IRS denies § 501(c)(4) status to a group running an IRC 105-plan loan and "Social Security solvency" scheme

Plain-English summary

An organization applied to be recognized as a tax-exempt social welfare organization
under Section 501(c)(4), and the IRS said no. The group had a two-part plan. First, it
would lend money to employees whose take-home pay was reduced by participating in
their employer's IRC Section 105 medical-expense plan; the employee would never have
to repay in life, because the group would take out a 30-year term life insurance policy
on the employee and collect the loan back from the death benefit. Second (most of its
projected money), it would take employers' unused Section 105 plan funds and route
them to the Social Security Administration, credited to each employer's own employees'
Social Security accounts, pitched as improving Social Security and Medicare solvency.
The IRS concluded the group is not operated primarily for the common good of the
community; instead it confers direct, non-incidental economic benefits on the specific
employers and employees who participate, functioning as a private-benefit and
tax-avoidance arrangement. Citing revenue rulings and case law on member/private-benefit
organizations, the IRS issued a final adverse determination: the organization does not
qualify under Section 501(c)(4) and must file Form 1120 corporate income tax returns.

Ruling snapshot

• Question: Does the organization qualify for exemption under IRC § 501(c)(4) as a social welfare organization?
• Outcome: Denied (final adverse determination)
• Key authorities: IRC § 501(c)(4); Treas. Reg. § 1.501(c)(4)-1(a); Rev. Ruls. 54-394, 73-349, 75-199, 81-58; Police Benevolent Association of Richmond v. U.S.

Full text (IRS public release)

Transcription note: This determination is a scanned document (final adverse
determination Letter 1371, with the proposed adverse determination Letter 4034
attached). Per the runbook's OCR proofreading duty, obvious scanning misreads
have been corrected to the letter's standard wording; genuinely unreadable spots
are marked [illegible]; blanks where the IRS redacted identifying details are left
as gaps. Wording is otherwise reproduced verbatim.

Department of the Treasury
Internal Revenue Service                                             JAN 1 1 2022
IRS Independent Office of Appeals

                                                     Person to contact:
                                                       Name:
                                                       Employee ID number:
                                                       Telephone:
Number: 202214013                                      Fax:
Release Date: 4/8/2022                                 Hours:

                                                     Employer ID number:

                                                     Uniform issue list (UIL):
                                                       501.04-00

Certified Mail

Dear                    :

This is a final adverse determination that you do not qualify for exemption from federal income tax under
Internal Revenue Code (the "Code") Section 501(a) as an organization described in Section 501(c)(4)
of the Code.

We made the adverse determination for the following reasons:

You are not operated for the promotion of social welfare within the meaning of section 501(c)(4) and are
operated as a tax avoidance scheme for the private benefit of the employees and employers who participate in
your program.

You're required to file federal income tax returns on Forms 1120. Mail your form to the appropriate Internal
Revenue Service Center per the form's instructions. You can get forms and instructions by visiting our website
at www.irs.gov/forms or by calling 800-TAX-FORM (800-829-3676).

We'll make this letter and the proposed adverse determination letter available for public inspection under
Section 6110 of the Code after deleting certain identifying information. We provided to you, in a separate
mailing, Notice 437, Notice of Intention to Disclose. Please review the Notice 437 and the documents attached
that show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in
Notice 437.

If you decide to contest this determination, you can file an action for declaratory judgment under the provisions
of Section 7428 of the Code in either:

* The United States Tax Court,
* The United States Court of Federal Claims, or
* The United States District Court for the District of Columbia

Letter 1371 (Rev. 10-2021)
Catalog Number 40683R


You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this
determination letter to you. Contact the clerk of the appropriate court for rules and the appropriate forms for
filing petitions for declaratory judgment. You can write to the courts at the following addresses:
United States Tax Court            US Court of Federal Claims       US District Court for the District of Columbia
400 Second Street, NW              717 Madison Place, NW            333 Constitution Avenue, NW
Washington, DC 20217               Washington, DC 20005             Washington, DC 20001

Note: We will not delay processing income tax returns and assessing any taxes due even if you file a petition for
declaratory judgment under Section 7428 of the Code.

You also have the right to contact the Taxpayer Advocate Service (TAS). 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 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.

TAS assistance is not a substitute for established IRS procedures, such as the formal appeals process. TAS
cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a
petition in a United States Court.

If you have questions, contact the person at the top of this letter.

Sincerely,



Enclosures:

Letter 1371 (Rev. 10-2021)
Catalog Number 40683R


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

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

                                                     Legend:              UIL:
                                                     M = State            501.04-00
                                                     B = Date
                                                     x 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)(4).
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)(4)? No, for the reasons stated below.

Facts

You incorporated in the state of M on B. Your Certificate of Incorporation and bylaws state that your purpose is
to provide benevolent support services to individuals financially burdened by participating in their employer's
IRC Section 105 plan, allowing opportunity to support the continuation of Social Security and Medicare
programs and benefits.

You were formed to accomplish a dual-purpose mission. First, you provide benevolent support to employees of
employers that offer IRC Section 105 employee benefit plans, which are use-it-or-lose-it plans for employees to
set monies aside to cover medical expenses, that choose to participate in your program. In a Section 105 plan,
the employee's take-home pay is reduced by the amount they contribute. Due to the need to devote funds for
their medical needs, the employee's other life needs may become more challenging to meet. You assist
employees experiencing financial distress as a result of their participation in the plan.

You will have an application process and will evaluate each applicant based on need. For qualified applicants,
you will provide a loan to fill the financial gap created by the employee's participation in the employer's IRC
Section 105 plan. Borrowing employees will not be required to repay the loan in their lifetime. Instead, you will
purchase a 30-year term life insurance policy covering that individual for an amount comparable to the loan
principle, and you, as the beneficiary, will be paid back upon the death of the participating employee via the life
insurance policy proceeds. The loan proceeds to the employee will be net of a single, up-front premium

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

2

payment of x dollars covering a portion of the term life policy. You will pay the annual premium of the term life
insurance policy.

It is possible that the same employee could be eligible, due to ongoing need, to participate in the loan program
for multiple years. In such cases, multiple loans could be made, and multiple life insurance policies could be
taken out for one person. You state that these services will allow beneficiaries not to have to choose between
paying for their health care needs and their daily living expenses.

The second purpose of your mission, which involves most of your projected revenues and expenses, is to
support the future solvency of Social Security and Medicare. At the end of the IRC Section 105 plan year, the
employer is responsible for using the unused set-aside funds to benefit all employees. Employers participating
in your lending program will donate their excess funds to you. You will then contribute the funds to the Social
Security Administration, to the credit of the employer, using the employer's Employer Identification Number.
Funds will be evenly divided among the employer's employees' Social Security accounts for the timeframe the
funding was allocated to the plan. You state that the goal is to encourage employers across the country who
have Section 105 plans to participate in this program, or others like it, to provide a supplemental stream of
revenue to ensure the ongoing solvency of the Social Security system.

Beyond donations from unused funds in IRC Section 105 plans, you expect to receive revenues related to
investment returns, interest income, fees paid by loan recipients, and life insurance payouts.

Law

IRC Section 501(c)(4) provides for the exemption from federal income tax of organizations not organized for
profit but operated exclusively for the promotion of social welfare.

Treasury Regulation Section 1.501(c)(4)-1(a)(1) states that an organization may be exempt under IRC Section
501(c)(4) if it is not organized or operated for profit and it is operated exclusively for the promotion of social
welfare.

Treas. Reg. Section 1.501(c)(4)-1(a)(2)(i) provides that an organization is operated exclusively for the promotion
of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of
the people of the community. An organization embraced within IRC Section 501(c)(4) is one that is operated
primarily for the purpose of bringing about civic betterments and social improvements.

Revenue Ruling 54-394, 1954-2 C.B. 131, stated that a nonprofit organization that provided antenna services
only to its members to enable them to receive television reception was not exempt as a social welfare
organization because the benefits were only available to members and not the community in general.

Revenue Ruling 73-349, 1973-2 C.B. 179, noted that an organization formed to purchase low-cost groceries for
its members was not exempt as a social welfare organization even though membership was open to all
individuals in the community. The members paid for the cost of the food and a monthly service charge to cover
operating costs. It operated primarily for the private benefit of its members; any benefits to the community were
not sufficient to meet the requirement that it operate primarily for the common good and general welfare of the
people of the community.

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

3

Revenue Ruling 75-199, 1975-1 C.B. 160, describes a nonprofit organization that restricts its membership to
individuals of good moral character and health belonging to a particular ethnic group residing in a stated
geographical area and provides sick benefits to members and death benefits to their beneficiaries. The
organization's income is derived principally from membership dues. Since the benefit from the organization was
for its members and there was only minor and incidental benefit to the community as a whole, the organization
did not qualify for exemption IRC Section 501(c)(4).

Revenue Ruling 81-58, 1981-1 C.B. 331, held that a nonprofit police officer association whose primary activity
is to provide a lump-sum payment to each member upon retirement or a lump sum payment to beneficiaries
upon the member's death did not qualify for exemption under IRC Section 501(c)(4). The association was
deemed to be essentially a mutual, self-interest type of organization that provides primary benefits to its
members.

In Police Benevolent Association of Richmond v. U.S., 661 F. Supp. 765 (1987), the court held that the
organization did not qualify under IRC Section 501(c)(4) because a substantial purpose of the association and
its activities were intended to serve the pecuniary interests of its members.

Application of law

To qualify for exemption under IRC Section 501(c)(4), an organization must primarily engage in activities that
benefit the community as a whole rather than select individuals or groups. You are not operated exclusively for
the promotion of social welfare within the meaning of Treas. Reg. Section 1.501(c)(4)-1(a)(1) because you are
primarily engaged in activities that confer direct economic benefits to select individuals and groups. You
contribute, on behalf of employers who participate in your program, funds to the Social Security Administration
to be evenly divided among the specific employer's employees' Social Security accounts.

An activity that confers non-incidental benefit on select individuals or groups does not promote the common
good and general welfare of the people of the community within the meaning of Treas. Reg. Section
1.501(c)(4)-1(a)(2)(i). Your activity of contributing, on behalf of employers who participate in your program,
funds to the Social Security Administration to be evenly divided among the specific employer's employees'
Social Security accounts confers non-incidental benefit to the employers and employees.

Like the organizations described in Revenue Rulings 54-394, 73-349, 75-199, and 81-58, your activities
primarily serve the private interests of participants in your Social Security solvency program rather than the
common good and general welfare of the community as a whole.

You are similar to the organization described in Police Benevolent Association of Richmond in that most of
your revenues and expenses are dedicated to serving the pecuniary interests of participants in your Social
Security solvency program.

Conclusion

You do not qualify for exemption under IRC Section 501(c)(4) because you are not operated exclusively for the
promotion of social welfare. Your activities primarily benefit select employers and their employees rather than
promoting in some way the common good and general welfare of the people of the community.

If you agree
If you agree with our proposed adverse determination, you don't need to do anything. If we don't hear from

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

4

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)).

Where to send your protest
Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address:

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

5

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