Member-benefit organization denied section 501(c)(3) status

Plain-English summary

An organization sought recognition as a charitable organization under section 501(c)(3). Its activities included paying members' work-related legal fees, helping members with funeral costs for immediate family members, providing refreshments during a redacted activity, and holding annual events. Members paid fees based on the organization's yearly expenses. The IRS concluded that these direct member benefits were more than insubstantial and served private interests rather than the public. The substantial purpose of providing financial assistance to members prevented the organization from satisfying the operational test, so the IRS denied exemption. The denial became final after the organization did not protest within 30 days, and contributions generally would not be deductible under section 170.

Ruling snapshot

• Question: Does an organization that provides legal-fee assistance and other direct benefits to members qualify under IRC § 501(c)(3)?
• Outcome: Denied
• Key authorities: IRC §§ 501(a), 501(c)(3), 170, and 7428(b)(2); Treas. Reg. §§ 1.501(c)(3)-1(a)(1), (c)(1), and (d)(1)(ii)

Full text (IRS public release)

Department of the Treasury                                      Date:
Internal Revenue Service                                        08/28/2023
Tax Exempt and Government Entities                              Employer ID number:
IRS PO Box 2508
Cincinnati, OH 45201                                            Person to contact:

Release Number: 202347019
Release Date: 11/24/2023
UIL Code: 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

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

                                                              Date: July 3, 2023

                                                              Employer ID number:

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

Legend:                                                       UIL:
X = formation date                                            501.03-00
Y = state of formation                                        501.33-00
q dollars = payment amount
r dollars = fee 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)(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 X, in the state of Y. 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
• 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

Form 1023-EZ states that your mission or most significant activities is a          which
to work related matters and provides assistance during                         .

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

Your response states that your activities are paying legal fees for attorney representation to all members,
providing a q dollars check to help cover funeral costs of an immediate deceased family member, providing
water and other drinks during the                 , and hosting an annual                 and                 .

You state that members are assessed a r dollars fee which is determined based on yearly expenses.

Law
IRC Section 501(c)(3) provides for the recognition of exemption of organizations that are organized and
operated exclusively for religious, charitable, educational 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, 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) provides that an organization is not organized or operated exclusively
for exempt 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.

Revenue Ruling 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 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. 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 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
You are not described in IRC Section 501(c)(3) because you don't meet the operational test outlined in Treas.
Reg. Section 1.501(c)(3)-1(a)(1).

You conduct activities that provide direct benefits to 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 organization described in Revenue Ruling 67-367. Like that organization, your activities
serve to benefit your members rather than benefit the public. For example, you are providing financial support
to members to cover                 and funeral costs. There is no charitable intent to the payments. 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.

The group of parents in Rev. Rul. 69-175 provided a cooperative service for themselves and thus served their
own private interests. Like that organization, you were formed to provide benefits to your members. In your
case, you are primarily providing financial assistance for                 of members. The payments
serve a private 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.

As explained in Better Business Bureau of Washington, D.C., Inc., a single, substantial non-exempt
purpose is sufficient to prevent exemption. You have a substantial purpose of providing financial assistance to
members for work-related legal fees, which prevents you from qualifying for exemption under IRC Section
501(c)(3).

Conclusion
You do not qualify for tax exemption under IRC Section 501(c)(3) because you are not operated exclusively for
exempt purposes. You further the private interests of your members and are operating for substantial non-
exempt purposes. 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
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