Automatic member death benefits prevent charitable exemption

Plain-English summary

An organization serving members of specified immigrant communities applied for section 501(c)(3) status. Its activities included counseling, cultural events, aid to people in need, and payments to members in good standing after a family death. About one-quarter of its time and resources went to those death-related benefits, which were automatic rather than based on charitable need. The IRS concluded that this substantial activity served members' private interests, so the organization failed the operational test despite its other charitable and educational work. The denial became final after the organization did not protest.

Ruling snapshot

• Question: Does an organization qualify under IRC § 501(c)(3) when a substantial part of its activities provides automatic death benefits to members?
• Outcome: Denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. §§ 1.501(c)(3)-1(a)(1), (c)(1), and (d)(1)(ii); Rev. Ruls. 67-367, 69-175, and 76-205; Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279 (1945)

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
IRS Cincinnati, OH 45201
Date:

January 4, 2016
Employer ID number:

Number: 201614038 .
Release Date: 4/1/2016 Contact person/ID number:

Contact telephone number:
Form you must file:

Tax years:

UIL: 501.32-00, 501.32-01, 501.33-00

Dear

This letter is our final determination that you don’t qualify for tax-exempt status under Section
501(c)(3) of the Internal Revenue Code (the Code). 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 Section 501(c)(3) of the Code, donors
can’t deduct contributions to you under Section 170 of the Code. You must file federal income tax
returns for the tax years listed at the top of this letter using the required form (also listed at the top of
this letter) within 30 days of this letter unless you request an extension of time to file.

We'll make this final adverse determination letter and the proposed adverse determination letter
available for public inspection (as required under Section 6110 of the Code) 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, follow the instructions in the Notice 437 on how to notify us. If you agree with our
deletions, you don’t need to take any further action.

We'll also notify the appropriate state officials of our determination by sending them a copy of this
final letter and the proposed determination letter (under Section 6104(c) of the Code). You should
contact your state officials if you have questions about how this determination will affect your state
responsibilities and requirements.

Letter 4038 (Rev. 7-2014)
Catalog Number 47632S


If you have questions about this letter, you can contact the person listed at the top of this letter. If
you have questions about your federal income tax status and responsibilities, call our customer
service number at 1-800-829-1040 (TTY 1-800-829-4933 for deaf or hard of hearing) or customer

service for businesses at 1-800-829-4933.

Sincerely,

Director, Exempt Organizations

Enclosure:

Notice 437

Redacted Letter 4036, Proposed Adverse Determination Under IRC Section 501(c)(3)
Redacted Letter 4038, Final Adverse Determination Under IRC Section 501 (c)(3) - No Protest

Letter 4038 (Rev. 7-2014)
Catalog Number 47632S


Department of the Treasury

Internal Revenue Service

Cincinnati, OH 45201
Date: November 3, 2015
Employer ID number:
Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend: UIL:

W = nationality 501.32-00
X = date 501.32-01
Y = date 501.33-00
Z = state

Dear

We considered your application for recognition of exemption from federal income tax under Section
501(a) of the Internal Revenue Code (the Code). Based on the information provided, we determined
that you don’t qualify for exemption under Section 501(c)(3) of the Code. This letter explains the basis
for our conclusion. Please keep it for your records.

Issues
Do you qualify for exemption under section 501(c)(3) of the Code? No, for the reasons stated below.

Facts
You submitted Form 1023-EZ Streamline Application for Recognition of Exemption Under Section
501(c)(3) of the Internal Revenue Code on X.

You attest that you were incorporated on Y in Z. You also attest that you have the necessary
organizing document, that your organizing document limits your purposes to one or more exempt
purposes within the meaning of section 501(c)(3), that your organizing document does not expressly
empower you to engage, otherwise than as an insubstantial part of your activities that in themselves
are not in furtherance of one or more exempt purposes, that your organizing document contains the
dissolution provision required under section 501(c)(3), and that your organizing document contains
the provisions required by section 508(e) or that your organizing document does not need to include
the provisions required by section 508(e) because you rely on the operation of state law in your
particular state to meet the requirements of section 508(e).

You attest 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).

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W


Specifically, attest you will:

• Refrain from supporting or opposing candidates in political campaigns in any way
• Ensure that your net earnings do not inure in whole or in part to the benefit of private
shareholders or individuals

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

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

• 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)

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

Your Form 1023-EZ was randomly selected for a pre-determination review, and detailed information
was requested supplemental to the above attestations. This information indicated that one of your
activities was to provide counseling support to needy W and W Americans. Counseling is provided to
assist individuals with the challenges that arise from living away from their country of origin and to
cope with cultural differences. Counseling support is also provided to individuals who have lost a
family member or other have another distress in their family.

You organize cultural events for youth, your members, and the W community to promote
understanding of their cultural heritage, history, and roots. Events may include invited speakers
and/or festivities, including music, food, and drink. Nominal entrance fees are collected to cover the
cost of conducting the activity. You currently organize one cultural event per year.

You organize activities to support W and W Americans in dire need. You provide financial assistance
to W immigrants as well as support to children, the elderly and homeless individuals in W. You
provide support to children in the United States who are pursuing their education.

Approximately 25% of your time and resources are devoted to providing assistance to individuals at a
time of loss. Specifically, you provide funds to members in good standing who have lost a family
member, you provide care for underage children who have lost their families, and you provide support
to individuals gathering to mourn by contributing food and drinks. Funds to members are intended to
be used for the high costs of funeral services and related charges. These activities are conducted
when a death occurs in the W community.

Your members, their families, and members of the W community participate in your activities.
Members pay an annual membership fee of approximately $100. While you submitted a total of your
expenses for each of the last three years, you did not indicate specifically how much was distributed
for the above described member death benefit.

Law

Section 501(c)(3) of the Code 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.

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W


Section 1.501(c)(3)-1(a)(1) of the Regulations states that in order to qualify under section 501(c)(3) of
the Code, 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.

Section 1.501(c)(3)-1(c)(1) of the Regulations states 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 section 501(c)(3) of the Code. 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)(ii) of the Regulations 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 an organization whose sole activity was the
operation of a scholarship plan for making payments to pre-selected, specifically named individuals.
The organization established a plan whereby it entered into agreements with subscribers. The
subscribers deposited a certain amount of money with a designated bank. The subscriber also named
a specific child to be the recipient of the scholarship money. The recipient received the scholarship
around the time he or she were to begin college. The organization did not qualify for exemption under
section 501(c)(3) of the Code because it was serving the private interests of its subscribers rather
than serve public charitable and educational 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. The organization did not qualify for

exemption under section 501(c)(3) of the Code because it served a private rather than public interest.

Revenue Ruling 76-205, 1976-1 C.B. 226, describes an organization formed to aid immigrants in
overcoming social, cultural, and economic problems by providing personal counseling, referrals to
helpful agencies, social and recreational activities, instruction in English, and distributing a newsletter
containing information on attaining citizenship, securing housing, and obtaining medical care is
operated exclusively for charitable and educational purposes and qualifies for exemption under
section 501(c)(3) of the Code.

In Better Business Bureau of Washington. D.C. v. United States, 326 U.S. 279 (1945), the Supreme
Court determined that the presence of a single non-exempt purpose, if substantial in nature, will
destroy exemption under section 501(c)(3) regardless of the number or importance of any other
exempt purposes.

Application of law

Section 1.501(c)(3)-1(a)(1) of the regulations provides that in order to be exempt as an organization
described in section 501(c)(3), an organization must be both organized and operated exclusively for
one or more of the purposes specified in such section. You conduct an activity that provides direct
benefits to members and private individuals that is more than insubstantial in nature. For this reason
you are not operating exclusively for exempt purposes (Section 1.501(c)(3)-1(c)(1) of the

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W

Regulations). As a result you do not satisfy the operational test requirement to be recognized as
exempt under section 501(c)(3) of the Code, and are not as described in section 501 (c)(3) of the
Code.

You are similar to the organization described in Revenue Ruling 67-367. Like that organization, your
activities serve to benefit your members rather than benefit the public. The organization in this
revenue ruling made predetermined payments to preselected individuals at a predetermined time.
You are providing a set aside amount of funds payable, much like an insurance policy, to your
members in the event of a family death. There is not charitable intent to the payments, qualification or
review to determine need — the payments are automatic if the member is in good standing. The
payment of these types of benefits to pre-selected, specifically named individuals serves a private
interest rather than a public interest. Section 1.501(c)(3)-1(d)(1)(ii) of the Regulations states that an
organization is not operated exclusively for one or more exempt purposes unless it serves a public
rather than a private interest.

The group of parents in Revenue Ruling 67-175 provided a cooperative service for themselves and
thus served their own private interests. Like that organization, you were formed to provide benefits to
your members. In your case, a substantial portion of your activities consists of providing death
benefits to members. The payment of these benefits serves private rather than a public interest.
Section 1.501(c)(3)-1(d)(1)(ii) of the Regulations states that an organization is not operated
exclusively for one or more exempt purposes unless it serves a public rather than a private interest.

You are distinguished from the organization described in Revenue Ruling 76-205 because you are
not operated exclusively exempt purposes. Although you conduct a number of charitable and
educational activities, more than an insubstantial part of your activities consist of providing death
benefits to your members. The payment of these benefits serves private, rather than a public interest
and are not in furtherance of one or more exempt purposes.

The Supreme Court held in Better Business Bureau of Washington. D.C. v. United States that a
single nonexempt purpose, if substantial in nature, would preclude an organization from qualifying
under section 501(c)(3) no matter the number or importance of truly exempt purposes. Despite the
other qualifying activities that you conduct, the activity of providing benefits to your members in the
event of a family death is serving private, non-exempt purposes.

Conclusion

Based on the above facts and analysis, you do not qualify for exemption under section 501(c)(3) of
the Code. You are not operated exclusively for a 501(c)(3) purpose. You further the interests of your
members which serves private interests. Therefore, you do not qualify for exemption under section
501(c)(3) of the Code.

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W


If you don’t agree ——

You have a right to file a protest if you don’t agree with our proposed adverse determination. To do
so, you must send a statement to us within 30 days of the date of this letter. The statement must —
include:

• Your name, address, employer identification number (EIN), and a daytime
phone number

• A copy of this letter highlighting the findings you disagree with
• An explanation of why you disagree, including any supporting documents
• The law or authority, if any, you are relying on

• The signature of an officer, director, trustee, or other official who is authorized to sign for
the organization, or your authorized representative

• One of the following declarations:

For an officer, director, trustee, or other official who is authorized to sign for the
organization:

Under penalties of perjury, I declare that I examined this protest statement, including
accompanying documents, and to the best of my knowledge and belief, the statement
contains all relevant facts and such facts are true, correct, and complete.

For authorized representatives:

Under penalties of perjury, I declare that I prepared this protest statement, including
accompanying documents, and to the best of my knowledge and belief, the statement
contains all relevant facts 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 he or she hasn'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 provided a basis for us to reconsider our
determination. If so, we'll continue to process your case considering the information you provided. If
you haven't provided a basis for reconsideration, we'll forward your case to the Office of Appeals and
notify you. You can find more information about the role of the Appeals Office in Publication 892, How
to Appeal an IRS Decision on Tax-Exempt Status.

If you don’t file a protest within 30 days, you can’t seek a declaratory judgment in court at a later date
because the law requires that you use the IRS administrative process first (Section 7428(b)(2) of the
Code).

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W


Where to send your protest
Please send your protest statement, Form 2848, if needed, 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
Room 7-008 550 Main Street, Room 7-008

P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

You can also fax your statement 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
he or she received it.

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.

You can find all forms and publications mentioned in this letter on our website at
www.irs.gov/formspubs. If you have questions, you can contact the person listed at the top of this
letter.

Sincerely,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Enclosure:
Publication 892

Letter 4036 (Rev. 7-2014)
Catalog Number 47630W