A members-only mutual aid society that pays funeral benefits to its dues-paying members does not qualify for 501(c)(3) exemption

Plain-English summary

To be exempt under Section 501(c)(3), an organization must operate exclusively for
public charitable purposes and serve a broad public interest, not just the private
interests of its own members. Here, a mutual aid society applied for charitable status
using the streamlined Form 1023-EZ. It collects a monthly due from its members and uses
the pooled money to help members pay funeral and related expenses when a family member
or relative dies. The IRS denied exemption. The benefit program is not aimed at a
charitable class, is open only to dues-paying members (not the general public), and
operates in a commercial manner (dues in, benefits out based on membership), so it
mainly serves the private interests of the members. Relying on a Tax Court case that
denied exemption to a similar burial-benefit association, the IRS concluded that
providing member funeral benefits is a substantial non-exempt purpose that defeats
501(c)(3) exemption, even though the society had not yet paid out any benefits. Groups
of this type are essentially member insurance or benefit pools rather than public
charities.

Ruling snapshot

• Question: Does a mutual aid society that pays funeral benefits to its dues-paying members qualify for exemption under IRC § 501(c)(3)?
• Outcome: Denied (serves members' private interests; substantial non-exempt purpose)
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(a)(1), (c)(1), (d)(1)(ii); Rev. Rul. 69-175; Korean-American Senior Mutual Association v. Commissioner, 120 T.C.M. (CCH) 191 (2020); Better Business Bureau v. United States, 326 U.S. 279 (1945); § 7428(b)(2)

Full text (IRS public release)

                       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



                                                                                Date:
                                                                                06/09/2025
                                                                                Employer ID number:


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




Legend:                                                                        UIL:
S = Date                                                                       501.03-00
T = State                                                                      501.03-30
U = Number                                                                     501.33-00
v dollars = Dollars


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 S in T.

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
       •   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
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     •   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 Form 1023-EZ that you are organized exclusively for charitable and educational purposes under
the IRC Section 502(c)(3). During our review of your Form 1023-EZ we requested detailed information to
supplement the above attestations.

You are a mutual aid society and primarily engage in activities aimed at supporting your members financially
during difficult situations, including the loss of a relative or a family member. You have U members who pay
dues of v dollars monthly. The funds raised from these membership dues are used to help members who
experience loss with funeral and other related expenses. At present, you have made no distributions to any of
your members.

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, 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 Section 501(c)(3). If an organization fails to meet either the organizational test or
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 applicant must show that it serves a public rather
than a private interest and specifically the organization must establish that it is not organized or operated for the
benefit of private interests such as designated individuals, the creator or his family, shareholders of the
organization, or persons controlled, directly or indirectly, by such private interests.

Revenue Ruling 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
served a private rather than a public interest and did not qualify for exemption.

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 preclude exemption under
IRC Section 501(c)(3), regardless of the number or importance of statutorily exempt purposes.


                                                                                        Letter 4034 (Rev. 01-2021)
                                                                                        Catalog Number 47628K
                                                        3


In Korean-American Senior Mutual Association, Inc, v. Commissioner of Internal Revenue, 120 T.C.M.
(CCH) 191 (Tax 2020), the court held that providing burial benefits for deceased members does not further
charitable purposes since:
      • The benefits are not directed towards meeting the needs of a charitable class,
      • The program is operated in a commercial manner by collecting membership dues, and additional fees
          when members die, and paying out burial benefits to families of deceased members based on their
          contributions to the fund, and
      • The program serves the private interests of its members rather than those of the public.

Application of law
IRC Section 501(c)(3) and Treas. Reg. Section 1.501(c)(3)-1(a)(1) set forth two main tests to qualify for exempt
status. An organization must be both organized and operated exclusively for purposes described in Section
501(c)(3). You have failed to meet both requirements, as explained below.

You are not described in Treas. Reg. Section 1.501(c)(3)-1(c)(1) because more than an insubstantial part of your
activities are devoted to the non-exempt private purpose of providing funds to your members to cover funeral
and other expenses. Members join, pay dues, and receive a substantial private benefit should they experience
the loss of a family member or relative. This program is not open to the general public, and members must pay
dues to receive a benefit. This causes your program to further a substantial non-exempt private purpose.

You are not operated exclusively for exempt purposes under Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii)
because, like the organization described in Revenue Ruling 69-175, substantially all your activities further the
private interests of your members, and any benefit to the general public is incidental.

Like the organization described in Korean American Senior Mutual Association Inc, you operate a benefit
program that is:
      • Not directed towards meeting the needs of a charitable class,
      • Operated in a commercial manner by collecting membership dues and paying for funeral and related
         expenses to members when they experience the loss of a family member or relative, and
      • Serving the private interests of your dues paying members rather than those of the public.

The Supreme Court held in Better Business Bureau 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. You primarily operate to benefit your members when they experience
the loss of a family member or relative. By providing these benefits you serve a substantial non-exempt
purpose which precludes you from exemption under Section 501(c)(3).

Conclusion
Based on the information you have submitted; you are not operated exclusively for one or more purposes as
described in IRC Section 501(c)(3). You are operated for the benefit of your members by providing them with
funeral and other expense assistance which is a substantial nonexempt purpose. Therefore, you 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


                                                                                      Letter 4034 (Rev. 01-2021)
                                                                                      Catalog Number 47628K
                                                          4

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.



                                                                                        Letter 4034 (Rev. 01-2021)
                                                                                        Catalog Number 47628K
                                                        5


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