202150031: IRS denies 501(c)(3) status to a family fund that covers funeral and emergency costs for the descendants of one ancestor

Plain-English summary

A membership fund applied to be recognized as a tax-exempt charity under Internal Revenue Code § 501(c)(3). Its members were the blood-related male descendants of a single ancestor, and the fund's purpose was to automatically cover the funeral and emergency expenses of any direct descendant of that ancestor, in the United States or abroad. It also offered members interest-free emergency loans, and its bylaws said that if the fund closed, any remaining money would be refunded to the members. The IRS denied exemption because the organization flunks both the "organizational test" and the "operational test." Its articles of incorporation do not limit its purposes to exempt (charitable) purposes and contain no proper dissolution clause dedicating assets to charity, and in operation the fund exists to benefit one family rather than the general public. Because the benefits flow to a defined private class (the descendants), the fund's earnings inure to private individuals and serve private, not public, interests. The IRS compared it to prior authorities denying exemption to funds set up to benefit named individuals or a single family (Rev. Rul. 67-367; Wendy L. Parker Rehabilitation Foundation), and noted that even one substantial nonexempt purpose defeats exemption (Better Business Bureau). Because the organization did not protest the proposed adverse determination within 30 days, the denial became final. Practical point: mutual-aid or burial funds limited to one family are private-benefit arrangements, not charities, and cannot receive deductible contributions.

Ruling snapshot

• Question: Does a fund that automatically pays the funeral and emergency expenses of one ancestor's descendants qualify for exemption under § 501(c)(3)?
• Outcome: denied (fails both the organizational and operational tests; serves private family interests)
• Key authorities: IRC § 501(c)(3); Treas. Reg. §§ 1.501(c)(3)-1(a)(1), (b)(1)(i), (b)(4), (c)(1), (c)(2), (d)(1)(ii); Rev. Rul. 67-367; Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279; Wendy L. Parker Rehabilitation Foundation, Inc. v. Commissioner, 52 T.C.M. (CCH) 51

Full text (IRS public release)

This document is an OCR transcription of a scanned IRS release. Wording is preserved verbatim; obvious scanning misreads have been corrected, and page furniture and footers are transcribed as scanned. Redacted legend items appear as single letters or blanks. Unreadable spots are marked [illegible].

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Department of the Treasury
Internal Revenue Service Date: 9/23/21
Tax Exempt and Government Entities

IRS PO Box 2508 Employer ID number:
Cincinnati, OH 45201 Form you must file:
Number: 202150031 Tax years:
Release Date: 12/17/2021 Person to contact:
Name:
ID number:
Telephone:

UIL: 501.03-30, 501.32-01, 501.33-00

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

Letter 4038 (Rev. 1-2021)
Catalog Number 47632S

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

Letter 4038 (Rev. 1-2021)
Catalog Number 47632S

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Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201
Date: July 20, 2021

Employer ID number:

Person to contact:
Name:
ID number:
Telephone:
Fax:

Legend: UIL:
E = State 501.03-30
F = Date 501.32-01
G = Name 501.33-00
H = Individual
J = Name
K = Number
q dollars = Amount
r dollars = Amount
t dollars = Amount
u 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.

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

Facts

You were incorporated in the state of E on F. Your filed Articles of Incorporation state you are organized "To
serve the charitable and social welfare needs of G". You explained that G is composed of descendants of H.
Your Articles of Incorporation also state your assets will be distributed "As set forth in the Bylaws". Your
bylaws state that "if a time comes that members decide to close the fund, the assets if any including the cash
balance will be disbursed according to the will of the majority members at that time. At present it has been
decided that after taking care of all the liabilities if any, the remaining balance will be refunded back to the
members according to their contributed share".

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

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You are a membership organization currently with K members. Your bylaws indicate that your purpose is to
cover the expenses incurred for any and/or for any direct descendant of H, also known as J, either
in the United States or abroad.

Your membership is voluntary. Members must have a source of income and must be a blood related
son, nephew, grandson, or grand grandson of H. You further explained that any of the family
who is a direct descendent of H, income earning, and is head of the household and wants to pay the
dues is welcome to join the membership. However, all those benefits are available without
paying any dues because at the time of need all costs are covered for all direct descendants of
H.

Members are expected to contribute r dollars per month which can be paid monthly, quarterly, semiannually or
annually depending on the members' choice. When your funds approach t dollars, the membership fee will be
reduced to u dollars per month. In the case of an unexpected shortage of funds, your members will be called to
contribute extra to meet the deficit.

You explained that there is no formal application form to receive benefits. The benefits are automatically
provided by directly taking care of the funeral expenses. In the case of of a direct descendant of
H abroad, you will provide reimbursement of expenses.

Your revenue is derived from payments of membership fees by your members. Your expenses consist of bank
, food and snacks, , licenses, permits and fees, supplies, and
travel reimbursements.

Finally, your bylaws indicate that members can be given an interest free loan of up to q dollars in case of
emergency (accident & illness only) which is expected to be repaid within one year.

Law

IRC Section 501(c)(3) provides for the exemption from federal income tax of organizations organized and
operated exclusively for charitable, education and other 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 Regulation 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 organization 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 limit its purposes to one or more exempt purposes and do
not expressly empower it to engage, otherwise than as an insubstantial part, in activities which 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

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Catalog Number 47628K

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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 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(c)(2) provides that an organization is not operated exclusively for one or more
exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals.

Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) 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.

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

In Better Business Bureau of Washington, D.C. Inc. v. U.S., 326 U.S. 279 (1945), the court held that the presence
of a single non-exempt purpose, if substantial in nature, will preclude exemption, regardless of the number or
importance of statutorily exempt purposes.

In Wendy L. Parker Rehabilitation Foundation, Inc. v. Commissioner, 52 T.C.M. (CCH) 51 (1986), the
organization was created by the Parker family to aid an open-ended class of "victims of coma." However, the
organization states that it anticipated spending 30 percent of its income for the benefit of Wendy Parker,
significant contributions were made to the organization by the Parker family, and the Parker family controlled
the organization. Wendy's selection as a substantial recipient of funds substantially benefited the Parker family
by assisting with the economic burden of caring for her. The benefit did not flow primarily to the general public
as required under Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii). Therefore, the Foundation was not exempt from
federal income tax under Section 501(c)(3).

Application of law

You are not described in IRC Section 501(c)(3) because you fail both the organizational and operational tests
under Treas. Reg. Section 1.501(c)(3)-1(a)(1).

You do not meet the requirements in Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i). Your Articles of Incorporation
state you are organized "To serve the charitable and social welfare needs of G." Because your purpose clause is
not limited to purposes described in IRC Section 501(c)(3), you fail the organizational test. Moreover, your
Articles of Incorporation do not have a dissolution provision as required by Treas. Reg. Section 1.501(c)(3)-
1(b)(4), which also causes you to fail the organizational test.

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

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You do not meet the provisions of Treas. Reg. Section 1.501(c)(3)-1(c)(1). For example, you are operated to
pay related expenses for all direct descendants of H, including your members, who must also be a direct
descendant of H. This shows you are operated for substantial nonexempt private purposes which disqualifies
you from exemption under IRC Section 501(c)(3).

You do not meet the provisions of Treas. Reg. Section 1.501(c)(3)-1(c)(2) and Treas. Reg. Section 1.501(c)(3)-
1(d)(1)(ii). You were created by the descendants of H to pay related expenses for direct descendants of H.
This shows your net earnings are inuring to the descendants of H and you are operated for the private interests
of the descendants of H. These facts preclude you from exemption under IRC Section 501(c)(3).

You are similar to the organization described in Revenue Ruling 67-367. Like that organization, your activities
serve to primarily benefit your members (who are descendants of H) rather than benefit the public. You are
paying expenses associated with , much like an , to your members in the event of .
There is no charitable intent or review to determine need; the provisions for these expenses are automatic. The
payment of these types of benefits to pre-selected individuals serves a substantial private rather than public
interest and disqualifies you from exemption under IRC Section 501(c)(3).

You have operated primarily for the non-exempt purpose of benefiting the descendants of H. As shown in
Better Business Bureau of Washington D.C., Inc., such a single non-exempt purpose, if substantial in nature,
will preclude exemption, regardless of the number or importance of the exempt purposes it serves.

You closely resemble the organization described in Wendy L. Parker Rehabilitation Foundation, Inc. because
you were formed by the descendants of H, a specific family, to pay the expenses of their family
members, relieving them of their economic burden. Your activities primarily benefit a single family and not the
general public, which precludes you from exemption under IRC Section 501(c)(3).

Conclusion

Based on the facts presented above, you fail the organizational and operational tests under IRC Section
501(c)(3). You fail the organizational test because your Articles of Incorporation do not limit your purposes to
those which are exempt, and do not dedicate your assets to an exempt purpose upon dissolution. You fail the
operational test because you are operated for a substantial private purpose as well as serving private interests.
Therefore, you do not 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

Letter 4034 (Rev. 01-2021)
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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 Determination 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
PO 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

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

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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. 01-2021)
Catalog Number 47628K