Residents' group denied 501(c)(3) for benefiting a facility's staff

Plain-English summary

A residents' group at a senior living facility applied to be recognized as a tax-exempt charity under Section 501(c)(3) using the streamlined Form 1023-EZ. Its two main activities were paying higher-education scholarships to the facility's staff members and collecting and distributing a staff "Holiday Fund" (voluntary tips) to those employees. It also ran a woodshop, an art studio, and a library for residents and acted as a liaison with facility management. The IRS denied exemption. To qualify, an organization must be operated exclusively for exempt purposes and must serve a public rather than a private interest. Here the scholarships and holiday funds went to a preselected group (the facility's staff) rather than to an open-ended charitable class, so the group was operating for the private benefit of its members and the staff, which is a substantial non-exempt purpose that fails the "operational test." Because exemption was denied, donors cannot deduct contributions under Section 170. The organization did not protest the proposed denial within 30 days, so it became final.

Ruling snapshot

• Question: Does a residents' group that funds scholarships and holiday gifts for a facility's staff qualify for exemption under IRC § 501(c)(3)?
• Outcome: denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a)(1), (c)(1), (d)(1)(ii); Rev. Ruls. 67-367, 69-175, 75-286; Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945); Cap. Gymnastics Booster Club, Inc. v. Comm'r, 106 T.C.M. (CCH) 154 (T.C. 2013)

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service

Date: 06/24/2024

Employer ID number:

Person to contact:

Release Number: 202438017
Release Date: 9/20/2024
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 47632B

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:

Letter 437

Redacted Letter 4034
Letter 4038

Letter 4038 (Rev. 11-2021)
Catalog Number 47632B

Department of the Treasury
Internal Revenue Service

Date: 04/25/2024

Employer ID number:

Person to contact:

Name:
ID number:
Telephone:
Fax:

Legend: UIL:
D = Date 501.03-00
E = State 501.33-00
F = Name
G = Number
H = Number
j percent = Percentage
m percent = Percentage
w dollars = Dollar 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, Streamline Application for Recognition of Exemption Under Section 501(c)(3)
of the Internal Revenue Code.

You attest that you were incorporated on D in the state of E. 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:

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

° 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

You described your mission in Form 1023-EZ as to provide scholarship assistance to members of the staff,
distribute staff Holiday Fund, act as a liaison between residents and the administration, and support residents'
activities and services.

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

You provide higher education scholarship assistance to F's staff members to encourage those who are furthering
their education by reimbursing them for tuition and other costs. This occurs twice a year upon successful
completion of coursework. To qualify for a scholarship, the staff member must have been in good standing for
at least G months, and work full time, part time or on call. Applicant must be in an institute of higher learning
or a professional certification program. Funds are awarded after successful completion of a program or course.
A staff member can apply for a grant no more than twice a year. You spend m percent of your time and
resources on this activity and the board approves a total of w dollars per course. Checks are paid directly to
applicants.

You maintain and distribute F's Holiday Fund in appreciation of the services their staff provided to your
members. These funds are contributed voluntarily by your members throughout the year. You create a database
of employees based on status and length of service. An algorithm is used to determine what portion of these
funds is given to a particular staff member. These distributions occur during the holiday season. You spend m
percent of your time and resources on this activity. Checks are paid directly to employees.

You support your members' activities by providing a weekly woodwork shop with classes on techniques, safe
practices, and the use of tools. Your art studio is open daily, and an instructor is available to assist beginners.
You maintain a library for your members on an ongoing basis. You spend j percent of your time and resources
on this activity. You also act as a liaison between your members and F's administration. The remaining j
percent of your time and resources is spent on meetings to discuss your members' issues and needs. No fees are
charged and all activities are conducted at F. There are around H residents at F, including both independent and
assisted living residents.

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.

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

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 that 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.

Rev. Rul. 69-175, 1969-1 C.B. 149, describes a nonprofit organization formed by parents of pupils attending a
private school, that provided school bus transportation for its members' children. It was held this organization
served a private rather than a public interest and did not qualify for exemption under IRC Section 501(c)(3).

Rev. Rul. 75-286, 1975-2 C.B. 210, held that an organization whose membership is limited to the residents and
business operators within a city block, and formed to preserve and beautify the public areas in the block, 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). Although the activities benefited the community, they also provided private benefit by
enhancing members' property rights. The organization therefore did 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), IRC 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
IRC Section 501(c)(3) and Treas. Reg. Section 1.501(c)(3)-1(a)(1) set forth two main tests for an organization
to be recognized as exempt. An organization must be both organized and operated exclusively for purposes

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

described in IRC Section 501(c)(3). Based on the information you provided in your application and supporting
documentation, we conclude you do not meet the operational test.

You do not meet the requirements of Treas. Reg. Section 1.501(c)(3)-1(c)(1) because more than an insubstantial
part of your activities do not further an exempt purpose. Your activities benefit the staff members of F. By
providing scholarship assistance and distributing holiday funds to F's staff members you are operating for their
private interests.

You do not meet the requirements of Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii) because you serve a private,
rather than a public interest. Specifically, you serve the private interests of your members and the staff members
of F by providing scholarship assistance and distributing holiday funds to staff members of F.

You are like the organizations described in Rev. Rul. 67-367 and Rev. Rul. 69-175. You were formed to
provide scholarship assistance and to distribute holiday funds to staff members of F. By paying scholarships and
holiday funds to specifically named individuals, you are serving private rather than public charitable interests.
This precludes you from qualifying for exemption under IRC Section 501(c)(3).

Similar to the organization in Revenue Ruling 75-286, although you provide services to your members who are
elderly residents of F, the majority of your activities are for the benefit of the staff members of F which
therefore confer a substantial private benefit upon your members. As provided by the Supreme Court in Better
Business Bureau of Washington, D.C., Inc, the presence of a single nonexempt purpose, if substantial, will
destroy the exemption. You are operating for the private benefit of your members that constitutes a substantial
non-exempt purpose, which precludes exemption under IRC Section 501(c)(3).

Your activities are like those described in Cap. Gymnastics Booster Club Inc. Inc., which held that private
interests are prohibited. You are raising funds to provide bonuses and scholarships to the staff members of F
which is a preselected group of individuals as opposed to an indefinite class of individuals. This shows you are
operating for the private benefit of the staff members of F and your members.

Conclusion

Based on the above facts and analysis, you are not operated exclusively for exempt purposes as described in
IRC Section 501(c)(3). You are organized and operated for the private interests of your members and the staff
of F. Your major activity is providing scholarships and other monetary gifts to staff members of F. You are
primarily operated for the private benefit of your members, which constitutes a substantial non-exempt purpose.
Accordingly, you do not qualify for exemption under IRC 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

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

• 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