Family-descendant scholarship fund denied charity status

Plain-English summary

The IRS denied IRC § 501(c)(3) recognition to an organization that provided scholarships only to descendants of one family. Applicants also had to register for and attend the family reunion and be enrolled in an undergraduate program. If applicants exceeded the available awards, recipients were selected by lottery, with priority for students in their final undergraduate year. The scholarships were paid directly to recipients without requiring proof that the money was used for education. The IRS concluded that the restricted family class served private interests rather than a broad charitable class, and the program used no need or merit criteria. This substantial private purpose caused the organization to fail the operational test.

Ruling snapshot

• Question: Does a scholarship program limited to descendants of one family operate exclusively for educational or charitable purposes under IRC § 501(c)(3)?
• Outcome: Denied, because the awards served a narrow family group rather than public charitable interests
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(c)(1), (d)(1)(ii); Rev. Rul. 67-367; Rev. Rul. 69-257; Local Union 712, I.B.E.W. Scholarship Trust Fund v. C.I.R.

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service 05/30/2025
Tax Exempt and Government Entities
IRS P.O. Box 2508
Cincinnati, OH 45201

Employer ID number: [redacted]
Person to contact: [redacted]

Release Number: 202534005
Release Date: 8/22/2025
UIL Code: 501.00-00, 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.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: 04/14/2025
Employer ID number: [redacted]
Person to contact:
Name: [redacted]
ID Number: [redacted]
Telephone: [redacted]
Fax: [redacted]

Legend: UIL:
V = Date 501.00-00
W = State 501.03-00
X = Name 501.33-00

Z = Number
Dear Applicant:

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 V, in the state of W. 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 educational 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

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

2

• 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

Detailed information was subsequently requested.

You stated your mission is to provide scholarships to the descendants of the X family. To qualify for your
scholarship the individual must be a descendant of X family, register and attend the family reunion, and be
enrolled in a college undergraduate program. You will provide up to Z scholarships per year. If there are Z or
less candidates both will receive a scholarship. If there are more than Z candidates you will randomly select the
recipients based on a number lottery system. Any candidate in their last year of their undergraduate program
will have precedence over anyone else not in their last year.

Scholarship funds are paid directly to the recipients. Recipients are not required to provide verification the
funds were used for educational expenses. Board members/officers of the organization are not eligible to apply
for the scholarship.

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) states that an organization is not organized or operated exclusively
for 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, describes a nonprofit 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 from federal income tax under IRC Section 501(c)(3) because it was
serving private rather than public or charitable interests.

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

3

Rev. Rul. 69-257, 1969-1 C.B. 151, held that an organization providing scholarships to recipients selected from
a broad class of applicants on the basis of scholastic standing, qualified for exemption under section 501(c)(3)
of the Code because it was engaged in the charitable activity of advancing education.

In Local Union 712, I.B.E.W. Scholarship Trust Fund v. C.I.R., T.C. Memo. 1983-76, the Tax Court upheld the
Service's position that the organization was not operated exclusively for exempt purposes under section
501(c)(3) of the Code, since it was serving the private interests of its members.

In Better Business Bureau of Washington, D.C., Inc, v. U.S., 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.

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
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. In contrast to Treas. Reg. Section 1.501(c)(3)-
1(d)(1)(ii) your activities benefit designated individuals, the family members of X. By providing scholarship
assistance only to descendants of X's family you are operating for the family’s private interests.

You are like the organization in Rev. Rul. 67-367 because you were formed to benefit the descendants of one
particular family. By paying scholarships 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).

You are distinguishable from the organization described in Rev. Rul. 69-257, 1969-1 C.B. 151. That ruling held
that an organization that provided scholarships to recipients selected from a broad class of applicants on the
basis of scholastic standing, qualified for exemption under section 501(c)(3) of the Code because it was
engaged in the charitable activity of advancing education. In contrast, your class of applicants is very limited
with no criteria to demonstrate need or merit.

You are similar to Local Union 712, I.B.E.W. Scholarship Trust Fund because the benefits you provide flow
primarily to the private interests, the descendants of X, rather than the general public.

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 interests of a
family that constitutes a substantial non-exempt purpose, which precludes exemption under IRC Section

501(c)(3).

Conclusion

You do not meet the requirements under IRC Section 501(c)(3). You are operating for the private interests of
the X family rather than the general public which constitutes a substantial non-exempt purpose. Accordingly,
you do not qualify for exemption under IRC Section 501(c)(3).

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

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

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

5

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