Taxi-driver member benefit plan denied exemption

Plain-English summary

An organization for taxi drivers offered networking, road-test guidance, driving-application help, and free finance courses. It also operated a paid social plan described as life insurance for participating drivers, with benefits for a member's death, a family member's death, illness, injury, hospitalization, or a car accident. The plan was funded through a membership charge and recurring deductions from taxi fares. The IRS found that the organizing document did not limit the organization to exempt purposes. It also found that the benefit plan primarily served the private interests of members rather than a public charitable interest. The organization therefore failed both the organizational and operational tests, and the denial became final after it did not protest.

Ruling snapshot

• Question: Did the taxi-driver organization qualify for exemption when a substantial activity was providing paid benefits to members?
• Outcome: Denied; the organization failed the organizational test and served private member interests.
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Ruls. 67-367, 69-175, and 76-205; Better Business Bureau v. United States, 326 U.S. 279 (1945)

Full text (IRS public release)

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

Release Number: 201822032
Release Date: 6/1/2018

Date: March 8, 2018

Employer ID number:

Contact person/ID number:

Contact telephone number:

Form you must file:

Tax years:

UIL: 501.03-30, 501.32-01, 501.33-00

Dear [redacted]:

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.

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,

Stephen A. Martin
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

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

Date: December 12, 2017

Employer ID number:

Contact person/ID number:

Contact telephone number:

Contact fax number:

Legend:
S = Business 1
T = Business 2
R = Taxi company
W = City
Y = Date
Z = State
b dollars = Plan benefit 1
c dollars = Plan benefit 2
d dollars = Plan benefit 3
f dollars = Plan benefit 4
x dollars = Plan fee
g cents = Fare deduction for driver’s plan

UIL:
501.03-30
501.32-01
501.33-00

Dear [redacted]:

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 were incorporated on Y in the State of Z. You did not submit a copy of your Articles of
Incorporation and any amendments thereto, but you attested that:

• Your organizing document does not expressly empower you to engage, other than as an
  insubstantial part of your activities, in activities that do not further one or more of those
  purposes.

• Your organizing document does not empower you to directly or indirectly participate in or
  intervene in any political campaign on behalf of or in opposition to any candidate for public
  office.

• Your organizing document permanently dedicates your assets for Section 501(c)(3) purposes.

You did not attest that your organizing document limits your purposes to one or more purposes
described in Section 501(c)(3).

You stated that your purpose is to help taxi drivers in W. You provide taxi drivers with a social club
where they can interact and network with other drivers. You provide guidance on exam road tests,
and driving applications. You offer free finance courses. You operate a social plan of a one-time fee
membership of x dollars and you state this fee is only charged to those who wish to be enrolled in the
social plan. You state the social plan works as life insurance for independent taxi drivers (not
including R). The plan breaks down as follows:

• If the beneficiary dies, the family will receive f dollars worth of compensation.

• If the beneficiary’s spouse/partner dies, the beneficiary will receive b dollars worth of
  compensation.

• If the beneficiary's child/children die, the beneficiary will receive c dollars worth of
  compensation.

• If the beneficiary (taxi driver) is in a car accident or is hospitalized, the beneficiary will received d dollars weekly worth of compensation for a month only.

You work with companies S and T, and drivers with a taximeter. You state g cents are deducted from
the fare charged and goes towards the social plan. The fee is deducted every 3 months and is only
for the members of the social plan.

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 Section 1.501(c)(3)-1(a)(1) states that, to be exempt as an organization
described in Section 501(c)(3) of the Code, 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(b)(1) provides that an organization is organized exclusively for one
or more exempt purposes only if its articles of organization limit its purposes to one or more exempt
purposes and do not expressly empower it to engage, otherwise than as an insubstantial part, in
activities which in themselves are not in furtherance of one or more exempt purposes.

(i) An organization is organized exclusively for one or more exempt purposes only if its articles of
organization (referred to in this section as its articles) as defined in subparagraph (2) of this
paragraph:

(a) Limit the purposes of such organization to one or more exempt purposes

Treas. Reg. Section 1.501(c)(3)-1(b)(2), provides that for purposes of this section, the term articles of
organization or articles includes the trust instrument, the corporate charter, the articles of association,
or any other written instrument by which an organization is created. The term "articles" means "the
trust instrument, the corporate charter, the articles of association, or any other written instrument by
which an organization is created." Accordingly, the organizational test cannot be met by reference to
any document that is not the creating document. In the case of a corporation, the by-laws cannot
remedy a defect in the corporate charter. A charter can be amended only in accordance with State
law which generally requires filing of the amendments with the chartering authority. In the case of a
trust, operating rules cannot substitute for the trust indenture. In the case of an unincorporated
association, the test must be met by the basic creating document and the amendments thereto,
whatever that instrument may be called. Subsidiary documents that are not amendments to the
creating document may not be called on.

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 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. Section 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated
exclusively for exempt purposes unless it serves a public rather than a private interest. Thus, even if
an organization has many activities which further exempt purposes, exemption is precluded if it
serves a private interest.

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

Treas. Reg. Section 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.

Your organizational document does not limit your purpose to one that is exclusively exempt in nature
as required by Treas. Reg. Section 1.501(c)(3)-1(b)(1). You did not attest that your organizing
document limits your purposes to one or more purposes described in Section 501(c)(3). 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.

You also fail the operational test as described in Treas. Reg. Section 1.501(c)(3)-1(c)(1). You are
primarily operated for the non-exempt, private benefit of your members and not exclusively for
exempt purposes.

In order to qualify for exemption under Section 501(c)(3) you must serve a public, rather than a
private, interest as described in Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii). You are similar to the
organization described in Rev. Rul. 67-367. Like that organization, your activities serve to benefit the
private interests of your members rather than the public.

Like the organization described in Rev. Rul. 69-175, you were formed to provide benefits to your
members. In your case, a substantial portion of your activities consists of providing death,
catastrophic illness or injury benefits to members. The payment of these benefits serves private
interests, precluding you from exemption.

You are distinguished from the organization described in Revenue Ruling 76-205 because you are
not operated exclusively 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.

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 or accident 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 Section 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:

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:

Internal Revenue Service
EO Determinations Quality Assurance
Room 7-008
P.O. Box 2508
Cincinnati, OH 45201

Street address for delivery service:

Internal Revenue Service
EO Determinations Quality Assurance
550 Main Street, Room 7-008
Cincinnati, OH 45202

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,
Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements
Enclosure:

Publication 892