202150020: IRS denies 501(c)(3) status to an ethnic community mutual-aid group that mainly pays benefits to its own members

Plain-English summary

A mutual-aid association organized around an ethnic community applied for recognition as a tax-exempt charity under Internal Revenue Code § 501(c)(3), and the IRS denied it because the group mainly serves its own members. The association's central activity is pooling member money and paying out financial assistance to members and their families during crises: funeral and death expenses, health bills, emergencies, and immigration problems (including posting bail or paying for legal counsel). A member raises a need at a meeting, the membership votes, and a collection funds it. The IRS found this fails the "operational test": to qualify under § 501(c)(3) an organization must operate exclusively for exempt purposes and serve a public rather than a private interest, but here more than an insubstantial part of the group's activity benefits the private interests of its own dues-paying members. The IRS compared the group to the organizations in Rev. Rul. 67-367 (scholarships paid only to pre-selected, named individuals) and Rev. Rul. 69-175 (bus service only for members' children), and applied Better Business Bureau v. United States, which holds that a single substantial non-exempt purpose defeats exemption no matter how many exempt purposes also exist. Because the group did not file a protest within 30 days of the proposed denial, the adverse determination became final. Contributions to the group are not deductible under § 170, and it must file federal income tax returns. The practical point: a members-only benefit or burial-aid society, however worthy to its members, is a private-benefit arrangement, not a public charity.

Ruling snapshot

• Question: Does a members-only mutual-aid association that pays financial benefits to its members and their families qualify for exemption under § 501(c)(3)?
• Outcome: denied (application for recognition of exemption); proposed adverse determination became final for lack of a timely protest; contributions not deductible under § 170
• Key authorities: IRC § 501(c)(3); Treas. Reg. §§ 1.501(c)(3)-1(a)(1), (c)(1), (d)(1)(ii); Rev. Rul. 67-367; Rev. Rul. 69-175; Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945)

Full text (IRS public release)

This document is an OCR transcription of a scanned IRS release. Wording is preserved verbatim; obvious scanning misreads have been corrected, and page furniture and footers are transcribed as scanned. The proposed adverse letter (Letter 4034) uses LEGEND placeholders (X, Y, Z) for redacted identifying details, reproduced as they appear. Unreadable spots are marked [illegible].

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Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
IRS PO Box 2508 Employer ID number:
Cincinnati, OH 45201 Form you must file:
Tax years:
Number: 202150020 Person to contact:
Release Date: 12/17/2021

Date: September 21, 2021

UIL: 501.00-00, 501.03-00, 501.33-00, 501.35-00

Dear

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

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

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number at 800-829-1040 (TTY 800-829-4933 for deaf or hard of hearing) or customer service for
businesses at 800-829-4933.

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

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Department of the Treasury
Internal Revenue Service
IRS PO Box 2508
Cincinnati, OH 45201
Date: June 22, 2021

Employer ID number:
Person to contact:
Name:
ID number:
Telephone:
Fax:

Legend: UIL:
501.00-00
X = Date 501.03-00
Y = City, Country 501.33-00
Z = Nationality 501.35-00

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 were formed as an unincorporated association on X. Your organizing document provides the following
objectives:

1. To protect and promote the interest of the Y communities in the United States

2. To create an atmosphere that shall enable the membership to engage in meaningful discussion on
   issues relating to the welfare of the Y community in the United States.

3. To create an environment in which the membership shall seek to improve the economic and
   educational opportunities for the members' ethnic group.

4. To seek educational opportunities for the development of human resources.

5. To form collaborative alliance with other Z organizations operating within the United States, to
   encourage dialogue, and activities indicative of peace, unity, and reconciliation among members of
   the Z communities.

Per your Form 1023 application, you are a community organizer who will protect and promote the interests of
the Y communities in the United States. You will provide aid for your members and those less fortunate living
in Y. You will provide membership benefits in the areas of immigration issues, involuntary arrests, death, health
issues and bills, emergencies, etc. Membership is open to persons age 18 or older and living in the United States

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

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who are by birth from Y, have family ties to Y, have lived or grown up in Y, or any member of the public who
wants to support your cause.

During review of your application, we requested more information about member benefits. You stated that you
give members a place to pool money together and that a major portion of your funding is used to provide
financial aid to members during unforeseeable crises. Specifically, you will post bail or pay for legal counsel
(immigration issues) and provide funds to member families (deaths, emergencies, and health issues). Assistance
and amount will be determined by your board of directors. A member will bring up their need at a meeting and
the matter will be put to a vote. A collection is then started to fund the need.

The financial data you provided indicates that revenues consist of membership fees (registration fee, annual fee,
and funeral contribution) and donations. Expenses are for specific activities you are funding (such as funeral
costs, birth celebrations, food, educational proceeds, etc.), occupancy, and professional fees.

Law

IRC Section 501(c)(3) provides for the exemption from federal income tax of organizations 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 in order to qualify under 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 or operational test, it is not exempt.

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 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 a nonprofit 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 from federal income tax under IRC Section 501(c)(3) because it was
serving private rather than public interests.

Rev. Rul. 69-175, 1969-1 C.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 IRC Section 501(c)(3)
because it served a private rather than public interest.

In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945), the Supreme Court
of the United States interpreted the requirement in IRC Section 501(c)(3) that an organization be "operated
exclusively" by indicating that an organization must be devoted to exempt purposes exclusively. This plainly

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

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means that the presence of a single non-exempt purpose, if substantial in nature, will destroy the exemption
regardless of the number and importance of truly exempt purposes.

Application of law
IRC Section 501(c)(3) sets forth two main tests for qualification of exempt status. Per Treas. Reg. Section
1.501(c)(3)-1(a)(1), an organization must be both organized and operated exclusively for purposes described in
Section 501(c)(3).

You do not meet the operational test. You are not operating "exclusively" for exempt purposes as required by
Treas. Reg. Section 1.501(c)(3)-1(c)(1). More than an insubstantial part of your activities includes providing
financial assistance to your membership. This activity serves the private interest of your members, rather than a
public interest as required by Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii).

Similar to the organizations described in Rev. Rul. 67-367 and Rev. Rul. 69-175, the financial benefits you
provide to your membership serve a private interest. Your members pool funds and make payments to pre-
selected, specifically named individuals or their families. Like the organization in Better Business Bureau, this
is a substantial non-exempt purpose that will destroy exemption regardless of the number and importance of any
truly exempt purposes.

Conclusion
Based on the information submitted, you do not qualify for exemption under IRC Section 501(c)(3). You do not
meet the operational test because you are operated for the substantial non-exempt purpose of serving the private
interests of your members.

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.

Letter 4034 (Rev. 01-2021)
Catalog Number 47628K

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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 Determination 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 IRS 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
PO 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. 01-2021)
Catalog Number 47628K