IRS revokes a foundation that a trade group used to pay member-only insurance and benefits

Plain-English summary

A § 501(c)(3) charitable foundation had been set up by a related trade group, a § 501(c)(6) professional membership organization (whose members included owners, trainers, and grooms in a particular licensed industry). The two entities shared officers, directors, and offices. The foundation's stated mission was to relieve poverty and provide emergency assistance for people associated with the industry, but in practice it used money transferred to it by the trade group to buy dental insurance, vision and prescription discount programs, a medical discount program, death (burial) benefits, and hardship assistance for the trade group's members and their families and employees. On audit the IRS revoked the foundation's exemption for two independent reasons. First, it never met the public support test: essentially all of its money came from the affiliated trade group (plus some dental premiums from "non-qualified persons"), with nothing from the general public, government, or exempt-function activity, so it did not qualify under § 509(a)(2) or § 170(b)(1)(A)(vi). Second, it failed the operational test because it served a pre-selected private group, the trade group's members, rather than a public charitable class, which is prohibited private benefit under Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii). Citing Rev. Rul. 61-170, Rev. Rul. 67-367, and Rev. Rul. 69-175, the IRS concluded the foundation operated for private rather than public interests. Its exemption is revoked, contributions are no longer deductible under § 170, and it must file Form 1120. The taxpayer disagreed with the IRS position. This release bundles the final revocation letter, the proposed revocation (Letter 3618), and the Form 886-A audit report.

Ruling snapshot

• Question: Can a § 501(c)(3) foundation keep its exemption when it is funded by, and pays insurance and benefits to, the members of a related § 501(c)(6) trade group rather than the general public?
• Outcome: Revocation (final adverse determination; public support test and operational test both failed)
• Key authorities: IRC § 501(c)(3); IRC §§ 509(a)(2), 170(b)(1)(A)(vi); Treas. Reg. § 1.501(c)(3)-1(a)(1), (b)(4), (c)(1), (d)(1)(i)–(ii), (d)(2); Rev. Rul. 61-170; Rev. Rul. 67-367; Rev. Rul. 69-175

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
1100 Commerce Street, MC 4920DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: February 23, 2021

Number: 202226011                             Taxpayer ID Number:
Release Date: 7/1/2022                        Form:
                                              Tax Period(s) Ending:
                                              Person to Contact:
                                              Identification Number:
                                              Telephone Number:
                                              Fax Number:
UIL: 501.03-00

CERTIFIED MAIL - Return Receipt Requested
LAST DAY FOR FILING A PETITION WITH THE TAX COURT:

Dear

This is a final determination that you do not 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), effective January 1, 20  . Your determination letter dated January 31,
20   is revoked.

Our adverse determination as to your exempt status was made for the following reasons:

Organizations described in IRC Section 501(c)(3) of the Code and exempt
under Section 501(a) must be both organized and operated exclusively for
exempt purposes. You have not demonstrated that you are operated
exclusively for charitable, educational, or other exempt purposes within the
meaning of 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. You have not established that you have operated exclusively for an
exempt purpose.

As such, you failed to meet the requirements of IRC Section 501(c)(3) and Treasury
Regulations Section 1.501(c)(3)-1(a), in that you have not established that you were
organized and operated exclusively for exempt purposes and that no part of your earnings
inured to the benefit of private shareholders or individuals.

Contributions to your organization are no longer deductible under IRC Section 170.

Organizations that are not exempt under IRC Section 501 generally are required to file federal
income tax returns and pay tax, where applicable. For further instructions, forms, and
information please visit www.irs.gov.

If you decide to contest this determination, you may file an action for declaratory judgment
under the provisions of IRC Section 7428 in one of the following three venues: 1) United States
Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court
for the District of Columbia. A petition or complaint in one of these three courts must be filed
within 90 days from the date this determination was mailed to you. Please contact the clerk of
the appropriate court for rules and the appropriate forms for filing petitions for declaratory
judgment by referring to the enclosed Publication 892. You may write to the courts at the
following addresses:

United States Tax Court
400 Second Street, N.W.
Washington, DC 20217

US Court of Federal Claims
717 Madison Place, N.W.
Washington, DC 20005

U. S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, DC 20001

Processing of income tax returns and assessments of any taxes due will not be delayed if you
file a petition for declaratory judgment under IRC Section 7428.

We'll notify the appropriate state officials (as permitted by law) of our determination that you
aren't an organization described in IRC Section 501(c)(3).

You may be eligible for help from the Taxpayer Advocate Service (TAS). 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 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 1-877-777-4778.

Taxpayer Advocate assistance can't be used as substitute for established IRS procedures,
formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or
technically correct tax determination, nor extend the time fixed by law that you have to file a
petition in Court. The Taxpayer Advocate can, however, see that a tax matter that may not have
been resolved through normal channels gets prompt and proper handling.

You can get any of the forms or publications mentioned in this letter by calling 800-TAX-FORM
(800-829-3676) or visiting our website at www.irs.gov/forms-pubs.

If you have any questions about this letter, please contact the person whose name and
telephone number are shown in the heading of this letter.

Sincerely,

Sean E. O'Reilly
Director, Exempt Organizations Examinations

Enclosures:
Publication 892

---

Department of the Treasury                    Date: May 01, 2020
Internal Revenue Service                      Taxpayer ID number:
Tax Exempt and Government Entities            Form:
                                              Tax periods ended:
                                              Person to contact:
                                               Name:
                                               ID number:
                                               Telephone:
                                               Fax:
                                               Address:
                                              Manager's contact information:
                                               Name:
                                               ID number:
CERTIFIED MAIL - Return Receipt Requested      Telephone:
                                              Response due date:

Dear

Why you're receiving this letter

If you agree

If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the
contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an
organization described in IRC Section 501(c)(3) for the period above.

If you disagree

1. Request a meeting or telephone conference with the manager shown at the top of this letter.

2. Send any information you want us to consider.

3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional
information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after
the meeting or after we consider the information.

The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes
informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of
limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case.
For your protest to be valid, it must contain certain specific information, including a statement of the
facts, applicable law, and arguments in support of your position. For specific information needed for a
valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status.

Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't
apply now that we've issued this letter.

4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities)
if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the
IRS.

Letter 3618 (Rev 8-2019)
Catalog Number 34809F

If you're considering requesting technical advice, contact the person shown at the top of this letter. If you
disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as
explained above. A decision made in a technical advice memorandum, however, generally is final and
binding on Appeals.

If we don't hear from you
If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final
adverse determination letter.

Contacting the Taxpayer Advocate Office is a taxpayer right

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 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.

Additional information
You can get any of 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 shown at the top of this letter.

Sincerely,

John A. Matias, Supervisory, IRA
For: Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:
Form 886-A
Form 6018

Letter 3618 (Rev 8-2019)
Catalog Number 34809F

---

Form 886-A (May 2017)   Department of the Treasury - Internal Revenue Service
Explanation of Items

ISSUES

Whether the tax exempt status of
should be revoked as of January 1, 20  , for failing to comply with
the organizational test and the operational test within the meaning of Section 501(c)(3) of the
Internal Revenue Code.

FACTS
      (hereinafter refers to "      ") was incorporated in the state of      on September 1,
20  .        submitted the Form 1023, Application for Recognition of Exemption
Under Section 501(c)(3) of the Internal Revenue Code, on September 27, 20   and received its
exemption as an organization exempt under Sections 501(c)(3) & 509(a)(2) of the Internal
Revenue Code ("the Code") on January 31, 20  .

      states the following information on the "Schedules" attached to its Form 1023:

* "Schedule 1: Part II, Line 5—How Officers and Directors are Selected:
  o The officers and directors of      are the same members that serve the
      , the 501(c)(6)
  organization that established      .

* "Schedule 2: Part II, Line 5 and Part IV—Narrative Description of Activities:
  o       was formed solely to provide emergency assistance to individuals
  who are associated with the       and who are in need
  of temporary shelter, health care, or basic necessities because of financial or a

[Page 1]

natural disaster, casualty, fire or similar emergency. To assist individuals who have
been associated with the       and who because of age,
physical disability, illness or other reason, have become incapable of self support,
and to care for (including burial) and relieve the poverty and distress of such worthy
individuals and their immediate families.

      is funded by the
and accepts private donations but does not solicit donations.

      may make distributions of income or principal and otherwise provide
financial assistance to organizations exempt from federal income tax under Section
501(c)(3) of the Internal Revenue Code of 1986 for the public welfare or for charitable,
scientific, or educational purposes to the fullest extent permitted by the
as amended."

* "Schedule 3: Part V—Compensation of Officers and Directors
  o President:
  o Vice President:
  o Executive Director:
  o Secretary/Treasurer:
  o Owner Directors:
  o Owner-Trainer/Trainer Directors:

[Page 2]

  o 1st Alternate:
  o 2nd Alternate:
  o 3rd Alternate:
  (No compensation is paid to any of the officers or directors by      .)

* "Schedule 4: Part V, 2a and Part VI, 3—Family and Business Relationships

        purpose is to provide emergency assistance to individuals who are
associated with the       and who are in need
of temporary shelter, health care, or basic necessities because of financial or natural
disaster, casualty, fire or similar emergency. To assist individuals who have been
associated with the       and who, because of age,
physical disability, illness or other reason, have become incapable of self-support,
and to care for (including burial) and relieve the poverty and distress of such worthy
individuals and their immediate families.

This community includes family members of the Board and members who may have
business relationships with each other. Assistance awards are subject to a vote of the
Board and members with a conflict must abstain from voting.       is also in
the process of developing a set of bylaws that will include a conflict of interest policy."

* "Schedule 5: Part V, 3b—Common Control
  o The Executive Director and Secretary/Treasurer are full time employees of the
  and are paid salaries by
  the      . The Board members of the       also serve as the Board
  members of      . Primarily all of the funding for       comes
  from      "

[Page 3]

* "Schedule 7: Part VIII, Line 15—Close Connections
        shares common officers and directors with the
      , a 501(c)(6) organization."

      Articles of Incorporation dated September 01, 20   state its exempt purposes
as follows:
"... its broad nonprofit purposes shall include the following:

(A) Provide assistance to individuals who have been associated with related
businesses and who are in need of temporary and long-term shelter, health care and basic
necessities because of a natural disaster, casualty, fire or similar emergency;

(B) Provide assistance to       that are distressed and
financially needy because of a natural disaster, casualty, fire or similar emergency;

(C) Provide assistance to individuals who have been associated with the
industry and who, because of age, physical disability, illness or other reasons, have become
incapable of self-support, and to care for (including burial) and relieve the poverty and distress
of, such worthy individuals and their immediate families; and

(D) Make distributions of income or principal and otherwise provide financial
assistance to organizations exempt from federal income tax under Section 501(c)(3) of the
Internal Revenue Code of 1986 for the public welfare or for charitable, scientific, or educational
purposes to the fullest extent permitted by the       as amended;

      Form 990-EZ, Short Form, Return of Organization Exempt from Income Tax,
for tax year ending December 31, 20   states the organization's primary exempt purposes on
Part III, Statement of Program Service Accomplishments, as follow:

"Payment of Medical Costs for People in the Industry."

The       did not adopt/maintain bylaws.

[Page 4]

Related organization:

      was formed by
("      "). was incorporated in the state of      on January   , 19   and received its
exemption as an organization exempt under Section 501(c)(6) of the Code in October 19   and
it is exempt under group ruling number      .

      is a membership organization and it defines its membership as follows:

"Any owner,      , or       who is currently licensed as such by
the       or is a tenure member as defined in section (   ) shall
be E(e)ligible for membership in [      ]. Any partnership, corporation or
other association, which is so licensed, shall likewise be eligible for membership.

All the officers and board members from       were also the officers and board members for
      and shared the same facility.

      's Parent organization
      was exempt under a group ruling;       was the parent organization.

      's website states that both national benefits and local benefits are available to the
members. The website lists some examples of the local benefits; provides links to all the local
affiliates' websites and directs the members to contact their local affiliate for the specific
information on the local benefits. Currently, the detailed local benefits information are no longer
posted on      's website, but before April 20  , the information was posted.

Examination on the related organization
The Internal Revenue Service ("IRS") initiated an examination on       Form 990EZ
for 20   calendar year. The treasurer stated the following information about      :

[Page 5]

* The reason to form       was to have       pay benefits to      's
members.
* realized that as an organization exempt under section 501(c)(6) of the Code,
is not allowed to provide any benefit to its members and therefore they wanted to form
another organization to take care of the member benefits.
* was formed to solely provide member benefits.
* After       was formed,       started to oversee operation.

Membership:
      has no member.

Activity:
The review of the Transaction Reports and interview conducted revealed that in 20  ,
      only activity was to provide benefits such as insurance and some discount
programs for dental, medical, vision, etc. to      's members and other related individuals.

Benefits provided by      :
      was formed solely to provide the following benefits to      's members and
other related people:

* Dental Insurance
* Vison discount program and Prescription drug discount program
* Medical discount program
* Other benefits

1. Dental Insurance
      provided a dental insurance to all the members for free.
      purchased the (      ") and paid monthly premium in 20  .

* According to the

[Page 6]

(      ) is a prepaid dental care organization that has
been committed to delivering dental care at an affordable cost since 19  ."

*       also defines following information:
  o Advantages
  o Enrollment
  o Appointments
  o Member costs
  o Orthodontics for children and adults
  o Emergency care benefit
  o Eligible dependents
  o       conversion plan

All the members were    % covered for the dental insurance including
("      " or "      "). The       were the       'employees; they were not      's members, but they were also
   % covered for the dental insurance (see table below for summaries).

#   Individual   Member?   Covered for Dental Insurance?   Notes
1              Yes       Yes
2              Yes       Yes
3              Yes       Yes
4              No        Yes                               They were the "      " employees.
5              No        No
6              No        No
7   Other      No        No                               They were the previous       , officer,      , employee,       employee

In 20  ,       individuals were enrolled in the       including      ; ;
      ; ; ;      ; and       other individuals who were related to

[Page 7]

      , they were: previous      ; (also      's) treasurer, members
from ("      "), employees from
      , and member spouses.

("      ")
Individual   Number of Individual
Other
Total

The dental insurance was also available to members' family member(s), but an extra fee
was charged; the amount of the extra premium depended on how many family members were
covered. In 20  , among the       enrolled individuals,       individuals had family members
covered;       individuals had       family members covered. The other       individuals only had
himself/herself covered.

#   # of Individuals Enrolled   # of Family Member Covered   Notes                              Monthly Premium
1                              Only "Self" was covered.                                        $
2                                   family members were covered.                               $
3                                   family members were covered.                               $
Total

According to the Archive website from April 7, 20   to April 17, 20  , the       posted
the local member benefits for      ; the dental insurance program was stated as follows:

* "The following people are eligible to sign up for Dental Insurance:

Currently licensed, validated, participating and signed on as an       member:

[Page 8]

*       validated and working on the
      , their spouse or minor, legally dependent children       [a]lso eligible to
participate but required to pay the monthly premium

*       person
* Independent Contractors
* Vendor
*       Official
*       employee
* Professional private contractor (      ,      , etc.)
* Vendor's employee
*       employee

* Dental Premiums are subject to periodic change."

2. Vison discount program and Prescription drug discount program
The       came with discount programs:

  o       and Savings offered by ("      ").
  o Prescription Drug discount Program from

a. Vision Care Discount and Savings

The Vision Care Discounts and Savings is stated on the
as follows:

* "You and your family can save on eye exams, glasses and sunglasses. If you have
enrolled in the       dental benefit, you're eligible for a vision
discount program offered by      . The       is available to you
and your family at no extra cost.

[Page 9]

* The       provides discounts on exams, glasses and sunglasses
from doctors in national network. Select a doctor from more than
      ; total       access points nationwide.
  o Services and discounts
    » You and your dependents receive these discounted services through a
    provider, plus like rebates and special offers.

Service                    Reduced Prices and Discounts
Eye Exam                   $    with purchase of a complete pair of glasses.    % off without purchase.
Retinal Screening          Routine screening guaranteed to not exceed $   .
Lenses                     With purchase of a complete pair of glasses:
  Single vision            $
  Lined bifocal            $
  Lined trifocal           $
  Lenticular               $
Lens Enhancements          Average savings of    % off lens enhancements such as progressive, scratch-resistant and anti-reflective coatings.
Frames                        % off the cost with purchase of a complete pair of glasses.
Sunglasses                    % off unlimited non-prescription sunglasses from any VSP provider within     months of the last covered eye exam.
Contact Lenses                % off contact lens exam.
Laser Vision Correction    Discounts available through      -contracted facilities.

This discount program is not vision insurance."

According to the Archive website from April 7, 20   to April 17, 20  , the vison program was
posted under the local member benefits on       website as followings:

* "EYE CARE PROGRAM
* GUIDELINES FOR      ,      , AND
  o The Eye Care program is a membership benefit provided by the       to
  member and       while they are participating at a commercial

[Page 10]

in       as well as their spouses and grooms. These guidelines may be changes
at the sole discretion of the       and may be modified, extended, altered
and revised from time to time without prior notice.

  = The       will assist eligible persons with the cost of an exam and
  prescription eye care up to a total of $   .   every       years. Any amount
  over $   .   is the financial responsibility of the applicant. The
  is not an insurance company. Under IRS guidelines, the       must make
  payments directly to the service/product provider. Reimbursement to
  individuals is not allowed...

    * ELIGIBILITY:
  o       and       —Licensed, validated and have started a       at
  the current commercial
  o       —Licensed, validated and have worked for a       for
        days at the current commercial

  " PROCEDURE:
    * Bring your validated license to the       office to verify
  eligibility and pick up an application. Complete the application and
  return it to the       office along with the cost estimates or unpaid bills
  that include the name and address of the providers(s).
    * Checks up to a total of $   .   made payable to the provider(s) will be
  given to you to return to the provider so your order for glasses/contact
  lenses will be processed.

b. Prescription Drug Discount Program:

The prescription drug discount program is stated on the Dental Enrollment &
Coverage Guide as follows:

[Page 11]

o "As a member of      , you are eligible for a prescription drugs discount through
      . This program offers substantial discounts on
prescription drugs purchased through affiliated pharmacies.
o How the program works:
  = When you need to fill a prescription, go to       of the participating pharmacies
  and present your       identification card with the
  prescription to receive the following discounts:
    a. Brand name drugs—Offered at the average wholesale price less
       %, plus a $   .   dispensing fee.
    b. Generic substitutes—Offered at the average wholesale price
    less    %, plus a $   .   dispensing fee.

* The program is not valid in combination with other discount programs, Health
Maintenance Organization prescription benefits or prescription cards.

* The       program is available to       members and their
families. Family members do not have to be enrolled in prepaid       benefits to
use the prescription drug discount program. This benefit is good on medical
and dental prescriptions.

* Currently,       pharmacies located in these stores participate in the prescription
drug discount program. Participation may vary.

  c.
  d.
  e.

3. Medical Discount Program:

The foundation contracted with       doctor in      , to provide the medical
services to       members. All the members are eligible to see the doctor. The
covered the costs for the members for the followings:
  o All expenses incurred during office visit such as co-pay, examination fee, lab fee (if
  the lab was performed in doctor's office), etc. The maximum amount is $   per visit.

[Page 12]

  o Lab fee, if the lab was performed outside of the doctor's office.

According to the       website from April       to April       the medical discount
program was posted under the local member benefits on       website as
follows:

"See       Office for forms and information on visits."

4. Other benefits

Except the above benefits, the       also provided other benefits to all the
members, they were:
a. Financial and emergency assistant:
  » Any emergency of necessities such as temporary shelter, health care, etc.
  » Financial assistance for food, housing, transportation, etc.

All the members had to meet the       property guideline to receive these benefits.

b. Dead benefits: all the members are eligible for the dead benefits, the
made the payments directly to the funeral company. In 20  , $   was
available for each member. The       also purchased flowers for the funeral
service.
c.       program: the       paid for the educational programs for the
such as       related learning classes, etc.

According to the       website from April       to April      , the "other benefit" was
posted under the local member benefits on National       website as follows:

* "      Local information
* ,       —Guidelines For Applicants

[Page 13]

o The       Program is intended to provide assistance to       unable to
meet their financial obligations for medical emergency or other crisis situations. The
is not an insurance company. This program is not meant to take the
place of any type of insurance nor be relied upon as a form of insurance. All
applications will be considered on an individual basis.

o Under IRS regulations, any assistance must be paid directly to the provider of the
service. Reimbursement is not allowed...

o An application for assistance must be filled out completely, approved and signed by
at least       members of the       Committee.

o Statements must accompany all applications except when appointments have been
made and the bills will be submitted when received.

  = Amounts up to, but not exceeding, $   ,   may be approved for payment by
  the       Committee or Officers.

    * Amounts above the $   ,   limited may be submitted by the       Committee to the
  [      ] Board of Directors for approval.

    * Any single person with a gross income for the past       month period of more
  than $   ,   will not be eligible for assistance.

    * Any family with a gross income for the past       month period of more than
  $   ,   will not be eligible for assistance.

NOTE: Each application is reviewed on an individual basis. Please do not hesitate to apply if you
feel your circumstances warrant consideration although you may not meet the above described
criteria."

Financial:

The       was solely funded by      .       transfers funds annually to the
      for the amounts enough to cover the dental, vision, and medical expenses. The
spent about the same amount of money every year. Normally,       treasurer cut a check
and deposited the funds to the       bank account; however, in 20  , the fund, $   ,

[Page 14]

was deposited directly from       to       bank account.       was a
for-profit entity that operated      , contracted with       and received commissions from
      for members' participation.

In 20  , the       generated the following revenue. Majority of the fund was contributed
from       and the other was the dental premiums paid by the non-qualified persons.

#   Amount   %     Source of Income—Year
1   $   ,        %  From       but deposited from      .
2   $   .        %  Dental premiums paid by non-qualified persons.
Total $   ,      %

In 20  , the       incurred the following expenditures. All of them were spent on different
types of member benefit.

#   Amount   %   Expenditure-Year
Dental & Medical Expenses:
1   $   .        Dental premium payment-
2   $           Eye glasses
3   $   .        Health Clinic-Medical expenses
Total: $   ,     %
Other Benefit:
4   $           Dead benefits
5   $           Flowers/gifts/awards
6   $   ,        Other
7   $           program
Total: $   ,     %
Other Expenses:
8   $           Professional fees
9   $           Not reported on financial report
Total: $   ,     %
Total: $   ,

[Page 15]

LAW:

Section 501(c)(3) of the Internal Revenue Code ("Code) of 1986 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.

Section 1.501(c)(3)-1(a)(1) of the Income Tax Regulations ("Regulations") states that, in order to
be exempt as an organization described in section 501(c)(3) of the Code, 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.

Section 1.501(c)(3)-1(b)(4) of the Regulations states 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, if upon
dissolution, such assets would by reason of a provision in the organization's articles of
organization or by operation of law, be distributed for one or more exempt purposes.

Section 1.501(c)(3)-1(c)(1) of the Regulations provides that an organization will be regarded as
operated exclusively for exempt purposes only if it engages primarily in activities, which
accomplish one or more exempt purposes. An organization will not be so regarded if more than
an insubstantial part of its activities is not in furtherance of an exempt purpose.

Section 1.501(c)(3)-1(d)(1)(i) of the Regulations provides that an organization may be exempt as
an organization described in the Code Section 501(c)(3) if it is organized and operated
exclusively for one or more of the following purposes:
(a) Religious,
(b) Charitable

[Page 16]

(c) Scientific,
(d) Testing for public safety,
(e) Literary
(f) Educational, or
(g) Prevention of cruelty to children or animals.

Section 1.501(c)(3)-1(d)(1)(ii) of the Regulations provides, in part, that the organization must
establish 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."

Section 1.501(c)(3)-1(d)(2) of the Regulations provides a definition of the term charitable as it is
used in section 501(c)(3). The regulation provides that the term charitable is used in its generally
accepted legal sense and is not to be construed as limited by the separate enumerations in
section 501(c)(3). The term charitable includes other tax-exempt purposes which may fall within
the broad outlines of charity as developed by judicial decisions. The term charitable includes
lessening the burdens of government.

Revenue Ruling 61-170, 1961-1 C.B. 112, held that an association composed of professional
private duty nurses and practical nurses which supported and operated a nurses' registry
primarily to afford greater employment opportunities for its members was not entitled to
exemption under section 501(c)(3) of the Code. Although the public received some benefit from
the organization's activities, the primary benefit of these activities was to the organization's
members.

Rev. Rul. 67-367 1967-2 C.B. 158 states that a nonprofit organization whose sole activity is the
operation of a 'scholarship' plan for making payments to pre-selected, specifically named
individuals does not qualify for exemption from Federal income tax under section 501(c)(3) of the
Internal Revenue Code of 1954.

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Revenue Ruling 69-175, 1969-1 C.B. 149, held that a nonprofit organization, formed by parents
of pupils attending a private school to provide school bus transportation for its members' children
served a private rather than a public interest and did not qualify for exemption under section
501(c)(3) of the Code.

TAXPAYER'S POSITION
The       does not agree with the IRS position.

GOVERNMENT'S POSITION

It's the government's position that the       does not qualify for exemption from Federal
income tax under Section 501(c)(3) of the Code because it does not operate exclusively for one
or more of the purposes specified described under sections 1.501(c)(3)-1(d)(1) to (d)(5) of the
Regulations.

First, the       did not meet the public support test in 20   and all the prior years.

The       was granted the exemption as a public charity under sections 501(c)(3) &
509(a)(2) of the Code; however, it did not meet the public support test for any of the years since
it has been formed. Public support is measured using a 5-year computation period that includes
the current and four prior tax years (including short years).

For an organization to qualify as a publicly supported organization under section 509(a)(2) of the
Code, either:

* More than 33 1/3 of its support must come from contributions, membership fees, and gross
receipts from activities related to its exempt functions or from amounts which are not
unrelated trades or business under section 513 of the Code, and

* No more than 33 1/3% of its support must come from gross investment income and net
unrelated business income (less section 511 tax) from business acquired by the
organization after June 30, 1975.

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For an organization to qualify as a publicly supported organization under section 170(b)(1)(A)(vi)
of the Code, either:

* 33 1/3% or more of its total support must come from governmental agencies, contributions
from the general public, and contributions or grants from other public charities, or
* 10% or more of its total support must come from governmental agencies, contributions from
the general public, and contributions or grants from other public charities and the facts and
circumstances indicate it is a publicly supported organization.

In 20  , the       generated       sources of income:    % of its funds was contributed by
      its related organization, and the other    % was the dental premiums paid by the "non-
qualified persons"; neither of them was generated from the general public, government agency,
membership fees, exempt function activities, etc. Per the treasurer      , the
generated the same types of income every year since it has been formed. The       did
not meet any of the public support test requirements mentioned above in any of the years since
it has been formed; therefore, the       is not exempt as a public charity described in
either sections 509(a)(1) & 170(b)(1)(A)(vi) of the Code or section 509(a)(2) of the Code.

Second, the       failed the operational test.

For an organization to maintain its exempt status, it must meet the operational test under section
1.501(c)(3)-1(a)(1) of the Regulations. The operational test generally requires that an
organization operates consistent with the requirements of the Code. Otherwise, the organization
is not operated exclusively for charitable purpose, and would lose tax-exempt status.

According to the Form 1023, the       was formed by its related
organization,      , and was formed solely to provide benefits to members and other
related individuals; therefore, the       was formed to serve a pre-selected group of
people instead of the general public.

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In 20  , all the expenditures incurred were spent on the dental insurance, medical discount
program, and other benefits provided to members and other related individuals such as
members' spouses, members' employees,      's officer, etc. These eligible beneficiaries were
pre-selected as members of       and related individuals. The private benefits to these
individuals who were not part of the charitable class described in the       articles and it
is prohibited as described under section 1.501(c)(3)-1(d)(1)(ii) of the Regulations.

According to section 1.501(c)(3)-1(d)(1)(ii) of the Regulations, an organization is not organized
or operated exclusively for exempt purposes unless it serves a public rather than a private
interest. Thus, even if an organization has many activities which further exempt purposes,
exemption may be precluded if it serves a private interest. The       activities served
private benefits and is similar to the organization described in Rev. Rul. 67-369 that the
organization paid "scholarships" to pre-selected, specifically named individuals designated by
subscribers, the organization is serving private interests rather than public charitable and
educational interests under section 501(c)(3) of the Code; therefore, it does not qualify for
exemption under 501(c)(3) of the Code.

CONCLUSION

Based on the information provided during the examination, we conclude that the
does not qualify for exemption under Section 501(c)(3) of the Code because it served the private
benefits rather than public. These activities failed to comply with the criteria as required by
section 501(c)(3) of the Code and the Regulations, thereunder. It is recommended that the
exempt status be revoked as of January 1, 20  . The       is required to
submit Form 1120 for the period ending December 31, 20   and all subsequent years.

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