IRS denies exemption to a group-purchasing and wellness trust

Plain-English summary

A trust was formed to receive health-insurance rebates, stabilize group health-plan premiums, fund wellness incentives, administer wellness programs, and procure products and services through group-purchasing agreements for participating organizations. The IRS asked for a detailed description of the trust's activities and a budget, but the trust supplied an incomplete response and a budget showing no revenue or expenses. The IRS found that the organizing document lacked a valid dissolution clause and therefore failed the organizational test. It also concluded that the record did not establish charitable or educational operations because the trust described services for consortium members without enough detail about its activities or use of funds. The IRS denied Section 501(c)(3) status, and the adverse determination became final after no timely protest was filed.

Ruling snapshot

• Question: Did the group-purchasing and wellness trust satisfy the organizational and operational tests for Section 501(c)(3) exemption?
• Outcome: Denied.
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Universal Life Church v. United States; Pius XII Academy v. Commissioner; New Dynamics Foundation v. United States

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
P.O. Box 2508
Cincinnati, OH 45201

Date: May 11, 2021
Employer ID number:
Form you must file:
Tax years:

Number: 202131010
Release Date: 8/6/2021

Person to contact:
Name:
ID number:
Telephone:

UIL: 501.03-00, 501.03-03

Dear [redacted]:

This letter is our final determination that you don’t qualify for exemption from federal income tax
under Internal Revenue Code (IRC) Section 501(a) as an organization described in 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
generally can’t deduct contributions to you under IRC Section 170.

We may notify the appropriate state officials of our determination, as required by IRC Section 6104(c),
by sending them a copy of this final letter along with the proposed determination letter.

You must file the federal income tax forms for the tax years shown above within 30 days from
the date of this letter unless you request an extension of time to file. For further instructions,
forms, and information, visit www.irs.gov.

We’ll make this final adverse determination letter and the proposed adverse determination letter
available for public inspection after deleting certain identifying information, as required by IRC
Section 6110. 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.

If you have questions about this letter, you can call the contact person shown above. If you have
questions about your federal income tax status and responsibilities, call our customer service
number at 800-829-1040 (TTY 800-829-4933 for deaf or hard of hearing) or customer service for
businesses at 800-829-4933.

Letter 4038 (Rev. 1-2021)
Catalog Number 47632S

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Notice 437
Redacted Letter 4034
Redacted Letter 4038

Letter 4038 (Rev. 1-2021)
Catalog Number 47632S

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

Date: March 16, 2021
Employer ID number:
Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:

X = State 501.03-00
Y = Date 501.03-03

Dear [redacted]:

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 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 were formed in X on Y as a trust. Your organizing document states that you were formed for charitable or
educational purposes within the meaning of Section 501(c)(3). Your organizing document states that you were
formed to receive, hold, invest and disburse amounts rebated by health insurance carriers providing group
health plan coverage for employees of your organizations participants for the purposes of stabilizing premium
costs for such group health plan coverage; to fund certain wellness incentives and to administer wellness
programs for the benefit of the employees of yours organizations participants. The specific activities that your
organization conducts are to procure products and services on group purchasing agreements.

You were asked to provide a more detailed description of your organizations activities as well as a budget of
your organizations revenues and expenses. You submitted an incomplete response as you did not provide a
detailed description of your activities and you submitted a budget that showed no revenues and expenses.

Law

IRC Section 501(c)(3) 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.

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

2

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(b)(4) holds that an organization is not organized exclusively for one or more
exempt purposes unless its assets are dedicated to an exempt purpose. An organization’s assets will be
considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, by reason of a
provision in the organization’s articles or operation of law, be distributed for one or more exempt purposes.

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 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)(2) defines the term charitable as including the relief of the poor and
distressed or of the underprivileged, and the promotion of social welfare by organizations designed to lessen
neighborhood tensions, to eliminate prejudice and discrimination, or to combat community deterioration. The
term “charitable” also includes lessening of the burdens of government.

Treas. Reg. Section 1.501(c)(3)-1(d)(3)(i) defines the term educational as the instruction or training of the
individual for the purpose of improving or developing his capabilities or the instruction of the public on subjects
useful to the individual and beneficial to the community.

In Universal Life Church v. United States, 372 F. Supp. 770 (E.D. Cal. 1974), the court concluded that “one
seeking a tax exemption has the burden of establishing his right to a tax-exempt status.”

Pius XII Academy v. Commissioner, T.C. Memo. 1982-97 provides that an organization must establish through
the administrative record that it operates as an exempt organization. Denial of exemption may be based solely
upon failure to provide information describing in adequate detail how the operational test will be met.

In La Verdad v. Commissioner, 82 T.C. 215 (1984), the administrative record did not demonstrate that the
organization would operate exclusively in furtherance of an exempt purpose. Therefore, denial of organization’s
request for tax-exempt status was reasonable.

New Dynamics Foundation v. United States, 70 Fed. Cl. 782 (2006), was an action for declaratory judgment
that the petitioner brought to challenge the denial of his application for exempt status. The court, in finding that
the actual purposes displayed in the administrative record supported the Service’s denial, stated “It is well-
accepted that, in initial qualification cases such as this, gaps in the administrative record are resolved against the
applicant.” The court noted that if the petitioner had evidence that contradicted these findings, it should have
submitted it as part of the administrative process. The court also highlighted the principle that exemptions from
income tax are matters of legislative grace.

Ohio Disability Association v. Commissioner, T.C. Memo. 2009-261 states denial is justified because responses
to requests for additional information failed to supplement the initial application or clarify purposes and

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

3

activities, and generalizations did not provide sufficient detail to determine that the organization would be
operated exclusively for exempt purposes.

Application of law

A ruling on exempt status is based solely on facts and representations in the administrative file. You have not
provided supporting documentation to establish you meet the requirements of IRC Section 501(c)(3). IRC
Section 501(c)(3) sets forth two main tests for qualification for exempt status. As stated in Treas. Reg.
1.501(c)(3)-1(a)(1), an organization must be both organized and operated exclusively for purposes described in
IRC Section 501(c)(3)

Your organizing document does not contain a valid dissolution clause. As a result, you have not satisfied the
organizational test described in Treas. Reg. Section 1.501(c)(3)-1(b)(4).

You do not meet the operational test under IRC Section 501(c)(3) because you are not operating exclusively for
charitable purposes as required under Treas. Reg. Section 1.501(c)(3)-1(c)(1). Your organization was formed to
procure products and services on group purchasing agreements. You do not operate for the relief of the poor and
distressed or of the underprivileged, and the promotion of social welfare by organizations designed to lessen
neighborhood tensions, to eliminate prejudice and discrimination, or to combat community deterioration. As
provided in Treas. Reg. Section 1.501(c)(3)-1(d)(2), you have not established that your operations accomplish
exclusively charitable purposes.

You do not meet the operational test under IRC Section 501(c)(3) because you are not operating exclusively for
educational purposes as required under Treas. Reg. Sections 1.501(c)(3)-1(c)(1). You were formed to provide
services for members of your consortium in the form of group purchase agreements. As provided in Treas. Reg.
Section 1.501(c)(3)-1(d)(3)(i), you have not established that your operations accomplish exclusively educational
purposes.

You have not submitted sufficient information establishing you are operated exclusively for 501(c)(3) purposes.
(See Universal Life Church, Pius XII Academy, La Verdad, New Dynamics Foundation and Ohio Disability
Association). You did not provide a detailed description of your activities or show how your funds are used to
further your exempt purpose. Therefore, there is not sufficient documentation to establish that you are exempt
from taxation as required by IRC Section 501(c)(3) and Revenue Procedure 2017-5. As in Universal, you have
the burden of establishing that you qualify for tax exemption.

In Pius, La Verdad, and New Dynamics, it was established that an organization must establish, through its
administrative record, that it meets the requirements for exemption. Because you failed to provide sufficient
details in your initial application and the additional documentation you provided did not meet the statutory and
regulatory requirements for exemption, you have not established that you meet the requirements for exemption
under IRC Section 501(c)(3). As provided in New Dynamics, any gaps in the administrative record will be
resolved against the applicant. Similarly, in Ohio Disability Association, the court found that even when
additional information was provided, but it contained generalizations and failed to clarify purposes, denial is
justified. You did not provide supplemental information; therefore, we are unable to determine that you qualify
for exemption.

Conclusion

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

4

Based on the information submitted, we conclude that you are not an organization described in Section
501(c)(3) of the Code because your activities don’t clearly show that your organization is operating exclusively
for purposes within Section 501(c)(3) of the Code. 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
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).

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

5

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.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

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