IRS denies 501(c)(3) status to a dues-based mutual-aid group that pays members' equipment-repair costs

Plain-English summary

An organization applied for 501(c)(3) charitable status using the short Form 1023-EZ. It describes itself as representing a community of haulers and offering them financial and educational help. In practice, members pay annual dues into a common pool, and the group uses that money to cover members' expenses, mostly equipment repairs, so they can get back on the road and back to work. Only dues-paying members are eligible, and even board members and their relatives can receive payments on the same terms as everyone else. The IRS denied exemption. To qualify under 501(c)(3), an organization must be operated exclusively for public, not private, purposes. This group is a fee-for-service mutual-benefit arrangement: it serves the private interests of its own dues-paying members rather than a charitable class or the general public. The IRS relied on the rule that a single substantial nonexempt purpose defeats exemption, and on rulings and cases denying exemption to member-serving groups. Because it failed the operational test, the organization does not qualify, and donors cannot deduct contributions to it.

Ruling snapshot

• Question: Does a membership organization that collects dues and pays its own members' equipment-repair expenses qualify for exemption under IRC § 501(c)(3)?
• Outcome: Denied (fails the operational test; serves private member interests, not a public/charitable interest)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a)(1), (c)(1), (d)(1)(ii); Rev. Ruls. 67-367 and 69-175; Better Business Bureau v. United States, 326 U.S. 279 (1945); Korean-American Senior Mutual Ass'n v. Commissioner, T.C. Memo. 2020-129

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service 08/10/2022
Tax Exempt and Government Entities Employer ID number:
PO Box 2508
Cincinnati, OH 45201 Form you must file:
Number: 202244021 Tax years:
Release Date: 11/4/2022

Person to contact:

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

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

Date: June 6, 2022

Employer ID number:

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

Legend:
C = State
D = Date
x dollars = Amount
y dollars = Amount

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

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 Internal Revenue Code (IRC) Section 501(c)(3)? No, for the reasons stated
below.

Facts

You submitted Form 1023-EZ, Streamline Application for Recognition of Exemption Under IRC Section
501(c)(3).

You attest that you were incorporated on D, in the state of C. 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 the IRC 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).

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

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

• 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

The Form 1023-EZ states that your mission is to represent the storage building community and give charitable
assistance to haulers, including but not limited to, educational and financial aid.

During review of your Form 1023-EZ, detailed information was subsequently requested.

You are a membership organization in which members pay x dollars per year to join. You use these funds to
pay member's expenses for the purpose of getting them back on the road and back to work. Generally, the funds
can be used only for equipment repairs so they can get back to work.

Eligible recipients are members who pay annual dues. In order to receive funds, the member must present a
plan that explains why the funds are needed and how the funds will be used. You explained that there is no
review for requests up to y dollars since this is viewed as a de minimis amount. If the requested amount exceeds
y dollars, the board must review and approve the request for funds.

You distribute funds by check or electronic means. The recipient, after providing estimates to the board in their
request, is required to provide receipts.

You state board members, their relatives, or members of the committee who select your recipients (or their
relatives) are eligible to receive funds because board members pay the same amount as everyone else for the
benefit. Since they are eligible, the same criteria are used for them as other paying members.

Law

IRC Section 501(c)(3) provides, in part, for the exemption from federal income tax of organizations organized
and operated exclusively for charitable, religious or educational purposes, no part of the net earnings of which
inures 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 exempt purposes. 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) states 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.

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

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.

Rev. Rul. 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
established a plan whereby it entered into agreements with subscribers. The subscribers deposited a certain
amount of money with a designated bank. The subscriber also named a specific child to be the recipient of the
scholarship money. The recipient received the scholarship around the time he or she were to begin college. 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 serve public charitable and educational 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 v. United States, 326 U.S. 279 (1945), the Supreme Court determined that the
presence of a single non-exempt purpose, if substantial in nature, will destroy exemption under IRC Section
501(c)(3) regardless of the number or importance of any other exempt purposes.

In Korean-American Senior Mutual Association v. Commissioner of Internal Revenue, TC Memo 2020-129, a
non-profit corporation that provided burial benefits to its elderly members did not operate exclusively for one or
more IRC Section 501(c)(3) exempt purposes, and thus it was not entitled to federal income tax-exempt status.
The corporation did not operate to serve the recognized charitable class of the elderly, as it did not provide
burial benefits without regard to members' ability to pay funeral expenses or establish that membership fees
were nominal charges. The organization operated in a fee-for-service manner, and it did not serve a public
benefit, as it did not provide burial benefits to nonmembers of the community and did not provide a subsidized
due program.

Application of law

IRC Section 501(c)(3) and Treas. Reg. Section 1.501(c)(3)-1(a)(1) set forth two main tests to qualify for exempt
status. An organization must be both organized and operated exclusively for purposes described in Section
501(c)(3). You fail the operational test.

You are not operated in accordance with Treas. Reg. Section 1.501(c)(3)-1(c)(1) because you are not primarily
engaged in activities that accomplish exempt purposes specified in IRC Section 501(c)(3). You are similar to
the organizations described in Rev. Rul. 67-367 and Rev. Rul. 69-175 because your activities serve the private
interests of your members rather than public interests in contravention to Treas. Reg. Section 1.501(c)(3)-
1(d)(1)(ii). Therefore, you do not qualify for exemption under IRC Section 501(c)(3).

The Supreme Court held in Better Business Bureau that a single nonexempt purpose, if substantial in nature,
precludes an organization from qualifying under IRC Section 501(c)(3), no matter the number or importance of
truly exempt purposes. Despite any other qualifying charitable activities that you may conduct, your activity of
providing benefits to your members is substantial and serves private, non-exempt purposes.

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

Similar to Korean-American Senior Mutual Association v. Commissioner of Internal Revenue, you operate in a
fee-for-service manner. You collect membership fees from the members and pay expenses strictly for the
benefit of your members and/or your board members. You are not servicing a charitable class and not operating
for a public benefit.

Conclusion

Based on the above facts and analysis, you do not qualify for exemption under IRC Section 501(c)(3). You are
not operated exclusively for IRC Section 501(c)(3) purposes because your activities serve a substantial non-
exempt purpose which 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.

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

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

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

U.S. mail:
Internal Revenue Service
EO Determinations Quality Assurance
Mail Stop 6403
PO Box 2508
Cincinnati, OH 45201

Street address for delivery service:
Internal Revenue Service
EO Determinations Quality Assurance
550 Main Street, Mail Stop 6403
Cincinnati, OH 45202

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