Fraternal insurer was denied charitable exemption

Plain-English summary

A local chapter of a fraternal benefit society applied for recognition as a charity under Section 501(c)(3). It was organized as a mutual-benefit corporation to provide fraternal life insurance, meet with members, and conduct some charity walks, church events, and local support activities. The IRS found that its articles did not limit its purposes and assets to exempt uses, so it failed the organizational test. The life-insurance activity also served members' private interests and was not exclusively charitable, causing failure of the operational test. The IRS therefore denied Section 501(c)(3) exemption.

Ruling snapshot

• Question: Did the fraternal mutual-benefit organization qualify as a Section 501(c)(3) charity?
• Outcome: denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a), (b), (c), and (d)

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service 12/19/2023
Tax Exempt and Government Entities Employer ID number:
IRS PO Box 2508
Cincinnati, OH 45201

Tax years:
All
Person to contact:
Release Number: 202411013
Release Date: 3/15/2024
UIL Code: 501.03-00,
501.03-30

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 476325

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
IRS PO Box 2508
Cincinnati, OH 45201
Date: October 10, 2023

Employer ID number:

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

Legend: UIL:
B = date 501.03-00
C = state 501.03-30

D = nationality

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 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
* Ensure that your net earnings do not inure in whole or in part to the benefit of private shareholders or

individuals

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

2

* 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 state you are a local chapter of a fraternal benefit society.

Detailed information was subsequently requested. You are organized as a mutual benefit corporation with the

purpose to have fraternal life insurance. You meet few times during the year to share fraternal news and check

on the wellbeing of your members. You and members conduct events, such as charity walks, church events, and
activities. You support charities and churches in your local area and related functions.

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, 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(b)(1)(i) provides that an organization will be regarded as organized
exclusively for one or more exempt purposes only if its articles of organization limit the purposes of such
organization to one or more exempt purposes; and do not expressly empower the organization to engage,
otherwise than as an insubstantial part of its activities, in activities which in themselves are not in furtherance of
one or more exempt purposes.

Treas. Reg. Section 1.501(c)(3)-1(b)(4) provides that an organization is not organized exclusively for one or
more exempt purposes unless its assets are dedicated to an exempt purpose. An organization’s assets will be
considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, by reason of a
provision in the organization’s articles or operation of law, be distributed for one or more exempt purposes.

Treas. Reg. Sec. 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.

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

Application of law

You do not qualify for exemption under IRC 501(c)(3) because you are not organized or operated exclusively
for an exempt purpose described in IRC Section 501(c)(3). To be considered exempt, you must be organized
and operated exclusively for a 501(c)(3) purpose as described in Treasury Regulation Section 1.501(c)(3)-

1(a)(1).

You failed the organizational test because your organizing document (Articles of Incorporation) does not limit
your purpose and assets to an exempt purpose as described in Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i) and
Treas. Reg. Section 1.501(c)(3)-1(b)(4).

You fail the operational test because your activities do not accomplish an exempt purpose. Although you
conduct charitable activities, you do not engage in this activity exclusively since you also provide life insurance
to your members. As described in Treas. Reg. Sec. 1.501(c)(3)-1(c)(1), you will not be considered exempt
because you engage in activities that do not serve an exempt purpose.

As stated in your organizing document (Articles of Incorporation), your purpose and activities provide a private
interest by being organized for mutual benefits and conducting the activity of offering life insurance benefits.
You are not operated and organized exclusively for an exempt purpose since you serve private interests rather
than exclusively a public interest as described in Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii).

Conclusion

You will not be considered exempt under IRC 501(c)(3) because you failed the organizational and operational
tests. You fail the organizational test because your organizing document (Articles of Incorporation) does not
limit your activities to an exempt purpose and do not dedicate your assets to an exempt purpose. You fail the
operational test because offering life insurance to members engages in a private interest rather than a public.

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

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 IRS 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

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

5

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