IRS denies 501(c)(3) status to a members-only funeral-benefit mutual-aid group that serves its members' private interests

Plain-English summary

An unincorporated nonprofit association applied for 501(c)(3) charitable status using the streamlined Form 1023-EZ. It operates as a members-only mutual-aid fund: members pay a monthly fee, register their family beneficiaries, and when a member's covered family member dies the group pays a set benefit to help with funeral and mourning expenses. If a member leaves, they get back a share of the fund; if the fund runs low, members chip in out of pocket. The IRS denied exemption. To be charitable, an organization must serve a public rather than a private interest, and this group's payments go automatically to pre-selected, specifically named individuals (its own dues-paying members and their families), with no eligibility screening for charitable need. That is a cooperative service benefiting the members' private interests, not the public, so the group fails the operational test and furthers a substantial non-exempt purpose. The IRS relied on cases and rulings striking down similar arrangements, including a burial-benefit membership association (Korean-American Senior Mutual Association) and a subscription "scholarship" plan paying named individuals (Rev. Rul. 67-367). Because the organization did not protest the earlier proposed denial within 30 days, the determination became final; donations to it are not deductible and it must file income tax returns. The release includes both the final letter (Letter 4038) and the proposed letter (Letter 4034) that lays out the full analysis.

Ruling snapshot

• Question: Does a members-only association that pays death/funeral benefits to its dues-paying members' families qualify for exemption under section 501(c)(3)?
• Outcome: denied (final adverse determination; became final because no protest was filed within 30 days)
• 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. v. United States, 326 U.S. 279 (1945); The Church in Boston v. Commissioner, 71 T.C. 102 (1978); Korean-American Senior Mutual Association, Inc. v. Commissioner, T.C. Memo 2020-129

Full text (IRS public release)

OCR transcription of a scanned two-letter packet (final Letter 4038 followed by the proposed Letter 4034), proofread per house rules. Redactions in the original are shown as blanks or by the LEGEND placeholders (B, C, D, k, m, n, p, q, r, s, t, u). Obvious scanning misreads were corrected; wording is otherwise verbatim.

Department of the Treasury                          Date:
Internal Revenue Service                            07/25/2022
Tax Exempt and Government Entities                  Employer ID number:
PO Box 2508
Cincinnati, OH 45201

                                                    Person to contact:

Number: 202242009
Release Date: 10/21/2022

UIL: 501.00-00, 501.03-00, 501.03-30, 501.33-00

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 Letter 437, Notice of Intention to Disclose - Rulings, and review the two attached letters that show our
proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Letter 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. 11-2021)
Catalog Number 47632S


Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Letter 437
Redacted Letter 4034
Redacted Letter 4038

Letter 4038 (Rev. 11-2021)
Catalog Number 47632S


--------------------------------------------------------------------------------
[Enclosed proposed determination]

Department of the Treasury
Internal Revenue Service
PO Box 2508
Cincinnati, OH 45201

Date: 05/31/2022

Employer ID number:

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

Legend:                          UIL:
B = Date                         501.00-00
C = Date                         501.03-00
D = State                        501.03-30
k = Number                       501.33-00
m dollars = Amount
n percent = Percentage
p dollars = Amount
q dollars = Amount
r dollars = Amount
s dollars = Amount
t dollars = Amount
u = Number

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 submitted Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3)
of the Internal Revenue Code, on date B.

You attest that you were formed on date C, in the state of D. You attest that you have the necessary organizing
document, that your organizing document limits your purposes to one or more exempt purposes within the
meaning of Section 501(c)(3), that your organizing document does not expressly empower you to engage in
activities, other than an insubstantial part, that are not in furtherance of one or more exempt purposes, and that
your organizing document contains the dissolution provision required under Section 501(c)(3).

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


2

You attest that you are organized and operated exclusively to further charitable purposes. You attest that you
have not conducted and will not conduct prohibited activities under IRC Section 501(c)(3). Specifically, you
attest you will:

• Refrain from supporting or opposing candidates in political campaigns in any way
• Ensure that your net earnings do not inure in whole or in part to the benefit of private shareholders or
individuals
• Not further non-exempt purposes (such as purposes that benefit private interests) more than
insubstantially
• Not be organized or operated for the primary purpose of conducting a trade or business that is not related
to your exempt purpose(s)
• Not devote more than an insubstantial part of your activities attempting to influence legislation or, if you
made a Section 501(h) election, not normally make expenditures in excess of expenditure limitations
outlined in Section 501(h)
• Not provide commercial-type insurance as a substantial part of your activities

You stated on the Form 1023-EZ that your mission is to help members during members' or their family's death.

Detailed information was subsequently requested and we specifically requested a copy of your organizing
document that shows proof of adoption. In response, you provided a Certificate issued by D on C for the agent
appointment as an unincorporated nonprofit association. You have also provided an unexecuted rules of
operation document. This document shows your mission is to help a group member financially when a group
member loses a family member and must pay funeral expenses. Your vision is to help a member pay his/her
expenses without having to get in any debt while mourning for a loss of a family member. You currently have u
members. If you stop operation, the account balance will be shared among the members.

According to the rules of operation document, the maximum number of members is k. Members must pay a
monthly fee of m dollars and members who miss payments for three consecutive months will be removed from
the group. A member is required to register beneficiaries among his/her family members. The members' meeting
is held once every three months. If a member wants to leave the group, he/she is required to formally inform the
members and committee. The application will be reviewed and if the reason is convincing, he/she will be
refunded n percent of the amount by dividing the money in the bank by the number of members in the group.

The financial assistance is provided as follows:
• If a family member whom a group member lives with (wife, husband, or child) dies, the member will be
granted p dollars.
• If a member's brother-in-law or sister-in-law dies and the member must go somewhere to mourn with
his/her parents, the member will be granted q dollars. If the member doesn't go out of town to grieve with
parents, the member will be granted r dollars.
• If a family member decides to mourn a loss of his/her family, the group member will be granted t dollars.

When your account balance is less than s dollars, members will pay the grieving member out of pocket. You
refrain from spending money until the bank balance reaches s dollars. You will only cover one member's

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

3

expense at a time. If a family of two different members dies at the same time, the group members must pay out
of pocket for the other member.

If a member dies, his/her attorney can either stay in the group by paying the monthly payments or leave and take
n percent of the amount by dividing the money in the bank by the number of members in the group.

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.

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
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 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)(1)(ii) provides that an organization is not organized and operated
exclusively for charitable purposes unless it serves a public rather than a private interest. To meet this
requirement, it is necessary for an organization to establish that it is not organized or operated for the benefit of
private interests such as designated individuals.

Revenue Ruling 67-367, 1967-2 C.B. 188, describes an organization whose sole activity was the operation of a
subscription "scholarship" plan for making payments to pre-selected, specifically named individuals by
subscribers. 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.

Rev. Rul. 69-175, 1969-1 C.B. 149, describes an organization which was formed by parents of pupils attending a
private school to provide bus transportation to and from the school for those children whose parents belong to the
organization. When a group of individuals associate to provide a cooperative service for themselves, they are
serving a private interest. Accordingly, the organization did not qualify for exemption under IRC Section
501(c)(3).

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

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

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


4

court affirmed the determination that the church failed to establish that its grant program constituted an activity
in furtherance of an exempt purpose under IRC Section 501(c)(3).

In The Korean-American Senior Mutual Association, Inc. v Commissioner, T.C. Memo 2020-129 (2020), the
organization provides burial benefits by collecting membership dues and additional fees when members died and
paying out burial benefits to families of deceased members correlated with the number of years the member had
paid. The Tax Court concluded that the organization does not serve a public benefit and does not operate
exclusively for one or more exempt purposes within the meaning of IRC Section 501(c)(3).

Application of law
You do not meet the requirements for recognition of tax exemption under IRC Section 501(c)(3) because you fail
the operational test as described in Treas. Reg. Section 1.501(c)(3)-1(a)(1).

You conduct an activity that provides monetary distributions to members and their family members that is more
than insubstantial in nature. For this reason, you are not operating exclusively for exempt purposes as described
in Treas. Reg. Section 1.501(c)(3)-1(c)(1).

You are similar to the organizations described in Rev. Rul. 67-367 and The Korean-American Senior Mutual
Association, Inc. Like these organizations, your activities serve to benefit designated individuals, your members,
and their families, rather than benefit the public. You provide financial support during bereavement to help cover
expenses so the member does not have to get into debt. The payment of these types of benefits to pre-selected,
specifically named individuals serves a private interest rather than a public interest. 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.

You are like the organization described in Rev. Rul. 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).

You do not apply eligibility criteria to determine the charitable need of the recipient before payments are made
and you are similar to the organization described in The Church in Boston. Your payments are automatic to pre-
selected, specifically named individuals to help them pay funeral expenses.

Conclusion

Based on the facts presented, 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 and serves the private interests of your members. 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.

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

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 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 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
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.

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


6

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