IRS denies 501(c)(3) status to a cultural group that mainly pays members' funeral costs

Plain-English summary

An organization that promotes a particular cultural heritage applied to
be recognized (actually, reinstated) as a tax-exempt charity under IRC
section 501(c)(3) after losing its exemption for not filing returns. The
IRS denied the application. Although the group runs cultural
celebrations and youth activities, its primary activity is paying funeral
and related costs for its own members, with benefit amounts tied to how
long each person has been a member. The IRS concluded this is a
substantial non-charitable purpose that serves the private interests of
the members rather than the public, so the group fails the "operational
test" for exemption. The IRS compared it to prior rulings and Tax Court
cases denying exemption to member-benefit and burial-benefit groups, and
distinguished a case where a religious organization performed religious
burial rites. Because no protest was filed within 30 days, the denial is
final, and donors generally cannot deduct contributions to the group.

Ruling snapshot

• Question: Does an organization that primarily pays funeral and death benefits to its own members qualify for exemption under IRC § 501(c)(3)?
• Outcome: Denied (final adverse determination; fails the operational test, serves private interests)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a), (c)(1), (d)(1)(ii); Rev. Ruls. 67-367, 69-175, 79-359; Better Business Bureau v. United States, 326 U.S. 279 (1945); Korean-American Senior Mutual Assn. v. Commissioner, T.C. Memo 2020-129

Full text (IRS public release)

202247016

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

Date: 08/29/2022
Employer ID number:
Person to contact:

Release Number: 202247016
Release Date: 11/25/2022

UIL Code: 501.00-00, 501.03-00,
501.03-30, 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 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

PO Box 2508
Cincinnati, OH 45201
Date: 07/06/2022

Employer ID number:

Person to contact:
Name:
ID number:
Telephone:
Fax:
Legend: UIL:
B = Date 501.00-00
C = State 501.03-00
D = Date 501.03-30
E = Date 501.33-00
F = Culture
G = Country

w dollars = Amount
x dollars = Amount
y 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 on B in the State of C. You were previously exempt under IRC Section 501(c)(3), but
your exempt status was automatically revoked on D, for failing to file required annual returns or notices for

three consecutive years. In response to the revocation, you filed Form 1023 requesting for reinstatement of
exemption under Section 501(c)(3) on E.

Your Articles of Incorporation describes your specific purpose is "to engage in activities related to promoting F
heritage and to assist the community at large by informing them of government assistance programs, F culture
and pride, solutions to concerns of the community through attempting to help local, state and federal lawmakers

establish relevant programs, promote youth sports, and assist a sister city in G with emergency relief supplies,
equipment and materials."

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

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The activities you described on your Form 1023 explains your resources are dedicated to the primary purpose of
covering funeral costs to members. The costs not only include funeral expenses, but often include the travel
costs to send the deceased and family members, to their city of origin in G. Annually, you serve from to

families and all requests are honored. Maximum amounts of w dollars are provided to members with less
than one year of membership, x dollars for memberships to years, and y dollars for memberships more
than years.

You will also provide the following:
e Coverage of medical expenses for your members and other community members in dire cases of
emergencies where the individuals cannot afford the procedure.
e Assistance to your sister city in G with emergency sanitation and medical supplies, equipment, and
material. This includes funds to construct a public , build a hospital clinic and enlarge
the

Approximately _ percent of your resources are devoted to the above activities. The remainder of your activities
includes the following:
e Promote F heritage in the community through annual celebrations based around G originated holidays.
The annual celebrations are also your fundraisers to supplement membership dues.

e Support youth in the community by hosting a party, donating sports equipment and uniforms,
and sponsor sports teams.
e Hold an annual party to celebrate families and children in the community.

It is unclear about your membership criteria. Only your members are eligible to receive funeral cost coverage.
Recipients for any of your benefits may be related to a board member but must meet the same criteria as any
other members.

You are mostly funded by membership fees and cultural events. Your expenses are mainly distributions to your
members and costs to conduct your cultural events.

Law

IRC Section 501(c)(3) 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.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) provides that in order to qualify under IRC Section 501(c)(3),
an organization must be both organized and operated exclusively for one or more exempt purposes. If an
organization fails to meet either the organizational 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) 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 this

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

3

requirement, it is necessary for an organization to establish that it is not organized or operated for the benefit of
private interests such as designated individuals.

Revenue Ruling 67-367, 1967-2 C.B. 188, describes an organization whose sole activity was the operation of a
subscription "scholarship" plan for making payments to pre-selected, specifically named individuals by
subscribers. The organization did not qualify for exemption under IRC Section 501(c)(3) because it was serving
the private interests of its subscribers rather than public or charitable interests.

Revenue Ruling 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. When a group of individuals associate to provide a
cooperative service for themselves, they are serving a private interest. Accordingly, the organization did not
qualify for exemption under IRC Section 501(c)(3).

Rev. Rul. 79-359, 1979-2 C.B. 226, describes an organization which provided religious burial services that
directly support and maintain its basic tenets and beliefs of a religion regarding burial of its members. The
organization was formed by religious and lay leaders of a particular religion, in order to comply with the
religious tenets, requirements regarding the preparation of the body must be followed and blessing, holding
services over and interring the deceased were required. The organization qualified for exemption under IRC
Section 501(c)(3) for exclusively religious purposes.

In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945), the Supreme Court
held that the presence of a single non-exempt purpose, if substantial in nature, will destroy a claim for
exemption regardless of the number or importance of truly exempt purposes.

In Schoger Foundation v. Commissioner, 76 T.C. 380 (1981), it was held that if an activity serves a substantial
nonexempt purpose, the organization does not qualify for exemption even if the activity also furthers an exempt
purpose.

In La Verdad v. Commissioner, 82 T.C. 215 (1984), the administrative record did not demonstrate that the
organization would operate exclusively in furtherance of an exempt purpose. Therefore, denial of the
organization's request for tax-exempt status was reasonable.

In The Korean-American Senior Mutual Association, Inc. v. Commissioner, T.C. Memo 2020-129 (2020), the
organization provides burial benefits by collecting membership dues and additional fees when members died
and paying out burial benefits to families of deceased members correlated with the number of years the member
had paid. The Tax Court concluded that the organization does not serve a public benefit and does not operate
exclusively for one or more exempt purposes within the meaning of IRC Section 501(c)(3).

Application of law

You do not meet the requirements for recognition of tax exemption under IRC Section 501(c)(3) because you
fail the operational test as described in Treas. Reg. Section 1.501(c)(3)-1(a)(1).

You conduct an activity that provides direct benefits to members and their family members that is more than

insubstantial in nature. For this reason, you are not operating exclusively for exempt purposes as described in
Treas. Reg. Section 1.501(c)(3)-1(c)(1).

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

You are similar to the organizations described in Rev. Rul. 67-367 and The Korean-American Senior Mutual
Association, Inc. Like these organizations, your activities serve to benefit your members and their families,
rather than benefit the public. You provide monetary support for funeral expenses correlating to the number of
membership years. The payment of these types of benefits to pre-selected individuals serves a private interest
rather than a public interest. 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.

Likewise, you do not meet the requirement of Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) because your
membership is a group of individuals who have associated to provide death and other benefits for themselves.
This serves the private interest of your members rather than a public interest, like the organization described in
Rev. Rul. 69-175, and precludes exemption under IRC Section 501(c)(3).

You are distinguished from the organization described in Rev. Rul. 79-359. That organization was formed to
further its religious beliefs regarding the burial of members of a particular religion and it performed religious
burial services. You provided no indicators that you were formed to carry out any religious burial services
regarding your deceased members. Your purpose is to pay death and other benefits to members or their
relatives, which is not a religious purpose within the meaning of IRC Section 501(c)(3).

As explained in Better Business Bureau of Washington, D.C., Inc., a single, substantial non-exempt purpose is
sufficient to prevent exemption. You have a substantial purpose of providing death and other benefits to your
members, which prevents you from qualifying for exemption under IRC Section 501(c)(3).

Although you may have some charitable activities such as cultural events to promote the F heritage, the cultural
events are also conducted as fundraisers to supplement your membership dues. You are like the organization in
Schoger Foundation. You do not qualify for exemption when your activities serve substantial non-exempt
purpose even though your activities may also accomplish exempt purposes.

Similar to the organization in La Verdad, the facts you provided do not demonstrate that you operate
exclusively in furtherance of an exempt purpose.

Conclusion
Based on the above facts and analysis, you fail the operational test under IRC Section 501(c)(3) because your
activity of providing funeral coverage to your members and their families constitutes a substantial non-exempt

purpose and serves the private interests of your members. 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

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

5

• 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:

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

6

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.

We sent a copy of this letter to your representative as indicated in your power of attorney.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

cc:

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