Determination 200850036: a mutual aid society for one ethnic group, denied under both 501(c)(3) and 501(c)(4), and carrying its neighbor's index row

Plain-English summary

A mutual aid society applied for exemption and was refused twice over, once as a charity and once as a social welfare organization. The released package is two letters. The first is the final refusal: "This is our final determination that you do not qualify for exemption from Federal income tax as an organization described in Internal Revenue Code section 501(c)(3) or section 501(c)(4)." It is dated 9/18/08, released 12/12/08, and issued from the Washington headquarters of the Tax Exempt and Government Entities Division. The second, attached, is the proposed adverse letter of "Date: July 24, 2008" that did the actual reasoning. The final letter explains why the file closed without argument: "Recently, we sent you a letter in response to your application that proposed an adverse determination." and "Since we did not receive a protest within the requisite 30 days, the proposed adverse determination is now final."

The consequences are stated plainly. Because the organization is not described in section 501(c)(3), "donors may not deduct contributions to you under Code section 170", and Federal income tax returns are due within 30 days. "In accordance with Code section 6104(c), we will notify the appropriate State officials" of the determination.

The applicant was an association of immigrants working in one trade in one city. Its own Article Four says its purpose is "the Corporation's primary purpose and focus will be to provide medical help, medical treatment unemployment benefits when member is unemployed, death benefits which include" funeral and burial expenses, and "rent reimbu(r)sement (sic) when unemployed", with the (sic) supplied by the IRS rather than by this corpus. Redaction reduces the particulars to legend tokens: "your membership consists of M members who are currently employed as P in the N and surrounding areas", where M is an ethnic type, P is an occupation and N is a city. "From monthly membership dues collected of $x per member" the association would "Pay benefits to sick and unemployed members for up to three months," pay their utilities and rent for the same period, "Reimburse families for burial expenses of members," and "Provide full or partial reimbursement to members for air fare to O if a family member dies". A waiting period applied: "Members must have made contributions to you for at least 90 days in order to qualify for the aforementioned benefits." and "Membership funds are nonrefundable".

Two answers the organization gave in a follow-up response did most of the damage to its own case. Asked whether it was a labor union, it said no, because "Item 8 of your May 12" response indicates that you are not part of a labor union since most labor union members “have their own owner-operated ‘Q.”" Then, explaining what distinguished it, it wrote: "Our members are exclusively—M Origin. | believe, this would make the major difference." The applicant offered that sentence as the reason it deserved exemption. The Service read it as the reason it did not. The same response also said the membership would grow, in that "Item 9 of your May 12" response indicates that you plan to expand your membership to other communities."

The law section is standard and the application is short. The regulations are quoted three times: that an organization is not operated exclusively for exempt purposes if its net earnings inure to private shareholders or individuals, that under "Section 1.501(c)(3)-1(a) of the Income Tax Regulations provides that in order to be exempt as an organization described in section 501(c)(3)" it must be both organized and operated exclusively for those purposes, and that "Section 1.501(c)(3)-1(d) states 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." Four revenue rulings frame the outcome. "In Revenue Ruling 55-495 (1955-2 CB 259), section 501(c)(4) exemption was granted to a member supported organization" paying life, sick and accident benefits, but that result did not survive: "Revenue Ruling 55-495 was modified by Revenue Ruling 75-199 (1975-1 CB 160), which removed the conclusion that the association was exempt under Section 501(c)(4) of the Code." Ruling 75-199 is the closest match in the books, because it describes a group restricted to one ethnicity in one area paying sick and death benefits, and the letter returns to it at the end. The charitable side turns on a contrast: "In Revenue Ruling 55-656 (1955-2 C.B. 262), a community nursing bureau operated as a community project" funded by the public was exempt, while "In Revenue Ruling 61-170 (1961-1 C.B. 112), an association composed of professional private duty nurses and practical nurses" running a registry for its own members was not.

The case law is a single sentence doing the heavy lifting: "Better Business Bureau of Washington, DC, Inc. v. United States, 326 US 279, 283 (1945), holds that the presence of a single non-exempt purpose, if substantial in nature, will destroy a claim for exemption" regardless of how many exempt purposes there are. Applied here, "the presence of a single substantial non-exempt purpose destroys your claim for exemption". The comparisons follow directly: "You are not like the organization in Revenue Ruling 55-656" and "You are similar to the organization in Revenue Ruling 61-170".

The social welfare leg fails on the same facts. "You provision of benefits exclusively to your membership on a mutual basis does not promote the social welfare of your community." And "you are very similar to the organization described in Revenue Ruling 75-199" "wherein section 501(c)(4) exemption was denied to an mutual organization that served the private interests of its members".

The organization's own position is quoted at length and is mostly about the future. "In Item 9 of your May 12, 2008 response, it states:" that "The L are very diverse and are part of an underdeveloped county-O." and "The Trustee plan (sic)to broad base (sic) the membership to other communities as well." The Service answers that future intentions are not activities: on the promise that "you will provide aid and relief to people in QO." it notes there is no evidence the activity is occurring or will occur soon, and that even if it began, the member benefits would still preclude exemption. Expanding the membership, it adds, only expands the membership. The applicant supplied no authority of its own: "Otherwise, you were unable to provide any legal citations to show that your activities" serve an exempt purpose. The conclusion is blunt: "Your organization was formed and is operated as a mutual benefit organization for the benefit of your membership."

There is a filing trap preserved in the package. The attached proposed letter sets out full protest rights, including that "Code section 7428(b)(2) provides, in part, that a declaratory judgment or decree shall not be issued in any proceeding" unless the court finds administrative remedies exhausted, and that failure to protest within 30 days is treated as that failure. Those instructions are still printed in the released document even though the final letter records that no protest arrived, which is exactly how the door to declaratory judgment closed.

Now the reason a reader should not trust this file's own index fields. The index row for 0850036 gives UILC 501.07-05 and the subject Business with Nonmembers. The document prints nothing of the kind. Its letterhead carries eight UIL codes, beginning "UIL Code: 501.03-00" and running through 501.03-05, 501.03-25, 501.03-30, 501.03-31, 501.32-00, 501.33-00 and 501.04-00, each printed twice, once in the letterhead and once in the legend column of the attached letter. Those are charitable-exemption codes and this is a charitable-exemption denial. The index row describing business with nonmembers belongs to the neighbouring document 0850035, which is a social club revoked over nonmember income, and that document in turn carries this one's charitable subject. The two rows are transposed. This corpus takes frontmatter uilc and subject from the index row without exception, so this file carries values that its own text contradicts, and the contradiction is recorded here instead of being quietly corrected.

Two OCR corrections were made, both single-character misreads of a capital I, and both are disclosed here. The scan printed "!f you have any questions about your" Federal income tax status, with an exclamation mark for the I, and that was corrected once. Inside the applicant's quoted sentence the scan printed "Our members are exclusively—M Origin. | believe, this would make the major difference." with a vertical bar for the I, and that was corrected once. Nothing else in the document was altered.

The rest of the defects are flagged and left as released. The response date prints twice as May 12 followed by a straight double quote where an ordinal was lost, and once in full as "In Item 9 of your May 12, 2008 response, it states:", so the full date is recoverable from the document itself. The letter reads "You provision of benefits" for Your, "an mutual organization" for a, "underdeveloped county-O" where country was probably meant inside a passage the applicant wrote, and "people in QO." where the redaction token O picked up a stray character. The document ends on a bare "Cc:" with nothing after it. Two of the regulation citations are printed as "Section 1.501(c)(3) of the Income Tax Regulations states that an organization is not operated exclusively for one or more exempt 501(c)(3) purpose if its net earnings inure in whole or in part to the benefit of private shareholders or individuals." with no subsection at all, once in the law section and once in the application section. Because the identical truncated form appears both times rather than once, this corpus treats it as the letter's own text rather than as scanner damage, reproduces it as released, and lists it in code_sections in the form printed.

One more divergence worth noting is the signature. The final letter is signed "Rob Choi" as Director, Exempt Organizations, Rulings & Agreements, and the attached proposed letter is signed "Robert Choi" as Director, EO Rulings & Agreements. Same office, same person, two spellings in one released package, each appearing once. Both are reproduced as printed.

The citation check this corpus normally runs on scanned documents could not be run, because the legal research tool is unavailable in this session. No case citation here was confirmed against an external source. That matters most for the one case cited, which the document prints as 326 US 279 without periods in the reporter abbreviation. That unpunctuated form is not unique to this scan, since sibling file docs/2015/201531022.md prints it the same way, so it is reproduced exactly as released. No case name, year, volume or page has been supplied or corrected from memory.

Ruling snapshot

• Question: Does an association that collects dues from members of one ethnic group and pays them medical, unemployment and death benefits qualify for exemption as a charity under section 501(c)(3) or as a social welfare organization under section 501(c)(4)?
• Outcome: Denied under both. The benefits are a substantial private purpose serving the membership rather than the public, and no protest was filed within 30 days, so the proposed adverse determination became final.
• Key authorities: Sections 501(a), 501(c)(3), 501(c)(4), 170, 6104(c) and 7428(b)(2); Regulations sections 1.501(c)(3), 1.501(c)(3)-1(a) and 1.501(c)(3)-1(d); Revenue Rulings 55-495, 75-199, 55-656 and 61-170; and Better Business Bureau of Washington, DC, Inc. v. United States.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION
Release Number: 200850036 Contact Person:
Release Date: 12/12/08
Date: 9/18/08 Identification Number:
UIL Code: 501.03-00 Contact Number:
501.03-05
501.03-25 Employer Identification Number:
501.03-30
501.03-31 Form Required To Be Filed:
501.32-00
501.33-00 Tax Years:
501.04-00
Dear

This is our final determination that you do not qualify for exemption from Federal income tax as
an organization described in Internal Revenue Code section 501(c)(3) or section 501(c)(4).
Recently, we sent you a letter in response to your application that proposed an adverse
determination. The letter explained the facts, law and rationale, and gave you 30 days to file a
protest. Since we did not receive a protest within the requisite 30 days, the proposed adverse
determination is now final.

Since you do not qualify for exemption as an organization described in Code section 501(c)(3),
donors may not deduct contributions to you under Code section 170. You must file Federal
income tax returns on the form and for the years listed above within 30 days of this letter, unless
you request an extension of time to file.

We will make this letter and our proposed adverse determination letter available for public
inspection under Code section 6110, after deleting certain identifying information. Please read
the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that
show our proposed deletions. If you disagree with our proposed deletions, you should follow
the instructions in Notice 437. If you agree with our deletions, you do not need to take any
further action.

In accordance with Code section 6104(c), we will notify the appropriate State officials of our
determination by sending them a copy of this final letter and the proposed adverse letter. You
should contact your State officials if you have any questions about how this determination may
affect your State responsibilities and requirements.

Letter 4038(CG) (11-2005)
Catalog Number 47632S

2

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. If you have any questions about your
Federal income tax status and responsibilities, please contact IRS Customer Service at
1-800-829-1040 or the IRS Customer Service number for businesses, 1-800-829-4933. The
IRS Customer Service number for people with hearing impairments is 1-800-829-4059.

Sincerely,

Rob Choi
Director, Exempt Organizations
Rulings & Agreements

Enclosure
Notice 437
Redacted Proposed Adverse Determination Letter
Redacted Final Adverse Determination Letter

Letter 4038(CG) (11-2005)
Catalog Number 47632S

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION

Date: July 24, 2008 Contact Person:
Identification Number:
Contact Number:
FAX Number:
Employer Identification Number:

Legend: UIL Index:

L = individuals 501.03-00

M = Ethnic type 501.03-05

N = City 501.03-25

O = Country 501.03-30

P = individuals 501.03-31

Q= items 501.32-00

xX = $amount 501.33-00

501.04-00
Dear

We have considered your application for recognition of exemption from Federal income tax under
Internal Revenue Code section 501(a). Based on the information provided, we have concluded
that you do not qualify for exemption under Code section 501(c)(3) or 501(c)(4). The basis for our
conclusion is set forth below.

ISSUE:

Are you, the applicant organization, which provides medical, unemployment and death benefits to
its membership, qualified for exemption under Internal Revenue Code section 501(c)(3) or
501(c)(4)?

FACTS:

Article Four of your Articles of Incorporation submitted with the Form 1023 states, in part, that:

...the Corporation's primary purpose and focus will be to provide medical help, medical
treatment unemployment benefits when member is unemployed, death benefits which include

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funeral and burial expenses, rent reimbu(r)sement (sic) when unemployed, travel expenses
for self and/or family to visit their spouse or parents, exclusively to members of the
Association of all ages at no charge or at a nominal fee...”

In the “Objective” attachment of the Form 1023 it indicates that your membership consists of M
members who are currently employed as P in the N and surrounding areas. From monthly
membership dues collected of $x per member, you will use the funds as follows:

— Pay benefits to sick and unemployed members for up to three months,

— Pay utilities and rent for unemployed members for up to three months,

— Reimburse families for burial expenses of members,

— Provide full or partial reimbursement to members for air fare to O if a family member dies (e.g.
wife, mother, father, mother-in-law or father-in-law).

Members must have made contributions to you for at least 90 days in order to qualify for the
aforementioned benefits.

Membership funds are nonrefundable and disbursements of the aforementioned benefits are
restricted to your members. The current membership total is unknown, but Item 9 of your May
12" response indicates that you plan to expand your membership to other communities.

Item 8 of your May 12" response indicates that you are not part of a labor union since most labor
union members “have their own owner-operated ‘Q.”

Your response further states that:

Our benefits may not be offered to these members [of labor unions], as they may not be
members of the Union and most of these members are “owner-operated”. We are not aware
of any of the Union’s objects. Our members are exclusively—M Origin. I believe, this would
make the major difference.

LAW:

Section 501(c)(3) of the Code describes certain organizations which are exempt from Federal
income tax under section 501(a) of the Code and reads, in part, as follows:

Corporations, and any community chest, fund, or foundation, organized and operated exclusively
for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or for
the prevention of cruelty to children or animals, no part of the net earnings of which inures to the
benefit of any private shareholder or individual, no substantial part of the activities of which is
carrying on propaganda, or otherwise attempting to influence legislation, and which does not
participate in, or intervene in (including the publishing or distributing of statements), any political
campaign on behalf of any candidate for public office.

Section 501(c)(4) of the Code provides for the exemption from Federal income tax of civic leagues
or organizations not organized for profit but operated exclusively for the promotion of social

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welfare.

Section 1.501(c)(3) of the Income Tax Regulations states that an organization is not operated
exclusively for one or more exempt 501(c)(3) purpose if its net earnings inure in whole or in part to
the benefit of private shareholders or individuals.

Section 1.501(c)(3)-1(a) of the Income Tax Regulations provides that in order to be exempt as an
organization described in section 501(c)(3), the organization must be one that is both organized
and operated exclusively for one or more of the purposes specified in that section.

Section 1.501(c)(3)-1(d) states 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. Thus, to
meet the requirements, an organization must establish that it is not organized or operated for the
benefit of private interests, such as those of its creator.

In Revenue Ruling 55-495 (1955-2 CB 259), section 501(c)(4) exemption was granted to a
member supported organization that provided for the payment of life, sick, accident or other
benefits to members or their dependents. Revenue Ruling 55-495 was modified by Revenue
Ruling 75-199 (1975-1 CB 160), which removed the conclusion that the association was exempt
under Section 501(c)(4) of the Code. Revenue Ruling 75-199 described an organization that
restricted its membership to individuals of good moral character and health belonging to a
particular ethnic group residing in a stated geographical area and provided sick benefits to
members and death benefits to their beneficiaries. Like the organization described in Revenue
Ruling 55-495, the primary source of revenues in the instant organization was derived from
membership dues. Since this organization was a mutual, self-interest type of organization that
provided direct economic benefits to its members and any community benefit was minor and
incidental it was found that the organization was not exempt under 501(c)(4) of the Code.

In Revenue Ruling 55-656 (1955-2 C.B. 262), a community nursing bureau operated as a
community project, which maintained a nonprofit register of qualified nursing personnel for the
benefit of area medical service providers which received its support primarily from public
contributions and community organizations, was found to be exempt under Section 501(c)(3) of
the Code.

In Revenue Ruling 61-170 (1961-1 C.B. 112), 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.

Better Business Bureau of Washington, DC, Inc. v. United States, 326 US 279, 283 (1945), holds
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.


Page 4

APPLICATION OF LAW:
501(c)(3)

Section 501(c)(3) of the Code describes certain organizations which are exempt from taxation
under section 501(a) of the Code. Your provision of benefits to your membership does not
exclusively serve any of the purposes listed in Section 501(c)(3).

Section 1.501(c)(3) of the Income Tax Regulations states that an organization is not operated
exclusively for one or more exempt purpose if its net earnings inure in whole or in part to the
benefit of private shareholders or individuals. You are not operated for one or more exempt
purposes because your net earnings inure to the benefit of your membership.

Section 1.501(c)(3)-1(a) of the Income Tax Regulations provides that in order to be exempt as an
organization described in section 501(c)(3), the organization must be one that is both organized
and operated exclusively for one or more of the purposes specified in that section. Although your
organizing document contains sufficient language to comply with the organizational test, you are
not operated exclusively for exempt purposes because you are a mutual organization that
provides substantial private benefit to your membership.

Section 1.501(c)(3)-1(d) states 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. You are not
operated exclusively for exempt purposes because you serve the private interests of your
membership.

You are not like the organization in Revenue Ruling 55-656 where a community nursing bureau
operated as a community project and was funded primarily from public contributions and
community organizations. You are member supported organization that provides benefits to a
limited membership.

You are similar to the organization in Revenue Ruling 61-170 where an association composed of
nurses supported and operated a nurses’ registry primarily to afford greater employment
opportunities themselves. Like the organization in the ruling, the primary beneficiary of your
activity is not the general public, but the membership of your organization.

Like in Better Business Bureau of Washington, DC, Inc. v. United States, the presence of a single
substantial non-exempt purpose destroys your claim for exemption. In this case your substantial

non-exempt purpose is providing unemployment, medical and death benefits to your members on
a mutual basis.

501(c)(4)

The promotion of social welfare is a recognized standard that enables an organization to obtain
exemption under section 501(c)(4). You provision of benefits exclusively to your membership on
a mutual basis does not promote the social welfare of your community.

Furthermore, you are very similar to the organization described in Revenue Ruling 75-199

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wherein section 501(c)(4) exemption was denied to an mutual organization that served the private
interests of its members, which consisted of individuals of a certain ethnic group within a specific
geographical area, by providing sick benefits to the members and death benefits to their
beneficiaries.

ORGANIZATION’S POSITION:

In Item 9 of your May 12, 2008 response, it states:

The L are very diverse and are part of an underdeveloped county-O. The Trustee plan (sic)to
broad base (sic) the membership to other communities as well. The fund collected will go a
long way to improve the M people in the USA and in O. Although, restricted to people of M
Origin, the association will provide aid and support as well as relief to the people of O in the
long run. Funds collected for relief and other natural calamities will also be utilized for the
relief purposes.

Otherwise, you were unable to provide any legal citations to show that your activities of providing

sick, unemployment, burial and/or bereavement benefits to your members serve any exempt
purpose.

SERVICE'S POSITION:

You indicate that, sometime in the future, you will provide aid and relief to people in QO. You have
given no evidence that this activity will provide a public benefit or that it is occurring or will occur in
the near future. Even if you began to provide benefits to needy people in O, the substantial non-
exempt purpose of providing benefits to your membership would preclude exemption.

Expanding your membership to include L in other communities simply expands your membership
base and does not provide benefits to the general public.

Your current activity is to provide sick, unemployment, burial and/or bereavement benefits to your
members. These member benefits result in substantial private benefit that precludes exemption.

CONCLUSION:

Your organization was formed and is operated as a mutual benefit organization for the benefit of
your membership. You do not serve any exempt purpose as defined in section 501(c)(3). You
serve the private interests of your members and not any public interest.

You do not promote the social welfare interests of the community as defined in section 501(c)(4).
On the contrary, you promote the personal interests of your membership.

Therefore, you do not qualify for exemption under Internal Revenue Code section 501(c)(3) or
section 501(c)(4).

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APPEAL RIGHTS:

You have the right to file a protest if you believe this determination is incorrect. To protest, you
must submit a statement of your views and fully explain your reasoning. You must submit the
statement, signed by one of your officers, within 30 days from the date of this letter. We will
consider your statement and decide if the information affects our determination. If your statement
does not provide a basis to reconsider our determination, we will forward your case to our
Appeals Office. You can find more information about the role of the Appeals Office in Publication
892, Exempt Organization Appeal Procedures for Unagreed Issues.

An attorney, certified public accountant, or an individual enrolled to practice before the Internal
Revenue Service may represent you during the appeal process. If you want representation during
the appeal process, you must file a proper power of attorney, Form 2848, Power of Attorney and
Declaration of Representative, if you have not already done so. You can find more information
about representation in Publication 947, Practice Before the IRS and Power of Attorney. All forms
and publications mentioned in this letter can be found at www.irs.gov, Forms and Publications.

If you do not file a protest within 30 days, you will not be able to file a suit for declaratory judgment
in court because the Internal Revenue Service (IRS) will consider the failure to appeal as a failure
to exhaust available administrative remedies. Code section 7428(b)(2) provides, in part, that a
declaratory judgment or decree shall not be issued in any proceeding unless the Tax Court, the
United States Court of Federal Claims, or the District Court of the United States for the District of
Columbia determines that the organization involved has exhausted all of the administrative
remedies available to it within the IRS.

If you do not intend to protest this determination, you do not need to take any further action. If we
do not hear from you within 30 days, we will issue a final adverse determination letter. That letter
will provide information about filing tax returns and other matters. Please send your protest
statement, Form 2848, and any supporting documents to the applicable address:

Mail to: Deliver to:

Internal Revenue Service Internal Revenue Service
EODQA, Room 7008 EODQA, Room 7008
P.O. Box 2508 550 Main Street
Cincinnati, OH 45201 Cincinnati, OH 45202

You may fax your statement using the fax number shown in the heading of this letter. If you fax
your statement, please call the person identified in the heading of this letter to confirm that he or
she received your fax. If you have any questions, please contact the person whose name and
telephone number are shown in the heading of this letter.

Sincerely,
Robert Choi

Director, EO Rulings & Agreements
Cc: