Member benefit organization denied section 501(c)(3) status

Plain-English summary

An organization formed by employees and volunteers of a local government agency collected dues to provide benefits to members during hardships and celebratory life events. Benefits included assistance for illness, births, deaths, retirement celebrations, hospitalization, fires, and other financial hardships. The IRS concluded that the organization primarily served the private interests of its dues-paying members rather than a public charitable interest. It therefore failed the operational test for section 501(c)(3) status. The organization did not protest the proposed adverse determination, so the IRS made the denial final.

Ruling snapshot

• Question: Does a dues-funded organization providing hardship and celebration benefits to its members qualify under section 501(c)(3)?
• Outcome: Denied
• Key authorities: IRC §§ 170, 501(c)(3), 6104(c), and 7428; Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 67-367; Rev. Rul. 69-175

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service 03/12/2025
Tax Exempt and Government Entities Employer ID number:
PO Box 2508
Cincinnati, OH 45201 Person to contact:

Release Number: 202523010
Release Date: 6/6/2025
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.

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

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 47632S

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

Date:
01/14/2025

Employer ID number:

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

Legend: UIL:
X = Date 501.03-00
Y = State 501.33-00
Z = Organization

q dollars = dollar amount

r dollars = dollar amount

s 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, Streamlined Application for Recognition of Exemption Under Section 501(c)(3)
of the Internal Revenue Code.

You attest that you were formed on X, in the State of Y. 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

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

• 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 Form 1023-EZ stated your purpose is to provide a token of your esteem and consideration to your
members when they are celebrating special occasions or facing challenging situations in their lives.

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

You responded that your organization is comprised of employees and volunteers of the Z, a local government
agency within the State of Y, which provides emergency services to local and surrounding communities. Your
membership may also include members of other approved organizations.

Your purpose is to collect dues from your membership to provide financial support to your dues-paying
members when experiencing financial hardships or celebratory life events. You may also choose to support any
individual, group, organization, or charity.

• Out of work due to illness/injury of self (or family member who provides income)

• Birth of baby - one year of diapers to be purchased by you

• Death of member/direct family member/colleague

• Retirement - Help cover the cost of retirement lunch/dinner celebration

• Financial hardship

• Unexpected hospitalization of member/direct family member/colleague

• House fire

The amount of money disbursed will depend on the following:

• Amount needed to remove the hardship.

• Amount given previously in similar situations.

• Amount currently available in bank account.

Membership in your organization is voluntary. To be a member, an individual must be an employee or
volunteer of the Z or a member of an approved organization, and pay q dollars in a weekly payroll deduction or
r dollars per month. A member who fails to pay or is no longer employed/volunteers with Z or an approved
organization will not receive any benefits and will not be returned any money they have paid to you. Members
who separate under good terms with Z or an approved organization and wish to remain a member may remain
active as long as they pay your monthly dues.

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

New members will not be eligible for benefits for the first three months of membership. New members must
also pay s dollars as an inception fee on top of the monthly dues.

Each member is responsible for informing you about illnesses, deaths, or special news. Once you are made
aware of a hardship or special news, you will vote to provide benefits and the amount to disburse. All members
of your board must be notified of the hardship or special news.

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(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.

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 the advancement of religion.

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

In Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279 (1945), the Supreme Court
determined that the presence of a single non-exempt purpose, if substantial in nature, will destroy exemption
under IRC Section 501(c)(3) regardless of the number or importance of any other exempt purposes.

In The Korean-American Senior Mutual Association, Inc. v. Commissioner, T.C. Memo 2020-129 (2020), the
Tax Court held that a membership organization did not qualify for exemption under IRC Section 501(c)(3). The
organization collected dues and additional fees to pay out burial benefits to the families of its deceased

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

members; as a result, the Court held it was operating in a fee-for-service manner that served private rather than
public interests and, therefore, failed to qualify for exemption under IRC 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 fail the operational test.

Contrary to the provision of Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii), you serve a private rather than a public
interest by operating exclusively for the benefit of your members and providing them financial assistance during
times of hardship or special occasions. Further, your benefits may be paid out for reasons that do not
exclusively further charitable purposes, contrary to the provisions of Treas. Reg. Section 1.501(c)(3)-1(d)(2).
Thus, you do not pass the operational test under IRC Section 501(c)(3), because your activities do not
exclusively further charitable purposes and, instead, serve private interests rather than the public interest.

You are similar to the organizations denied exemption in Revenue Rulings 67-367 and 69-175. Like these
organizations, you were formed to serve the private interests of your members rather than the public interest.
As described in Rev. Rul. 67-367, when a group of individuals associate to provide a cooperative service for
themselves, they are serving a private interest, not the public interest, which precludes exemption under IRC
Section 501(c)(3).

Similar to the organization in The Korean-American Senior Mutual Association, Inc., which collected dues and
fees to pay benefits to the families of its deceased members upon their deaths, you were formed to collect dues
from your members to relieve their economic burdens and celebrate special occasions. This serves the private
interests of your members, since your benefits do not flow primarily to the public because you were created
specifically to benefit your members, precluding exemption under IRC Section 501(c)(3).

Finally, you are like the organization in Better Business Bureau of Washington, D.C., Inc., because you have a
more than insubstantial, non-exempt purpose, i.e., serving the private interests of your members. Although your
activities may provide some financial and other types of relief to your members during times of hardship, your
benefits are limited exclusively to your dues-paying members. Thus, you are not operating exclusively for
exempt purposes within the meaning of IRC Section 501(c)(3), and your claim to exemption is destroyed.

Conclusion

Based on the information submitted, you fail the operational test under IRC Section 501(c)(3) because you
serve the private interests of your members rather than the public interest by collecting membership dues from a
limited membership to provide your members with financial assistance during times of hardship or celebratory
occasions. Thus, you are formed to serve the private interests of your dues-paying members and do not qualify
for exemption 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.

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

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.

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

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