Members-only mutual benefit society denied 501(c)(3) charity status

Plain-English summary

A membership association applied for tax-exempt charity status under IRC § 501(c)(3) using the streamlined Form 1023-EZ. Membership was open to people of a particular national-origin descent who paid monthly dues, and the group's main function was to pay cash benefits to members and their families on deaths, marriages, and naming ceremonies. The IRS denied exemption on two grounds. First, the group failed the organizational test because it never clarified whether it was a corporation or a trust. Second, it failed the operational test because paying member benefits from member dues serves the private interests of the members rather than a public charitable purpose. The IRS relied on Rev. Rul. 67-367, Rev. Rul. 69-175, the Better Business Bureau Supreme Court case, and a Tax Court decision on a member burial-benefit group. Because no protest was filed within 30 days, the proposed denial became final, and the organization was told it must file income tax returns and that donors cannot deduct contributions to it.

Ruling snapshot

• Question: Does a dues-based mutual benefit society that pays cash benefits to members on life events qualify as a charity under IRC § 501(c)(3)?
• Outcome: Denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. §§ 1.501(c)(3)-1(a), (c), (d); Rev. Rul. 67-367; Rev. Rul. 69-175; Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945); The Korean-Am. Senior Mut. Ass'n v. Commissioner, T.C. Memo. 2020-129

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities

PO Box 2508
Cincinnati, OH 45201

Date: 11/07/2024

Employer ID number: [redacted]

Person to contact: [redacted]

Release Number: 202505024
Release Date: 1/31/2025
UIL Code: 501.03-00, 501.33-00

Dear [redacted]

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.us.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 47632S

Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45201

Date: 09/03/2024

Employer ID number: [redacted]

Person to contact:
Name: [redacted]
ID number: [redacted]
Telephone: [redacted]
Fax: [redacted]

Legend:
B = Date
C = State
D = Date
E = Date
F = Country
G = Number
u percent = Percent
w dollars = Amount
x dollars = Amount
y dollars = Amount
z dollars = Amount

UIL: 501.03-00, 501.33-00

Dear [redacted]

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

You state on your Form 1023-EZ application that your mission is to collaborate, promote unity amongst members, provide support in times of marriages, bereavements, outdoor milestones, illnesses, and other issues affecting members and to educate members in today's society.

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

You were incorporated on D, in the state of C. This corporation is still active. You submitted a Declaration of Trust that was formed on E. Multiple phone calls were made to contact you to clarify how you were formed, but you did not respond.

You will grant membership to any person of F descent who accepts and abides by your by-laws. Active members shall be defined as those who attend group meetings and events u percent of the time and are not in default of membership dues for more than G months. Membership dues are voted on and established by a simple majority of your members. Membership fees are w dollars a month. New members must file an application and pay a w dollars nonrefundable registration fee. New members begin paying their monthly dues immediately after becoming a member. New members are on probation for at least six months before they are eligible for member benefits.

Member benefits are as follows:

• Upon the death of an active member x dollars will be donated by each member
• Upon death of an active member's parent, spouse, or child that member shall receive y dollars from each member as a contribution benefit
• Upon death of an active member's brother or sister they shall receive z dollars from each member
• Upon death of an extended family member the group shall contribute voluntarily
• Upon an active member getting married each member shall contribute z dollars
• Upon a naming ceremony for an active member each member shall contribute z dollars

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)(2) defines the term charitable as including the relief of the poor and distressed or of the underprivileged, and the promotion of social welfare by organizations designed to lessen neighborhood tensions, to eliminate prejudice and discrimination, or to combat community deterioration. The term "charitable" also includes lessening of the burdens of government.

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. It must not be operated for the benefit of designated individuals or the persons who created it.

Revenue Ruling 67-367, 1967-2 C.B. 188, described 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, described an organization formed by the parents of pupils attending a private school exempt under IRC Section 501(c)(3). The organization provided bus transportation to and from the school for those children whose parents belonged to the organization. The ruling stated 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 to school, the organization enabled the participating parents to fulfill their individual responsibility of transporting their children to school.

In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945), the court held that the presence of a single non-exempt purpose, if substantial in nature, will preclude exemption regardless of the number or importance of statutorily exempt purposes.

In The Korean-Am. Senior Mut. Ass'n v. Commissioner, T.C. Memo. 2020-129 (U.S. Tax Ct., 2020), the court held that an organization was not operated exclusively for any of the purposes indicated in IRC Section 501(c)(3) because it was a membership organization whose main purpose was to provide burial grants for the private benefit of its members. Therefore, the law does not permit it to qualify as an exempt organization described in Section 501(c)(3).

Application of law

IRC Section 501(c)(3) sets forth two main tests for qualification for exempt status. As stated in Treas. Reg. 1.501(c)(3)-1(a)(1), an organization must be both organized and operated exclusively for purposes described in Section 501(c)(3).

You failed to demonstrate whether you are a corporation or a trust. Thus, you did not demonstrate that you are organized exclusively for exempt purposes as required by IRC Section 501(c)(3).

You do not meet the operational test under IRC Section 501(c)(3) because you are not operating exclusively for charitable purposes as required under Treas. Reg. Section 1.501(c)(3)-1(c)(1). You provide private benefit to your members by distributing funds to individuals. As provided in Treas. Reg. Section 1.501(c)(3)-1(d)(2), you have not established that your operations accomplish exclusively charitable purposes.

You share a similar fact pattern with the organizations described in Rev. Rul. 67-367, Rev. Rul. 69-175, and The Korean-Am. Senior Mut. Ass'n:

• A limited membership,
• Dues paid for membership, and
• Benefits provided to the members.

Given those facts, each of the rulings held the organizations served private interests rather than the public interest. You have a limited membership, dues paid for membership, and benefits provided to members, and you serve the private interest of your members rather than the public interest. You, therefore, fail the operational test and do not qualify for exemption as an organization described under IRC Section 501(c)(3).

The Supreme Court held in Better Business Bureau of Washington, D.C. that a single nonexempt purpose, if substantial in nature, would preclude an organization from qualifying under IRC Section 501(c)(3) no matter the number or importance of truly exempt purposes. Your primary activity, providing social and economic support for your members, is serving private, non-exempt purposes and precludes exemption. You serve the private interests of your members. Accordingly, you are not operated exclusively for one or more exempt purposes.

Conclusion

You did not clarify whether you are a corporation or a trust. Thus, we could not determine if you pass the organizational test. You fail the operational test because you serve the private interests of your members rather than serving public interests. You do not qualify for IRC Section 501(c)(3) because you fail the organizational and operational tests.

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:
Internal Revenue Service
EO Determinations Quality Assurance
Mail Stop 6403
PO Box 2508
Cincinnati, OH 45201

Street address for delivery service:
Internal Revenue Service
EO Determinations Quality Assurance
550 Main Street, Mail Stop 6403
Cincinnati, OH 45202

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