Member benefit pool denied exemption

Plain-English summary

An organization sought charitable exemption under section 501(c)(3) and stated a purpose of helping poor, hungry, homeless, and underprivileged people. Its primary current activity, however, was collecting application fees and monthly dues from members and distributing the resulting pool to members' families for marriages, anniversaries, retirement, and deaths. Eligibility depended on fully paid dues and active attendance. The IRS concluded that this restricted, fee-supported program substantially benefited private members rather than the public, so stated plans for outreach and public picnics did not satisfy the operational test. The organization did not protest the proposed adverse determination within 30 days, making the denial final and generally preventing donors from deducting contributions.

Ruling snapshot

• Question: Does a dues-funded pool paying personal-event benefits to members' families qualify under section 501(c)(3)?
• Outcome: Denied, because the organization's primary activities served private member interests
• Key authorities: IRC §§ 170, 501(c)(3); Treas. Reg. §§ 1.501(c)(3)-1(c)(1), 1.501(c)(3)-1(d)(1)(ii); Rev. Rul. 67-367; Rev. Rul. 69-175; Rev. Rul. 75-286

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service 05/29/2024
Tax Exempt and Government Entities Employer ID number:

Form you must file:

Tax years:

Release Number: 202434012 Person to contact:
Release Date: 8/23/2024

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

Date: 04/01/2024

Employer ID number:

Person to contact:

Name:
ID number:
Telephone:
Fax:
Legend: UIL:
B = Date of Incorporation 501.32-01
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 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

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

2

• 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

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

You have amended your organizing documents to include language compliant with IRC Section 501(c)(3).
Your purpose is to support the poor, provide food for the hungry, homeless, and underprivileged in your state.

You formed to help your members and the community. Your primary activities include creating and
maintaining a pool of money. Prospective member application fees and monthly member dues are used to form
this pool of money, which is later distributed to family members to cover expenses for marriages, anniversaries,
retirement and in the event a member dies. Your members with fully paid dues and active attendance are
eligible for this benefit. You also state picnics are held and open to the public, with other events planned in the
future.

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) 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, held an organization that pays ‘scholarships' to pre-selected,
specifically named individuals designated by subscribers, the organization is serving private interests rather than
public charitable and educational interests contemplated under IRC Section 501(c)(3) and does not qualify for
exemption.

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

3

Rev. Rul. 69-175, 1969-1 C.B. 149, held that when a group of individuals associate to provide a cooperative
service for themselves, they are serving a private interest. By providing bus transportation for school children,
controlled by parents who pay fees for the service, the organization serves a private rather than a public interest
and is not exempt under IRC Section 501(c)(3).

Rev. Rul. 75-286, 1975-2 C.B. 210, held that an organization enhancing the value of its members’ property
rights, by the restricted nature of its membership and the limited area in which its improvements are made,
indicate that the organization is organized and operated to serve the private interests of its members within the
meaning of Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii). Accordingly, although the organization is primarily
engaged in promoting the general welfare of the community, it is not organized and operated exclusively for
charitable purposes and does not qualify for exemption under IRC Section 501(c)(3).

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...[nonexempt] purpose, if substantial in nature, will destroy the exemption
regardless of the number or importance of truly...[exempt] purposes.”

In Cap. Gymnastics Booster Club, Inc. v. Comm'r, 106 T.C.M. (CCH) 154 (T.C. 2013), Section 501(c)(3)
provides that, in order for an organization to qualify as tax-exempt, “no part of the net earnings of the
organization may inure to the benefit of any private shareholder or individual”. This prohibition looks to
benefits conferred on a “private shareholder or individual”, generally understood to mean an insider of the
organization (such as a member or an officer).

Application of law

Per Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) serving private interests is prohibited. Organizations that limit
membership, require the payment of a fee to receive a benefit and provide substantial benefit to only members
are all common factors that indicate you are serving private interests.

You do not meet the operational test under IRC Section 501(c)(3) because you are not operated exclusively for
charitable purposes as required under Treas. Reg. Section 1.501(c)(3)-1(c)(1). Your primary activities serve the
private interests of your members not the public as a whole. Your activities are like those described in Cap.
Gymnastics Booster Club, Inc., which held that private interests are prohibited. You state you intend to provide
public aid through outreach activities. However, your current activities are only provided to paid members or
your organization. The Supreme Court held in Better Business Bureau of Washington, D.C., Inc., the presence
of a single nonexempt purpose, if substantial, will destroy the exemption. As provided in Treas. Reg. Section
1.501(c)(3)-1(d)(1)(ii) and 1.501(c)(3)-1(d)(2), you have not established that your operations benefit the public
or accomplish exclusively charitable purposes.

Similar to Rev. Rul. 67-367 your organization has restricted membership to those who have paid the required
fee. Benefits are provided only to these members, which serves private interest.

You are similar to the organization in Rev. Rul. 69-175 in that you are formed to fulfill the private interests of
your members. Your organization restricts membership, requires payment of fees in order to receive benefit.
This serves private interest. You are similar to the organization in Rev. Rul. 75-286 in that you do not operate
exclusively for charitable purposes, but rather for the private interest of your members.

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

Conclusion

You are operated and organized for the purpose of private benefit since your current activities strictly benefit
members of your organization. You are not operated exclusively for exempt purposes as described in IRC
Section 501(c)(3). You state your activities are collection of member fees for the purpose of funding a money
pool. Distributions are made for marriages, anniversaries, retirement and in the event a member dies. These
activities all serve private interest and thus do not qualify you for exemption under Section 501(c)(3). Your
donors can not deduct contributions to you.

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:

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

5

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