IRS denies 501(c)(3) status to a mutual-aid group that pays bereavement benefits to its own members

Plain-English summary

A membership group applied to be recognized as a tax-exempt charity under IRC § 501(c)(3), and the IRS denied it. The group's stated purpose was to support its own members when they lose an immediate family member, providing both moral comfort and financial help such as travel and medical expenses. Members, described as originally from one country and now living in the United States, agreed to contribute a set amount each month and to pool money for whichever member suffers a loss. The IRS concluded this fails the operational test: paying benefits to the group's own members serves a private interest, not the public interest that section 501(c)(3) requires. Citing Revenue Rulings 67-367 and 69-175 and the Supreme Court's Better Business Bureau decision, the IRS held that a substantial private-benefit purpose destroys exemption no matter how worthy the group's other aims. Because the organization did not file a protest within 30 days of the proposed denial, this is the final adverse determination. Donors generally cannot deduct contributions to a group that is not recognized under § 501(c)(3).

Ruling snapshot

• Question: Does a mutual-aid group that pools member contributions to help its own members during family bereavement qualify for exemption under IRC § 501(c)(3)?
• Outcome: Denied (final adverse determination; no protest filed).
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a)(1), (c)(1), (d)(1)(ii); Rev. Rul. 67-367; Rev. Rul. 69-175; Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945).

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
IRS Tax Exempt and Government Entities

Date: March 24, 2022

Employer ID number:

PO Box 2508
Cincinnati, OH 45201

Form you must file:

Tax years:

Number: 202224015
Release Date: 6/17/2022

Person to contact:
Name:
ID number:
Telephone:

UIL: 501.00-00, 501.03-00, 501.33-00, 501.35-00

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 Letter 437, Notice of Intention to Disclose - Rulings, and review the two attached letters that show our
proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Letter 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.

Letter 4038 (Rev. 11-2021)
Catalog Number 47632S

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Letter 437
Redacted Letter 4034
Redacted Letter 4038

Letter 4038 (Rev. 11-2021)
Catalog Number 47632S

Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201
Date: January 18, 2022

Employer ID number:

Person to contact:
Name:
ID number:
Telephone:
Fax:
Legend: UIL:
X = Date 501.00-00
Y = State 501.03-00
Z = Country 501.33-00
w dollars = amount 501.35-00

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

Your mission as stated on the Form 1023-EZ is, "To assist and support a member who has lost his/her spouse,
child, parent, sister, or brother". You were formed as a corporation on X in the state of Y.

During review of your Form 1023-EZ, we sent a request for information regarding your activities to supplement
the above information.

You responded that your sole purpose is to help your members during bereavement, both morally and financially
(travel, medical expenses, etc.). Your members are originally from Z but are now living and working in the United
States. Many members whose families are in Z look for financial support from their family living in the U.S.A.
Whenever a member loses an immediate family member, membership will gather at his/her residence and also
provide monetary contributions. Members have agreed to contribute w dollars a month for this purpose.

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

Law
IRC Section 501(c)(3) provides for the exemption from federal income tax of organizations 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 qualify under 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 or operational test, it is not exempt.

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 that 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) 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 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 interests.

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

In Better Business Bureau of Washington, D.C., Inc v. United States, 326 U.S. 279 (1945), the Supreme Court
of the United States interpreted the requirement in IRC Section 501(c)(3) that an organization be "operated
exclusively" by indicating that an organization must be devoted to exempt purposes exclusively. This plainly
means that the presence of a single non-exempt purpose, if substantial in nature, will destroy the exemption
regardless of the number and importance of truly exempt purposes.

Application of law

IRC Section 501(c)(3) sets forth two main tests for qualification of exempt status. Per Treas. Reg. Section
1.501(c)(3)-1(a)(1), an organization must be both organized and operated exclusively for purposes described in
Section 501(c)(3).

You do not meet the operational test. You are not operating "exclusively" for exempt purposes as required by
Treas. Reg. Section 1.501(c)(3)-1(c)(1). More than an insubstantial part of your activities includes providing
financial assistance to your membership. This activity serves the private interest of your members, rather than a
public interest as required by Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii).

Similar to the organizations described in Rev. Rul. 67-367 and Rev. Rul. 69-175, the financial benefits you
provide to your membership serve a private interest. Your members pool funds and make payments to pre-

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

selected, specifically named individuals or their families. Like the organization in Better Business Bureau, this
is a substantial non-exempt purpose that will destroy exemption regardless of the number and importance of any
truly exempt purposes.

Conclusion

Based on the information submitted, you do not qualify for exemption under IRC Section 501(c)(3). You do not
meet the operational test because you are operated for the substantial non-exempt purpose of serving the private
interests of your members.

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 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:

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

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
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