Social dining group with a member loan fund was denied charity status

Plain-English summary

An unincorporated association met monthly in members’ homes to cook, entertain one another, socialize, and provide emotional support, with two restaurant gatherings each year. Members contributed a redacted monthly amount to a common fund that made loans and helped with unexpected medical expenses. The organization itself stated that its primary purpose was the pleasure, recreation, and social interaction of members and that it was seeking social-club treatment, although it had applied using Form 1023-EZ for IRC § 501(c)(3) status. The IRS found that the recurring social and recreational activities were a substantial nonexempt purpose. It also concluded that the common fund’s financial assistance served the private interests of members rather than a public charitable class. The organization therefore failed the operational test and was denied IRC § 501(c)(3) status, with the denial becoming final after no protest was filed.

Ruling snapshot

• Question: Did the members’ social gatherings and mutual loan fund operate exclusively for charitable purposes under IRC § 501(c)(3)?
• Outcome: Denied
• Key authorities: IRC §§ 501(c)(3), 501(c)(7); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 67-367; Rev. Rul. 69-175

Full text (IRS public release)

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

Date:
01/08/2025

Employer ID number:
[redacted]

Form you must file:
1120

Tax years:
All

Person to contact:
[redacted]

Release Number: 202514007
Release Date: 4/4/2025
UIL Code: 501.03-00, 501.03-05, 501.35-00

Dear [redacted]:

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.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Letter 437
Redacted Letter 4034

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

Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201
Date: 10/31/2024

Employer ID number:

Person to contact:

Name
ID number:
Telephone
Fax:
Legend: UIL:
B= State 501.03-00
C= Date 501.03-05
D = Date 501.35-00

y dollars = Amount
Dear [redacted]:

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, Streamlined Application for Recognition of Exemption Under Section 501(c)(3)
of the Internal Revenue Code. You attest that you were formed as an unincorporated association on C, in the
state of B. 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).

You attest that you are organized and operated exclusively to further charitable purposes. You attest that you
have not conducted and will not conduct prohibited activities under IRC Section 501(c)(3). Specifically, you
attest you will:

e Refrain from supporting or opposing candidates in political campaigns in any way

e Ensure that your net earnings do not inure in whole or in part to the benefit of private shareholders or
individuals

e Not further non-exempt purposes (such as purposes that benefit private interests) more than
insubstantially

e Not be organized or operated for the primary purpose of conducting a trade or business that is not related
to your exempt purpose(s)

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

2

e Not devote more than an insubstantial part of your activities attempting to influence legislation or, if you
made a Section 501(h) election, not normally make expenditures in excess of expenditure limitations
outlined in Section 501(h)

e Not provide commercial-type insurance as a substantial part of your activities

You stated your mission on the Form 1023EZ is to empower and support members of your community by
meeting monthly in different homes and twice a year you will meet at a restaurant. Detailed information was
subsequently requested.

The response shows you meet monthly to cook and entertain each other. During these meetings you encourage
each other and provide each other support. You are committed to fostering social interaction and emotional
support among a diverse group of individuals and you believe the mutual support and recreational gatherings
strengthen the bonds among your members.

You explained that your members voluntarily contribute y dollars per month for a common fund and use these
funds to provide loans to members when needed. The common fund serves as a mechanism to support one
another during times of need by providing financial assistance, and to help pay unexpected medical expenses.
The monthly contributions made by your members are solely intended to facilitate mutual support rather than
generating profit.

You further stated:
e¢ You are applying for tax exemption under IRC Section 501(c)(7), and you meet the criteria for these
types of organizations.
e Your primary purpose is to promote the pleasure, recreation, and social interactions of your members.

We explained the reasons for the proposed adverse decision with you in a phone conversation on D in which
you stated that you wanted to proceed.

Law

Internal Revenue Code (IRC) Section 501(c)(3) describes a corporation organized and operated exclusively for
religious, charitable, educational, and other purposes, provided that no part of its net earnings inures to the
benefit of any private shareholder or individual and which does not participate in, or intervene in, any political
campaign on behalf of (or in opposition to) any candidate for public office.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) states that to be described in 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 test or the 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 which 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.

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.

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

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 belonged 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. 179 (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 Minnesota Kingsmen Chess Association v. Commissioner, T.C. Memo 1983-495 (1983), the organization

sponsored chess tournaments, provided chess magazines and books to libraries, offered free chess lessons, and
published a newsletter that primarily contained reports of past tournaments and announcements of future ones.
The petitioner sought exemption under IRC Section 501(c)(3) because its purposes and activities were described
as educational. The court found that the promotion of chess tournaments furthered a substantial recreational
purpose, even though individual participants may have received some educational benefits.

In St. Louis Science Fiction Limited v. Commissioner, T.C, Memo 1985-162 (1985), the Tax Court held that a
science fiction society failed to qualify for tax-exempt status under IRC Section 501(c)(3). Although many of
the organization’s functions at its annual conventions (the organization’s principal activity) were educational, its
overall agenda was not exclusively educational. A substantial portion of convention affairs were social and
recreational in nature.

Application of law

IRC Section 501(c)(3) and Treas. Reg. Section 1.501(c)(3)-1(a)(1) set forth two main tests for an organization
to be recognized as exempt. An organization must be both organized and operated exclusively for purposes
described in Section 501(c)(3). Based on the information you provided in your application and supporting
documentation, we conclude you do not meet the operational test.

You are operating for substantial nonexempt purposes.

Treas. Reg. Section 1.501(c)(3)-1(c)(1) provides that an organization will not be regarded as exempt under IRC
Section 501(c)(3) or operated exclusively for one or more exempt purposes if more than an insubstantial part of
its activities is not in furtherance of an exempt purpose. Like the organizations in Minnesota Kingsmen Chess
Association and St. Louis Science Fiction Limited, you are conducting substantial social and recreational
activities. You conduct monthly gatherings for your members to cook and entertain each other. These social and
recreational activities are more than insubstantial in nature. Similar to the organization in Better Business
Bureau, you are operating for substantial nonexempt purposes. Therefore, you are precluded from meeting the
requirements for Section 501(c)(3).

You are serving private interests.

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

4

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 purpose unless it serves a public rather than a private interest. Your
members voluntarily contribute y dollars per month for a common fund and use these funds to provide loans to
members when needed. The common fund serves as a mechanism to support one another during times of need
by providing financial assistance.

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. 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 you provided, you fail the operational test under IRC Section 501(c)(3). You are
operated for substantial nonexempt purposes and serving the private interests of your members. Therefore, you
do not qualify for tax 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
  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.

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

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
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