Member death-benefit organization denied exemption for serving private interests

Plain-English summary

An organization provided death benefits to the beneficiaries of active and retired members who died from any cause. Participating groups supplied the names of their participants, fees were based on the number of participants, and the organization assessed each member one dollar when a member died. The IRS found that paying benefits to members’ survivors served designated individuals’ private pecuniary interests rather than a public charitable interest. Because the organization failed the operational test, the IRS denied exemption under section 501(c)(3).

Ruling snapshot

• Question: Does the member death-benefit organization qualify for exemption under section 501(c)(3)?
• Outcome: denied, because its activities primarily served the private interests of members and their beneficiaries rather than a public charitable interest
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 69-175; Police Benevolent Association of Richmond v. United States

Full text (IRS public release)

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

Date: July 18, 2019

Employer ID number:

Number: 201941027
Release Date: 10/11/2019 Contact person/ID number:

Contact telephone number:
Form you must file:

Tax years:

UIL: 501.33-00, 501.35-00

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,

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

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


Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201
Date:
March 21, 2019

Employer ID number:
Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:
X = Submission date 501.33-00
Y = Formation date 501.35-00

Z = State of formation

Dear

We considered your application for recognition of exemption from federal income tax under Internal Revenue
Code (IRC) Section 501(a). We determined that you don’t qualify for exemption under IRC Section 501(c)(3).
This letter explains the reasons 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 the state of Z. You 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 in
activities, other than an insubstantial part, that are not in furtherance of one or more exempt purposes, and that
your organizing document contains the dissolution provision required under Section 501(c)(3).

You attest that you are organized and operated exclusively to further charitable purposes. You attest 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

2

• 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 review of your Form 1023-EZ, detailed information was requested supplemental to the above
attestations. You are governed by your Bylaws. You were formed to provide death benefits to the beneficiaries
of members, active and retired, who die from any cause. You contact the in your area to make
them aware of your death benefits, and each that participates furnishes you the names of their
participants. board members conduct all your activities at your office address. These include mailings,
invoicing, receipts of payments, and processing payments. Fees are based on the number of
participants. When a member dies, you assess each member a dollar.

Law

Section 501(c)(3) of the Code provides for the recognition of exemption of organizations that are organized and
operated exclusively for religious, charitable or other purposes as specified in the statute. No part of the net
earnings may inure 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. Sec. 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. Sec. 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated exclusively
for one or more of the purposes specified in Section 501(c)(3) 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. 69-175, 1969-1 C.B. 149, describes an organization formed by the parents of pupils attending a
private school which provides bus transportation to and from the school for their children. Parents must pay an
initial family fee and an additional annual charge for each child. The organization's income approximately
equals the expenses involved in its operations. Treas. Reg. Sec. 1.501(c)(3)-1(d)(1)(ii) provides that an
organization is not organized or operated exclusively for any exempt purpose set forth in Section 501(c)(3) of
the Code unless it serves a public rather than a private interest. When a group of individuals associate to provide
a cooperative service for themselves, they are serving a private interest. By providing bus transportation for
school children, under the circumstances described, the organization serves a private rather than a public
interest. Accordingly, it is not exempt from Federal income tax under Section 501(c)(3) of the Code.

In Police Benevolent Association of Richmond v. U.S., 661 F. Supp. 765 (E.D. Va. 1987) the association
alleged that, in tax year 1982, it was tax-exempt under Section 501(c)(4) until it restated its articles of

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

3

incorporation, and thereafter was exempt under section 501(c)(3). The government argued that, under the facts
alleged, the association was not entitled to tax-exempt status under either provision of the statute. The
association's restated articles provided that its sole purpose was to provide supplemental pension benefits to
retired active members of the corporation. As such the court found that the association was not organized to
serve the charitable public interest in lessening government burdens, and any such incidental benefit to the
government was not significant. The court held that as a matter of law, the association could not establish that it
was organized and operated for a charitable purpose under any set of facts consistent with its allegations.
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.

Application of law

You are not described in Section 501(c)(3) of the Code because you do not meet the operational test as required
by Treas. Reg. Sec. 1.501(c)(3)-1(a)(1). You do not meet the operational test because you are not, as Treas.
Reg. Sec. 1.501(c)(3)-1(c)(1) requires, operated exclusively for one or more exempt purposes. You are not
organized or operated exclusively for exempt purposes because you do not serve a public rather than a private
interest, as Treas. Reg. Sec. 1.501(c)(3)-1(d)(1)(ii) demands.

Your activities consist of paying death benefits to active and retired members who have died from any cause,
assessing a fee of members whenever one dies. By paying the benefits to survivors of members you are serving
private interests rather than a public interest, like the Police Benevolent Association of Richmond, and
the transportation cooperative of Rev. Rul. 69-175.

Conclusion

For the reason stated, you are not operated exclusively for exempt purposes within the meaning of Section
501(c)(3) of the Code and the related income tax regulations, and in consequence do not qualify for exemption
under Section 501(c)(3).

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.

If you don't agree

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

• Your name, address, employer identification number (EIN), and a daytime phone number
• A statement of the facts, law, and arguments supporting your position
• A statement indicating whether you are requesting an Appeals Office conference

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

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K

• The following declaration:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I have examined this request, or this modification to the
request, including accompanying documents, and to the best of my knowledge and belief, the request
or the modification contains all relevant facts relating to the request, 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 they haven’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 gave us a basis to reconsider our determination. If so,
we’ll continue to process your case considering the information you provided. If you haven’t given us a basis
for reconsideration, we'll send your case to the Appeals Office and notify you. You can find more information
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 later because the
law requires that you use the IRC administrative process first (IRC Section 7428(b)(2)).

Where to send your protest
Send your protest, Form 2848, if applicable, 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
Mail Stop 6403 550 Main Street, Mail Stop 6403

P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

You can also fax your protest 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 they received it.

You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-
pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at
the top of this letter.

Contacting the Taxpayer Advocate Service

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

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K


Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Letter 4034 (Rev. 11-2018)
Catalog Number 47628K