Family scholarship and hardship fund denied charitable exemption

Plain-English summary

An organization formed to provide scholarships and financial assistance primarily to members of one extended family sought section 501(c)(3) exemption. Its family-controlled board expected most scholarships and hardship payments to go to relatives, gave priority to people connected to the family, and also offered funds for attendance at family reunions. It planned to raise most support from family members, although it would accept outside donations and sometimes assist others. The IRS concluded that the organization's earnings and activities primarily relieved the family's private economic burdens rather than serving a public charitable class. It denied exemption, and the determination became final when the organization did not protest within 30 days.

Ruling snapshot

• Question: Does a family-controlled scholarship and hardship fund primarily serving one family qualify under section 501(c)(3)?
• Outcome: denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 67-367; Rev. Rul. 69-175; Rev. Rul. 80-302; Charleston Chair Co. v. United States, 203 F. Supp. 126 (1962); Wendy Parker Rehabilitation Foundation, Inc. v. Commissioner, T.C. Memo. 1986-348

Full text (IRS public release)

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

Date:
January 21, 2020

Release Number: 202016026
Release Date: 4/17/2020
UIL Number: 501.32-00, 501.33-00

Employer ID number:

Contact person/ID number:
Contact telephone number:
Form you must file:

Tax years:

Dear

This letter is our final determination that you don’t qualify for tax-exempt status under Internal Revenue Code
(IRC) Section 501(c)(3). 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 IRC Section 501(c)(3), donors can’t deduct
contributions to you under IRC Section 170. 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 IRC Section 6110) 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 IRC Section 6104(c)). 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
P.O. Box 2508
Cincinnati, OH 45201

Date:

November 21, 2019
Employer ID number:

Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend:                                     UIL:

M = State                                   501.32-00
B = Date                                    501.33-00
C = Name

X = Name

Y = Name

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 IRC Section 501(c)(3)? No, for the reasons stated below,

Facts

You incorporated in the state of M on B. Your Articles of Incorporation and bylaws state that you were formed
to raise funds to provide scholarships and financial aid to members of the C family. Your bylaws list your
specific objectives and purposes as to:

• provide college scholarships to high school seniors planning to attend an accredited college or
university, or a technical or vocational program;

• provide assistance to family members facing financial hardships; and

• sponsor, host, or participate in events and activities that promote the provision of college scholarships
and financial aid.

Your governing body is comprised of members of the C family, and you stated that you were established to
provide a means to support members of the C family. Your primary focus is to provide small scholarships to
high school seniors.

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

2

You will give scholarships to members of the C family as well as other individuals who share the C family’s
value of sustaining family ties. To that end, you will make awards available to any student whose family holds
annual family reunions.

Scholarships are intended to help pay for room and board, books, and school supplies for individuals who have
been accepted to an accredited college or university or who plan to enroll in a technical or vocational program.
You anticipate that the majority of scholarships will be awarded to individuals who are members of the C

family.

You will also provide financial assistance to individuals who are unable to meet their financial obligations,
especially following the loss of a close family member. Funds will also be made available to individuals to
attend their family reunion. While you will not limit distributions to members of the C family, you will give
priority to individuals with a connection to the C family. You anticipate that the majority of distributions will be
made to individuals who are members of the C family.

You will promote your programs through X’s and Y’s social media networks as well as your website.

You will be supported by funds from members of the C family but will also accept donations. Substantially all
your expenses are related to scholarships and distributions to individuals facing financial hardships.

Law

Treasury Regulation Section 1.501(c)(3)-1(a)(1) states that, in order to be exempt as an organization described
in IRC Section 501(c)(3), 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(c)(1) of the regulations provides that an organization will be regarded as
operated exclusively for one or more exempt purposes only if it engages primarily in activities that accomplish
one or more of such exempt purposes specified in IRC Section 501(c)(3). 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(c)(2) provides an organization is not operated exclusively for one or more
exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals.

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,

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 did
not qualify for exemption under IRC Section 501(c)(3) because it was serving the private interests of its
subscribers rather than public or charitable interests.

Revenue Ruling 69-175, 1969-1 C.B. 149, describes an organization formed by the parents of pupils attending a
private school exempt under IRC Section 501(c)(3). The organization provides bus transportation to and from
the school for those children whose parents belong to the organization. The ruling states that when a group of

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

3

individuals associate to provide a cooperative service for themselves, they are serving a private interest. By
providing bus transportation for school children to school, the organization enables the participating parents to
fulfill their individual responsibility of transporting their children to school.

Revenue Ruling 80-302, 1980-2 CB 182, describes an organization that (1) limits its membership to
descendants of a particular family, (2) compiles family genealogical research data for use by its members for
reasons other than to conform to the religious precepts of the family's denomination, (3) presents the data to
designated libraries, (4) publishes volumes of family history, and (5) promotes social activities among family
members. The organization did not qualify for exemption under IRC Section 501(c)(3) because the activities are
primarily limited to one particular family. Therefore, these activities do not advance education to benefit the
public interest.

In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945), the court held that
the presence of a single non-exempt purpose, if substantial in nature, will preclude exemption regardless of the
number or importance of statutorily exempt purposes.

In Charleston Chair Co. v. United States, 203 F Supp. 126 (1962), the court held that a scholarship fund
established to give scholarships to relatives of the organizer or donor is not exempt, even if the students are

poor.

In Benjamin Price Genealogical Association v. Commissioner, 44 A.F.T.R.2d (1979), the court held that an
organization formed to disseminate information on, and to preserve documents relating to, the genealogy of
Benjamin Price did not qualify for exemption under IRC Section 501(c)(3) because it was created and operated
primarily for the benefit of the private interests of its members rather than exclusively for educational purposes.

In Wendy Parker Rehabilitation Foundation, Inc. v. Commissioner, T.C. Memo 1986-348, the organization was
created by the Parker family to aid an open-ended class of "victims of coma." However, the organization stated
that it anticipated spending 30 percent of its income for the benefit of Wendy Parker, significant contributions
were made to the organization by the Parker family, and the Parker family controlled the organization. Wendy's
selection as a substantial recipient of funds substantially benefited the Parker family by assisting with the
economic burden of caring for her. The benefit did not flow primarily to the general public as required under
Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii). Therefore, the organization did not qualify for exemption under IRC
Section 501(c)(3).

Application of law

Treas. Reg. Section 1.501(c)(3)-1(a)(1) provides that an organization described in IRC Section 501(c)(3) must
be operated exclusively for one or more of the purposes specified in such section. Treas. Reg. Section
1.501(c)(3)-1(c)(1). Because more than an insubstantial part of your activities involves awarding scholarships
and financial aid to members of the C family, you do not engage primarily in activities that accomplish one or
more of such exempt purposes.

Treas. Reg. Section 1.501(c)(3)-1(c)(2) provides that an organization is not operated exclusively for one or
more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or
individuals. Your net earnings inure in part or in whole to the benefit of members of the C family. You do not,
therefore, meet the operational test under IRC Section 501(c)(3).

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

4

Likewise, you do not meet the requirement of Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) because you operate
for private interests rather than public interests by awarding scholarships and financial aid to members of the C
family.

You are like the organizations described in Revenue Rulings 67-367, 69-175, and 80-302 and Benjamin Price
Genealogical Association because you serve the private interests of the C family rather than the public interest.

Although you conduct some activities that benefit the public, you have specifically been raising funds since
inception for the non-exempt purpose of awarding scholarships and financial aid to members of the C family.
According to the court in Better Business Bureau of Washington, D.C., Inc., such a single non-exempt purpose,
if substantial in nature, will preclude exemption regardless of the number or importance of exempt purposes the
organization serves.

You closely resemble the organizations described in Charleston Chair Co. and Wendy Parker Rehabilitation
Foundation, Inc. because you were formed to relieve the C family’s economic burdens.

Conclusion

Based on the information submitted, you fail the operational test under IRC Section 501(c)(3) because your
funds inure to the benefit of the C family. Additionally, your activity of awarding scholarships and distributing
funds to the C family constitutes a substantial non-exempt purpose. Therefore, you 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

• 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

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

5

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