IRS denies 501(c)(3) exemption to a members-only mutual-aid association paying benefits for life events

Plain-English summary

This is a final IRS letter denying tax-exempt charity status under Section 501(c)(3) to a members-only mutual-aid association. The group's members each pay a monthly fee, and the group uses that money to make payments to members for life events: deaths, funerals, marriages, and birthdays (including organizing members' birthday parties). Any member, including board members, is eligible. The IRS found the group failed the operational test. Paying benefits to its own dues-paying members serves the private interests of those members rather than a public charitable purpose, and that private benefit is more than insubstantial. Citing revenue rulings and Better Business Bureau v. United States, the IRS explained that a single substantial non-exempt purpose defeats exemption, and that providing payments to pre-selected members is a private, not charitable, activity. Because the group did not protest the earlier proposed denial within 30 days, that denial became final; contributions are not deductible under Section 170, and the group may have to file federal income tax returns.

Ruling snapshot

• Question: Does a members-only association that pays its dues-paying members for deaths, marriages, and birthdays qualify for exemption under Section 501(c)(3)?
• Outcome: denied (fails the operational test; benefits to members serve a substantial private interest)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(c), (d)(1)(ii); Better Business Bureau v. United States, 326 U.S. 279 (1945); Rev. Ruls. 67-367, 69-175

Full text (IRS public release)

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Department of the Treasury                      Date:
Internal Revenue Service                        10/31/2024
Tax Exempt and Government Entities              Employer ID number:

IRS                                             Form you must file:
PO Box 2508                                     1120
Cincinnati, OH 45201                            Tax years:
                                                All

                                                Person to contact:

Release Number: 202504021
Release Date: 1/24/2025
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.

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 476328

---

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

Date: 09/03/2024

Employer ID number:

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

Legend:                     UIL:
B = Date                    501.03-00
C = State                   501.33-00
D = Ethnic group
E = Country
F = Continent
g dollars = 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 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
* 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

Your mission is to help your D members in need in C and other people in need throughout the E and F.

During review of your Form 1023-EZ, detailed information was requested supplemental to the above attestations. You help your association members in need if there is a death, marriage, or birthday. Each association member pays a monthly fee of g dollars, and your only expense will be with the disbursement of funds to meet the needs of your members. You disburse funds to members for birthdays, marriages, deaths, or funerals, and for organizing members' birthday parties. Any member is eligible to receive these distributions, including board members. No funds have been distributed for disaster relief since your formation.

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 program 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 charitable interests.

Rev. Rul. 69-175, 1969-1 C.B. 149, describes an organization 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 do not meet the operational test outlined in Treas. Reg. Section 1.501(c)(3)-1(a)(1). Your activity of disbursing funds for members when there is a death, marriage or birthday provides direct benefits to your 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 Rev. Rul. 67-367 whose activities primarily serve its members rather than the public in general. You are providing payments to your members for marriages, birthdays, funerals, and deaths. The payment of these types of benefits to pre-selected, specifically named individuals serves a private rather than a public interest. There is no charitable intent to these payments. 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.

Like the organization in Rev. Rul. 69-175, that a group of parents provided a cooperative service for themselves and served their own private interests, you were formed to provide benefits to your members. In your case, you are primarily providing payments to your members for marriages, birthdays, funerals or deaths. These payments serve a private rather than a public 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 non-exempt purpose of providing payments to your members for marriages, birthdays, funerals, or deaths which prevents you from qualifying for exemption under IRC Section 501(c)(3).

Conclusion

Based on the facts and analysis, you do not qualify for exemption from federal income tax as an organization described in IRC Section 501(c)(3) because you are not operated exclusively for exempt purposes. You are operated for the substantial non-exempt purpose of providing funds to your members for deaths, funerals, marriages, birthdays, furthering their private interests. Thus, you fail the operational test 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