Member funeral benefit plan denied charitable exemption

Plain-English summary

A mutual assistance membership organization collected fees and death-triggered contributions from members and paid funeral benefits when a member or family member died. Eligibility opened after one month of membership, benefit levels were set by the administrative rules, and payments went directly to the funeral home or morgue. The organization did not evaluate a recipient's charitable need before making the automatic benefit payment. The IRS concluded that the arrangement provided a cooperative service to a preselected group and primarily served members' private interests rather than a public charitable interest. It therefore denied exemption under section 501(c)(3).

Ruling snapshot

• Question: Did the member-funded funeral benefit arrangement operate primarily for charitable public purposes?
• Outcome: denied (automatic benefits to members and their families served private interests without a needs-based selection process)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Ruls. 67-367 and 69-175; Better Business Bureau v. United States, 326 U.S. 279 (1945); The Church in Boston v. Commissioner, 71 T.C. 102 (1978)

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201

Number: 202017030
Release Date: 4/24/2020 Employer ID number:

Date: January 30, 2020

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
Cincinnati, OH 45201
Date:

December 11, 2019
Employer ID number:

Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:

M = State 501.03-30
B = Date 501.32-01
C = National identity 501.33-00
D = City

v dollars = Amount
w dollars = Amount
x dollars = Amount
y dollars = Amount
z dollars = Amount

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 bylaws describe you as a mutual assistance membership

organization whose objectives include collecting contributions and membership fees from members and
disbursing funds to members or their families to carry out burial services and related ceremonies when there is a

death of a member or a member’s family member.

Membership in your organization is open to any C as well as persons of C heritage or their spouses over the age
of 18 who reside in the metropolitan area of D. You stated that your mission is to help C families with expenses

incurred due to a death in the family.

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

2

Your website includes a membership form and administrative regulations. New members are eligible for death
benefits after one month of membership. The administrative regulations show different levels of benefits that
will be paid to a member or a member’s family in the event of a death.

Members pay a one-time membership fee of v dollars and must contribute between w dollars and x dollars
within -------- days following the death of a member or a member’s family member based on the number of
members of a single family who die at the same time. When a member or member’s family member dies, you
pay a death benefit of between y dollars and z dollars. You will distribute funds directly to the funeral home or

morgue handling the funeral.

You promote your program to the community by word of mouth, the internet, flyers, brochures, and through
relationships with local nonprofit organizations. In addition to member contributions, you will raise funds from

individuals and businesses.

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(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
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.

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.

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

3

In The Church in Boston v. Commissioner, 71 T.C. 102 (1978), an organization made grants to various
individuals, including officers of the church. Although the church contended that the grants were made to assist
the poor who needed food, clothing, shelter, and medical attention, the church failed to provide any documented
criteria demonstrating the selection process of recipients and the reasons for the specific amounts given. The
court affirmed the determination that the church failed to establish that its grant program constituted an activity

in furtherance of an exempt purpose.

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. You do not meet the
operational test because you are not, as Treas. Reg. Section 1.501(c)(3)-1(c)(1) requires, operated exclusively
for one or more exempt purposes. Because more than an insubstantial part of your activities involves providing
death benefits for the benefit of your members and their families, you do not engage primarily in activities that
accomplish one or more of such exempt purposes.

Likewise, you do not meet the requirement of Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) because your
membership is a group of individuals who associated to provide a cooperative service for themselves. This
serves the private interest of your members rather than a public interest.

You are like the organization described in Revenue Ruling 69-175 in that you provide a cooperative service that
enables your members to meet their personal obligations. As a result, the benefits you offer to your members
serve their private interests and not the interests of the public.

Like the organization described in Better Business Bureau of Washington, D.C., Inc., you further a substantial
non-exempt purpose, which precludes your claim for exempt status under IRC Section 501(c)(3).

Like the organization described in The Church in Boston, you do not apply eligibility criteria to determine the
charitable need of the recipient before payments are made. Your payments are distributed like those of the
organization described in Revenue Ruling 67-367 in that after a death occurs, the payments are automatic and
are made on behalf of a pre-selected, specifically named individual or their family to help them pay funeral

expenses.

Conclusion
Based on the information submitted, you fail the operational test under IRC Section 501(c)(3) because your

activity of providing death benefits to pre-selected individuals and their families 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:

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

4
• 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
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.

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

5

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.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

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