Member funeral-benefit association denied charitable status

Plain-English summary

A mutual-benefit association charged members registration and per-death fees, then made prompt funeral-expense payments when a member or registered family member died. The payments were automatic, went to preselected members or beneficiaries, and did not depend on financial need. The IRS found that the organizing document described a mutual-benefit corporation and that the association's substantial activity served private member interests much like an insurance arrangement. It denied exemption under IRC § 501(c)(3), and the proposed denial became final after no protest was filed within 30 days.

Ruling snapshot

• Question: Did the member funeral-benefit association satisfy the organizational and operational tests for charitable exemption?
• Outcome: Denied, with the proposed adverse determination becoming final after no timely protest
• Key authorities: IRC §§ 501(c)(3) and 508(e); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 67-367; Rev. Rul. 69-175; Rev. Rul. 76-205; Rev. Rul. 85-2; 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: May 11, 2016

Employer ID number:

Number: 201632020
Release Date: 8/5/2016 Contact person/ID number:

Contact telephone number:
Form you must file:

Tax years:

UIL: 501.03-30, 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.

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

Sincerely,

Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
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: February 17, 2016
Employer ID number:
Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend: UIL:
= 501.03-30
= 501.33-00
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 meet the organizational test under section 501(c)(3) of the Code? No, for the reasons
stated below.
• Do you meet the operational test 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 date X.

You attest that you were incorporated on date Y in state 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).

Specifically, you 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

During our review of your application, detailed information was requested supplemental to the above
attestations. This information shows that you were formed as a not for profit mutual benefit
corporation on date Y in the state of Z.

You were formed to create a support system for members. Specifically, you provide funds to
members or their registered family members who have lost a family member. Funds are intended to
be used for the cost of funeral expenses. Members pay a registration fee of approximately $20 and
are expected to pay a fee of approximately $100 per death of an active member or registered family
member.

Your board of directors provides details to members regarding the deceased individuals and present
funds to the registered beneficiary within twenty-four hours of the incident. Members participate in
comforting grieving families.

You explain in the W community mutual benefit associations are a common way to provide
assistance when the unexpected happens. You explain within the immigrant community many
individuals have little to no information regarding life insurance or saving money.

You indicate you formed a support system that lessens the burden of government and provides relief
to the poor and underprivileged.

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.

Treasury Regulation § 1.501(c)(3)-1(a)(1) 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.

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

-3-

Treas. Reg. § 1.501(c)(3)-1(b)(1)(iv) states that in no case shall an organization be considered to be
organized exclusively for one or more exempt purposes, if, by the terms of its articles, the purposes
for which such organization is created are broader than the purposes specified in section 501(c)(3).

Treas. Reg. § 1.501(c)(3)-1(c)(1) 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.

Treas. Reg. § 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.

Treas. Reg. § 1.501(c)(3)-1(d)(2) provides that the term ‘charitable’ is used in section 501(c)(3) of the
Code in its generally accepted legal sense, and includes the lessening of the burdens of government.

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.

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 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

Rev. Rul. 76-205, 1976-1 C.B. 154, 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 Rev. Rul. 85-2, 1985-1 C.B. 178, an organization that provides legal assistance to guardians ad
litem who represent abused and neglected children before a juvenile court that requires their
appointment lessens the burdens of government and is described in section 501(c)(3) of the Code.
The Service stated the determination of whether an organization’s activities lessen the burdens of
government involves two tests: 1- It is necessary to determine whether the governmental unit
considers to be its burden. 2- The activities must actually lessen such burden of the government.

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

-4-

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

Treas. Reg. § 1.501(c)(3)-1(a)(1) 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.

Organizational Test

Your organizational document does not limit your purpose to one that is exclusively exempt in nature
as required by Treas. Reg. § 1.501(c)(3)-1(b)(1)(iv). Rather, you are formed as a not for profit mutual
benefit corporation. As a result you do not satisfy the organizational 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.

Operational Test

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
(Treas. Reg. § 1.501(c)(3)-1(c)(1)). 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 Rev. Rul. 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. The payment of these types of benefits to
pre-selected, specifically named individuals serves a private interest rather than a public interest.
Treas. Reg. § 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

The group of parents in Rev. Rul. 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. Treas. Reg.
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

You are distinguished from the organization described in Rev. Rul. 76-205 because you are not

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

-5-

operated exclusively for exempt purposes. A substantial portion of your activities consists 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.

Although you claim to lessen the burdens of government, there is no evidence of any involvement of
any governmental unit. In addition, there is no objective manifestation that a governmental unit
considers your activities to be its burden or that your activities actually lessen that burden. See Rev.
Rul. 85-2 and Treas. Reg. § 1.501(c)(3)-1(d)(2).

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.

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:

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

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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).

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.

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

-7-

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