501(c)(3) denied to a members' group offering discounted insurance and career promotion to its industry members

Plain-English summary

An organization applied for 501(c)(3) charitable status using the short Form 1023-EZ, describing its mission as providing members with health, life, or disability insurance and financial planning. When the IRS asked for more detail, the group explained that its main activity is partnering with an insurance provider so members (all from one specific industry) can buy medical, dental, disability, and life coverage at group rates, plus free financial-planning advice. It also helps members promote their own careers and businesses through electronic press kits, webinars, and travel discounts, and it is funded entirely by member dues. The IRS denied exemption. To qualify under 501(c)(3), an organization must be operated exclusively for exempt purposes and must serve a public rather than a private interest. The IRS found this group flunks the operational test because its activities mainly advance the private business and career interests of its own dues-paying members. It compared the group to a parents' cooperative school-bus association and a cooperative art gallery, both denied exemption for serving members' private interests, and cited the rule that a single substantial non-exempt purpose defeats exemption no matter how many exempt purposes exist. Because no protest was filed within 30 days, the denial became final: the organization must file Form 1120 and contributions to it are not deductible. The lesson: a members-only benefits club is not a charity, even if it uses nonprofit form.

Ruling snapshot

• Question: Does a members' organization that arranges discounted group insurance and career-promotion services for its industry members qualify under IRC § 501(c)(3)?
• Outcome: Denied (application; proposed adverse determination became final for lack of a timely protest)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a)(1), (c)(1), (d)(1)(ii); Rev. Rul. 69-175; Rev. Rul. 71-395; Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279 (1945)

Full text (IRS public release)

(Scanned document; OCR-proofread. Obvious scan misreads were corrected; wording is preserved verbatim. Letter 4034 uses a LEGEND for redacted items: B = Date, C = State. Blanks where identifying details were redacted appear as gaps in the original.)

Department of the Treasury Internal Date:
Revenue Service 02/27/2023
Tax Exempt and Government Entities Employer ID number:

IRS PO Box 2508
Cincinnati, OH 45201

Form you must file:
1120

Tax years:
All

Person to contact:

Release Number: 202321016
Release Date: 5/26/2023
UIL Code: 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 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
Cincinnati, OH 45201
Date:

12/19/22
Employer ID number:

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

Legend: UIL:
B= Date 501.00-00
C = State 501.03-00

501.33-00
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 submitted Form 1023-EZ Streamline Application for Recognition of Exemption Under Section 501(c)(3)
of the Internal Revenue Code. You attested that you are organized and operated exclusively to further charitable
purposes and that you have not conducted and will not conduct prohibited activities under Section 501(c)(3).

Your mission as stated on the Form 1023-EZ is to provide members with “health, life, or disability insurance, or
financial planning.” You were formed as a corporation on B in the state of C.

During review of your Form 1023-EZ, we sent a request for information regarding your activities to supplement
the above information.

Your response explains that your primary purpose is to partner with an insurance provider to assist your
members (all from a specific industry) in gaining access to medical, dental, disability and life insurance at
affordable group rates. Members will also receive free financial planning advice from the provider.

In addition to your primary activity, you will also assist members in career development and promotion. You
will provide electronic press kits, webinars, and travel discounts; all to help your members learn to promote
themselves and manage their individual business. Electronic press kits are housed on your website and include
information about the member that can be shared with potential employers (contact information, publicity
information, promotional photos, video promo, etc.).

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

Membership is open to anyone in your industry. Financial information shows you are supported solely by
membership dues. Expenses will support your website, web events, and marketing.

Law

IRC Section 501(c)(3) provides for the exemption from federal income tax of organizations organized and
operated exclusively for charitable, religious, educational, or other purposes as specified by 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 exempt 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) 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.

Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not operated exclusively for one or
more exempt purposes unless it serves a public rather a private interest. It must not be operated for the benefit
of designated individuals or the persons who created it.

In Revenue Ruling 69-175, 1969-1 C.B. 149, an organization formed by parents of pupils attending a private
school, that provides school bus transportation for its members’ does not qualify for exemption under IRC Section
501(c)(3) because when a group of individuals associate to provide a cooperative service for themselves, they are
serving a private interest.

In Revenue Ruling 71-395, 1971-2 C.B. 228, a cooperative art gallery formed and operated by a group of artists
for the purpose of exhibiting and selling their works did not qualify for exemption under IRC Section 501 (c)(3)
because it was serving the private purposes of its members. . The gallery, in showing and selling only the works
of its own members, is a vehicle for advancing their careers and promoting the sale of their work.

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.

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) because you do not primarily engage in activities that accomplish such
purposes. A substantial part of your activities further members private business interests (procuring discounted
insurance, career and business advice, member press kits, etc.). Conducting a variety of activities that aid your

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

3

members in their individual careers serves their private interest, 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. 69-175 and Rev. Rul. 71-395, the benefits you provide to
your membership serve a private interest. Your organization is a vehicle for advancing the personal careers of
your members. 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.

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)).

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

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