IRS denies 501(c)(3) status to a group formed to pay one board member's child's medical bills

Plain-English summary

An organization applied for recognition as a tax-exempt charity under section 501(c)(3). Its sole stated purpose was to raise and receive funds to pay the medical bills of a single minor child who suffers from a medical condition. That child is the child of the organization's board of directors, and the organization confirmed that no money would ever be spent on anything other than that child's medical bills. The IRS issued a final adverse determination denying exemption. It found the group fails the operational test because raising money for one pre-selected individual serves a substantial private interest (that of the family), not a public interest, and because paying the medical costs of a board member's family member is inurement. The IRS compared the group to the "scholarship" plan for named individuals in Rev. Rul. 67-367 and to Wendy L. Parker Rehabilitation Foundation v. Commissioner, where a foundation that substantially benefited a founder's family coma victim was denied exemption. Because the taxpayer did not protest the earlier proposed adverse determination within 30 days, that determination became final. The document is the final adverse letter (Letter 4038) with the enclosed proposed adverse determination (Letter 4034).

Ruling snapshot

• Question: Does an organization whose sole activity is paying the medical bills of one pre-selected individual (a board member's child) qualify for exemption under section 501(c)(3)?
• Outcome: Denied (final adverse determination)
• Key authorities: IRC § 501(c)(3); Treas. Reg. §§ 1.501(c)(3)-1(a)(1), (c)(1), (d)(1)(ii); Rev. Rul. 67-367; Wendy L. Parker Rehabilitation Foundation, Inc. v. Commissioner

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service 05/15/2023

Tax Exempt and Government Entities Employer ID number:

P.O. Box 2508

Cincinnati, OH 45201 Form you must file:
Tax years:

Number: 202332016
Release Date: 8/11/2023
Person to contact:

UIL: 501.03-00, 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


Internal Revenue Service

Department of the Treasury
Cincinnati, OH 45201

Date: 03/22/2023

Employer ID number:

Person to contact:
Name:

ID number:
Telephone:
Fax:

Legend: UIL:
B = Date of Incorporation 501.03-00
C = State of Incorporation 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 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.

You attest that you were incorporated on B, 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 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 IRC 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
Ensure that your net earnings do not inure in whole or in part to the benefit of private shareholders or
individuals

e Not further non-exempt purposes (such as purposes that benefit private interests) more than
insubstantially

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


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e Not be organized or operated for the primary purpose of conducting a trade or business that is not related
to your exempt purpose(s)

e 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)

e Not provide commercial-type insurance as a substantial part of your activities

During review of your Form 1023-EZ, detailed information was requested supplemental to the above
attestations.

You state your sole purpose is to raise funds for the payment of medical bills for a minor who suffers from a

. You indicate these funds will be collected from other tax-exempt entities who will have fundraising
events specifically for this minor. The minor is the child of your board of directors. At no point will money
be spent outside of paying for the minor's medical bills.

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 of
the purposes specified in such section. If an organization fails to meet either the organizational test or the
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) states that an organization is not organized or operated exclusively for
one or more of the purposes specified in subdivision (i) of this subparagraph unless it serves a public rather than
private interest. Thus to meet the requirement of this subdivision, 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, the creator
or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private
interests.

Revenue Ruling 67-367, 1967-2 C.B. 188, held that an organization whose sole activity is the operation of a
'scholarship' plan to award scholarships to pre-selected, specifically named individuals doesn't qualify for
exemption under IRC Section 501(c)(3).

In Wendy L. Parker Rehabilitation Foundation, Inc., Petitioner v. Commissioner, T.C. Memo. 1986-348, the tax
court upheld the Service's position that a foundation formed to aid coma victims, including a family member of
the founders, wasn't entitled to recognition of exemption. Approximately 30% of the organization's net income

was expected to be distributed to aid the family coma victim. The court found that the family coma victim was a

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

3

substantial beneficiary of the foundation's activities. This activity constituted inurement which is prohibited
under IRC Section 501(c)(3).

Application of law

IRC Section 501(c)(3) and Treas. Reg. 1.501(c)(3)-1(a)(1) sets forth two main tests for qualification for exempt

status. An organization must be both organized and operated exclusively for purposes described in IRC Section

501(c)(3). You have not provided sufficient supporting documentation to establish you meet the requirements of
this section as further explained below.

As you have indicated, your sole activity is to raise and receive funds for the minor child of your board

who suffers from . While you are looking to provide some relief to this family, this
activity serves the substantial private interest of this family and is not serving a public interest. Since more than
an insubstantial part of your activities is not in furtherance of an exempt purpose, you do not meet the
operational requirement for IRC Section 501(c)(3). See Treas. Regs. Section 1.501(c)(3)-1(c)(1) and

1.501(c)(3)-1(d)(1)(ii).

You are also similar to the organization described in Revenue Ruling 67-367. You have pre-selected one
individual that will be receiving all disbursements of the organization to facilitate payment of treatment of this
individual's medical treatment. You confirmed that no other funds received by you will be used for any
other purpose. Therefore, you do not meet the operational test for exemption under IRC Section 501(c)(3).

In Wendy L. Parker Rehabilitation Foundation Inc, even though the foundation was providing services to others
recovering from comas, the court found that the family coma victim was a substantial beneficiary of the
foundation's activities. It also found that the board members related to the family coma victim were 'private
individuals' within the meaning of the regulations and the distribution of funds or services to them from the
organization relieved the family of the economic burden of providing care. The court ultimately ruled this to be
inurement. Your activity is similar to the one outlined in this case as you are providing money to one
beneficiary who is the minor child of your board of directors. As was stated this activity constitutes inurement
which is not acceptable under IRC Section 501(c)(3).

Conclusion

Based on the information you provided, we have determined you do not meet the requirements for tax
exemption under IRC Section 501(c)(3). Your operation to provide a financial benefit to a pre-selected
individual serve the substantial private interests of the board of director's minor child and their family as a
whole. This activity does not serve a public interest and constitutes inurement. Therefore, you do not qualify for
exemption under IRC Section 501(c)(3). Donations to you are not deductible.

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

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


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¢ 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.

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

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


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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