Reg. Section 1.501(c)(3)-
1(b)(1)(i), you fail the organizational test under IRC Section 501(c)(3). Furthermore, your Articles of
Incorporation do not contain a dissolution clause required by Treas. Reg. Section 1.501(c)(3)-1(b)(4) which also
causes you to fail the organizational test under IRC Section 501(c)(3).

You are not operated in accordance with Treas. Reg. Section 1.501(c)(3)-1(c)(1) because you are not
exclusively engaged in activities that accomplish exempt purposes specified in IRC Section

501(c)(3). Your activities consist of collecting the proceeds from the in the lunchroom to
give to employees who are members of E union at your a payment of f dollars upon . These
facts illustrate that you have a substantial non-exempt purpose of providing a private benefit to pre identified
individuals, which consist of the workers at the who are members of E and, who . Therefore, you are
precluded from exemption under IRC Section 501(c)(3).

You are like the organization in Rev. Rul. 57-449. You are operating for the benefit of specific individuals.
This is not a chartable activity even if the specific individuals in question are in need of assistance.

You are like the organization in Rev. Rul. 67-367. You are collecting the proceeds from sales
throughout the year in order to pay f dollars to all individuals who are employees at the and are members
of E, who . By providing payments to specific pre identified individuals, you are serving private interests

rather than charitable interests. 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.
This precludes you from qualifying for exemption under IRC Section 501(c)(3).

You are like the organization in Carrie Maxwell. You are raising funds to provide a payment of f dollars to the
employees who and are members of E. This is a preselected group of individuals as opposed to an
indefinite class of individuals. This shows you are operating for noncharitable purposes even though the
individuals may have established financial need.

Your position
You indicated that you would make changes to your bylaws. These consist of changing your objectives and
purposes to indicate you are formed:

• To provide needed assistance to or union members;
• To strengthen interaction and communication with between and Union members.

You will also add a provision stating that “No substantial part of the activities of the corporation shall
consist of carrying on propaganda, or attempting to influence legislation, and the corporation shall not
participate or intervene in any political campaign on behalf of any candidate for public office.

In addition, you will add the provision “If more than two-thirds of members of the Board of Directors voted to
dissolve the corporation, a special meeting of regular membership shall be called to proceed for such
dissolution. On the dissolution of the corporation, its assets remaining after payment of, or provision for
payment of all debts and liabilities, shall be distributed to a nonprofit fund, organization which is organized and
operated exclusively for charitable purposes and which has established its tax-exempt status under Section 501
(c)(3) of the Internal Revenue Code, or the federal government or the state or local government, for a public

purpose”.

Our response to your position

You have failed to provide any information that shows you are organized and operated exclusively for purposes
described under IRC Section 501(c)(3). As described previously, you are primarily operating for substantial
nonexempt private purposes that prevents you from qualifying under IRC Section 501(c)(3).

Conclusion

You have not satisfied the organizational or operational tests in accordance with IRC Section 501(c)(3). Your
organizing document does not contain the required provisions for exemption under Section 501(c)(3).
Moreover, even though some of your activities may be charitable, you are operating to benefit preidentified
individuals, which is a substantial nonexempt purpose. This causes you to fail the organizational test. Therefore,
you fail to qualify for exemption under Section 501(c)(3)

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.

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