Members' mutual death-benefit fund denied 501(c)(3) status

Plain-English summary

A membership organization applied for 501(c)(3) charitable status. Its main activity is pooling premiums paid by members and giving cash to any member who recently loses a close family member (a spouse, parent, child, or sibling), mainly to cover travel and funeral-related costs. It also holds picnics and housewarmings for members and said it would give cash to a handful of homeless people each year. The IRS denied exemption on two grounds. On the organizational test, its Articles of Incorporation state a broad "any lawful purpose" and direct that assets go to members or their families, so the governing document neither limits purposes to exempt ones nor dedicates assets to charity. On the operational test, its core activity, paying benefits to its own dues-paying members, serves private rather than public interests, much like the mutual-benefit and "scholarship for named individuals" arrangements the IRS has long treated as non-exempt. Because serving members' private interests is a substantial non-exempt purpose, the organization does not qualify. This is the final adverse determination (Letter 4038), issued after no protest was filed within 30 days.

Ruling snapshot

• Question: Does a members' mutual-aid fund that pays benefits to dues-paying members qualify for exemption under IRC § 501(c)(3)?
• Outcome: denied (final adverse determination)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a), (b), (c), (d); Rev. Rul. 67-367; Rev. Rul. 69-175; Better Business Bureau v. United States, 326 U.S. 279 (1945)

Full text (IRS public release)

        Department of the Treasury                      Date:
        Internal Revenue Service                        04/25/2024
IRS     Tax Exempt and Government Entities              Employer ID number:

                                                        Form you must file:

                                                        Tax years:
Release Number: 202429021
Release Date: 7/19/2024                                 Person to contact:
UIL Code: 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

Date: February 15, 2024

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
f dollars = Amounts              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 were formed as a corporation on X in the state of Y. Your Articles of Incorporation state that you are
formed for any lawful purpose and that assets will be distributed among the living members or if a member is
dead, a share part will be distributed for a legal spouse or one of the children or legal representative.

Per your Form 1023 application, you contribute money to your members in times of emergency such as when
they lose first-degree family members. Money is for travel and flights to and from Z. You will also help
members to maintain wellness by holding picnics and housewarming events. You are funded by membership
premiums and out of pocket contributions by each member.

During review of your application, we requested more information about your activities. You explained that you
will provide monetary support to active members in times of emergency who have recently lost a close family
member. A close family member can be a spouse, son, daughter, father, mother, brother, or sister. Other criteria
include that the loss of the family member must be recent, the loss must happen after the individual has become
an active member, and the deceased family member must be a close family member. Each member must pay a
minimum membership premium to belong and receive benefits. Members who have reported the loss of a close
family member have received in the range of f dollars. Cash is provided to the recipient as soon as the money is
collected from each member. You do not apply late fees to outstanding balances of members; however, you

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

2

encourage members to pay their monthly premium on time so it will not be a financial burden to pay all at once.
You provide active members their current payment status monthly. Picnics happen twice a year as do
housewarmings. You also provided a document titled, "organizing document" which is separate from your
Articles of Incorporation. This document states that you are a social organization created for the mutual benefit
of your members.

Subsequently, you provided additional information regarding your planned activities. You stated that your
Board decided to include some annual charitable contributions to homeless individuals in the local area. You
stated you will contribute cash to at least five homeless individuals a year.

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(b)(1)(i) provides that an organization is organized exclusively for one or more
exempt purposes only if its articles of organization limit the purposes of such organization to one or more
exempt purposes; and do not expressly empower the organization to engage, otherwise than as an insubstantial
part of its activities, 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) provides that an organization is not organized exclusively for one or
more exempt purposes unless its assets are dedicated to an exempt purpose. An organization's assets will be
considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, by reason of a
provision in the organization's articles or operation of law, be distributed for one or more exempt purposes.
Treas. Reg. Section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as "operated exclusively"
for one or more exempt purposes only if it engages primarily in activities 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

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

3

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 organizational test as explained in Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i) and
1.501(c)(3)-1(b)(4). Your organizing document contains a broad purpose statement that does not limit your
purposes to one or more exempt purposes. Further, your organizing document does not dedicate your assets to
an exempt purpose.

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-
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 organizational test because your organizing document does not limit your purpose or dedicate
remaining assets upon dissolution to one or more exempt purposes described in 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. Accordingly, 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

4

* 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

5

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