Revokes firefighter member-benefit charity's exemption

Plain-English summary

An organization formed a charity to accept contributions for members' families when a firefighter died in the line of duty or members experienced other catastrophic events. The IRS found that the organization primarily served the private interests of its members by providing them or their beneficiaries with direct economic benefits. It therefore failed the operational test and the requirement that a section 501(c)(3) organization serve public rather than private interests. The IRS revoked the organization's exemption and said contributions were no longer deductible under section 170. The report states that the organization was originally exempt effective August 25 of a redacted year, while its conclusion and the final letter use January 1 of a redacted year as the revocation date.

Ruling snapshot

• Question: Did a firefighter organization that provided death and other catastrophic-event benefits to members remain eligible under section 501(c)(3)?
• Outcome: Revocation because the organization primarily served members' private interests.
• Key authorities: IRC §§ 170, 501(a), 501(c)(3), and 7428; Treas. Reg. § 1.501(c)(3)-1; Rev. Ruls. 67-367, 69-175, and 81-58

Full text (IRS public release)

[Redaction note: the IRS release blanks the organization's identity, taxpayer identification number, contact information, dates, state, and other identifying details.]

DEPARTMENT OF THE TREASURY

Internal Revenue Service
TE/GE EO Examinations

1100 Commerce Street MC 4920 DAL

Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: APR 26 2018

Person to Contact:
Identification Number:
Telephone Number:
In Reply Refer to:

Number: 201833023
Release Date: 8/17/2018

LAST DATE FOR FILING A PETITION
WITH THE TAX COURT:

UIL: 501.03-00

CERTIFIED MAIL — Return Receipt Requested

Dear

This is a final adverse determination regarding your exempt status under section 501(c)(3) of
the Internal Revenue Code (IRC). Our favorable determination letter to you dated October
17, 20XX, is hereby revoked and you are no longer exempt under section 501(a), as an
organization described in section 501(c)(3) of the IRC, effective January 1, 20XX.

Our adverse determination was made for the following reasons:

You have not established that you are organized and operated exclusively for
an exempt purpose or that you have been engaged primarily in activities that
accomplish one or more exempt purposes within the meaning of IRC section
501(c)(3).

You have not established that no part of your net earnings inure to the benefit
of any private shareholder or individual.

Contributions to your organization are no longer deductible under section 170 of the Code.

You are required to file Federal income tax returns on Form 1120. These returns should be
filed with the appropriate Service Center for the year ending December 31, 20XX and for all
years thereafter.

Processing of income tax returns and assessment of any taxes due will not be delayed should
a petition for declaratory judgment be filed under section 7428 of the Internal Revenue
Code.

If you decide to contest this determination in court, you must initiate a suit for declaratory
judgment in the United States Tax Court, the United States Court of Federal Claims or the
District Court of the United States for the District of Columbia before the 91st day after the
date this determination was mailed to you. Contact the clerk of the appropriate court for the
rules for initiating suits for declaratory judgment. You may write to the courts at the
following addresses:

United States Tax Court
400 Second Street, NW
Washington, DC 20217

US Court of Federal Claims
717 Madison Place, NW
Washington, DC 20005

U. S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, DC 20001

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that
can help protect your taxpayer rights. We can offer you help if your tax problem is causing a
hardship, or you've tried but haven’t been able to resolve your problem with the IRS. If you
qualify for our assistance, which is always free, we will do everything possible to help you.
Visit taxpayeradvocate.irs.gov or call 1-877-777-4778.

We will notify the appropriate State Officials of this action, as required by section 6104(c) of
the Internal Revenue Code.

If you have any questions, please contact the person whose name and telephone number are
shown in the heading of this letter.

Sincerely yours,

Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:
Publication 892

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
IRS Exempt Organizations Examinations

Date:
October 3, 20XX

Taxpayer Identification Number:
Form:

Tax Year(s) Ended:

Person to Contact / ID Number:
/
Contact numbers:
Telephone:
Fax number:
Manager's Name / ID Number:
/
Manager’s Contact Number:

Response Due Date:

Certified Mail — Return Receipt Requested

Dear ,

Why you are receiving this letter

We propose to revoke your status as an organization described in section 501(c)(3) of the
Internal Revenue Code. Enclosed is our report of examination explaining the proposed action.

What you need to do if you agree

If you agree with our proposal, please sign the enclosed Form 6018, Consent to Proposed
Action — Section 7428, and return it to the contact person at the address listed above (unless
you have already provided us a signed Form 6018). We'll issue a final revocation letter
determining that you aren't an organization described in section 501(c)(3).

After we issue the final revocation letter, we'll announce that your organization is no longer
eligible for contributions deductible under section 170 of the Code.

If we don't hear from you

If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll
issue a final revocation letter. Failing to respond to this proposal will adversely impact your legal
standing to seek a declaratory judgment because you failed to exhaust your administrative
remedies.

Effect of revocation status

If you receive a final revocation letter, you'll be required to file federal income tax returns for the
tax year(s) shown above as well as for subsequent tax years.

What you need to do if you disagree with the proposed revocation

If you disagree with our proposed revocation, you may request a meeting or telephone
conference with the supervisor of the IRS contact identified in the heading of this letter. You also
may file a protest with the IRS Appeals office by submitting a written request to the contact
person at the address listed above within 30 calendar days from the date of this letter.

The Appeals office is independent of the Exempt Organizations division and resolves most
disputes informally.

For your protest to be valid, it must contain certain specific information including a statement of
the facts, the applicable law, and arguments in support of your position. For specific information
needed for a valid protest, please refer to page one of the enclosed Publication 892, How to
Appeal an IRS Decision on Tax-Exempt Status, and page six of the enclosed Publication 3498,
The Examination Process. Publication 3498 also includes information on your rights as a
taxpayer and the IRS collection process. Please note that Fast Track Mediation referred to in
Publication 3498 generally doesn’t apply after we issue this letter.

You also may request that we refer this matter for technical advice as explained in Publication

892. Please contact the individual identified on the first page of this letter if you are considering
     requesting technical advice. If we issue a determination letter to you based on a technical
     advice memorandum issued by the Exempt Organizations Rulings and Agreements office, no
     further IRS administrative appeal will be available to you.

Contacting the Taxpayer Advocate Office is a taxpayer right

You have the right to contact the office of the Taxpayer Advocate. Their assistance isn't a
substitute for established IRS procedures, such as the formal appeals process. The Taxpayer
Advocate can't reverse a legally correct tax determination or extend the time you have (fixed by
law) to file a petition in a United States court. They can, however, see that a tax matter that
hasn't been resolved through normal channels gets prompt and proper handling. You may call
toll-free 1-877-777-4778 and ask for Taxpayer Advocate assistance. If you prefer, you may
contact your local Taxpayer Advocate at:

Internal Revenue Service

For additional information

If you have any questions, please call the contact person at the telephone number shown in the
heading of this letter. If you write, please provide a telephone number and the most convenient
time to call if we need to contact you.

Thank you for your cooperation.

Sincerely,

Director, EO Examinations

Enclosures:

Report of Examination

Form 6018

Form 4621

Copy of Form 1023EZ

Copy of Determination Letter dated October 17,

Publication 892

Publication 3498

Form 886A

Department of the Treasury - Internal Revenue Service

Explanation of Items

Schedule No. or Exhibit

Name of Taxpayer

Year/Period Ended

Date of Notice: October 3, 20XX

Issues:

Whether , which qualified for exemption from
Federal Income Tax under Section 501(c)(3) of the Internal Revenue Code, should be revoked
due to its failure to meet the organizational test?

Facts:

filed the 1023EZ Streamlined Application for
Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code on
September 23, 20XX. Organization granted exemption as a 501(c)(3) on October 17, 20XX.
Effective date is August 25, 20XX. Organization checked on Form 1023EZ they will be
organized and operated exclusively for charitable purpose.

The Organization was selected for audit to ensure that the examined organization’s activities
and operations align with its approved exempt status.

An organization exempt under 501(c )(3) needs to be organized and operated exclusively for
religious, charitable, scientific, testing for public safety, literary or educational purposes and
to foster national and amateur sports competition.

The organization sent in a copy of their organizing documents dated August 21, 20XX.
These documents have the required clauses and verbiage required. The organizing
documents are date stamped by the State of .

The organizations purpose is to maintain a charity which would be used for the benefit of our
members in case there was ever another tragic incident in our state. This would include the
loss of one life or multiple lives.

We do not at this time intend to have regular fundraising events. We need this charity so that
when a fire fighter loses their life in the line of duty we have a means to accept
contributions on behalf of his or her family.

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 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.

Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i) 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.

Treas. Reg. Section 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. 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.

Rev. Rul. 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, 1969-1C.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. 81-58, 1981-1 C.B. 331, describes an organization formed to provide retirement
payments to its members or death benefits to the beneficiaries of the members. Its income is
used to provide direct economic benefits to members. Although the class of employees
benefited by the organization consists of police officers engaged in the performance of
essential and hazardous public services and there is an incidental benefit provided by the
organization to the larger community, the fact remains that the primary benefits from the
organization are limited to its members. The organization which is primarily engaged in
providing retirement benefits to members and death benefits to the beneficiaries of members,
does not qualify for exemption from federal income tax under Section 501(c)(4) of the Code as a
social welfare organization.

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.

In Police Benevolent Association of Richmond, (PBA) v.US., 661 F. Supp. 765, (E.D.Va.1987),
the U.S. District Court held that as a matter of law, the association could not establish that it
was organized and operated for a charitable purpose under Section 501(c)(3). Because a
substantial purpose of the association and its activities were intended to serve the pecuniary
interests of its members, a non-exempt purpose, the court held that the association could not
qualify as an organization operated exclusively for the promotion of social welfare under
Section 501(c)(4), either.

Application of Law:

You failed 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) of the Code 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
benefits to members. The payment of these benefits serves private interests, precluding you
from exemption.

The Supreme Court held in Better Business Bureau that a single nonexempt purpose, if
substantial in nature, precludes an organization from qualifying under Section 501(c)(3) no
matter the number or importance of truly exempt purposes. Despite the other qualifying
charitable activities that you conduct, your activity of providing benefits to your members in the
event of death, catastrophic illness, or injury is substantial and serves private, non-exempt
purposes.

Similar to the organization in Rev. Rul. 81-58, your income is used to provide direct economic
benefits to your members. This ruling stated that an organization which is primarily engaged in
providing benefits to members does not qualify for exemption under Section 501(c)(4) of the
Code as a social welfare organization. If providing payments to members is too much private
benefit under Section 501(c)(4), it is logical to conclude that it is also too much private benefit to
qualify under Section 501(c)(3). This was confirmed in Police Benevolent Association, where the
court determined that an organization providing retirement and death benefits to members
could not qualify for exemption under Section 501(c)(3) or 501(c)(4) due to the private benefit to
members. You are similar to these associations because your only activity is providing benefits
to your members and is serving private interests, which is a non-exempt purpose and precludes
you from exemption under Section 501(c)(3).

Conclusion:

Based on the facts and circumstances presented, we conclude that you do not qualify for
recognition of exemption from federal income tax as an organization described in Section
501(c)(3) of the Code and you must file federal income tax returns.

Contributions to the organization are not deductible under § 170.

is revoked to effective date of exemption, January 1,
20XX.