501(c)(3) exemption denied to an employee mutual-benefit association

Plain-English summary

An organization applied for charitable exemption under Section 501(c)(3), but the IRS denied it. The group is a mutual-benefit association open to full-time permanent employees of one employer who pay biweekly dues. It reimburses members for uncovered medical expenses up to an annual cap, pays a life insurance benefit, provides hospital-confinement payments, hosts social events (retirement parties, holiday parties, a summer BBQ), and runs fundraisers for members facing hardship. It also pays retirement-type and life insurance benefits based on years of membership, and lets long-tenured members cash in a portion of their benefit. To be exempt, an organization must operate exclusively for public purposes and must not serve the private interests of designated individuals or its creators. The IRS found the group failed the operational test: a substantial part of its activities served the private interests of its dues-paying members, and benefits went to members without regard to need. The IRS compared it to prior cases denying exemption to member-only benefit and burial-benefit associations. This is the final adverse determination: the applicant did not protest within 30 days, so the denial became final, and donors generally cannot deduct contributions under § 170. The document reproduces both the final adverse letter (Letter 4038) and the enclosed proposed adverse letter (Letter 4034).

Ruling snapshot

• Question: Does a dues-funded association that pays medical, retirement, and life insurance benefits to one employer's employees qualify for exemption under § 501(c)(3)?
• Outcome: Denied (fails the operational test; serves private member interests, not the public); final adverse determination.
• Key authorities: IRC § 501(c)(3); IRC § 170; Treas. Reg. § 1.501(c)(3)-1(a)(1), (c)(1), and (d)(1); Rev. Rul. 67-367; Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279 (1945); Policemen's Benevolent Association of Westchester County, Inc. v. Commissioner, 42 T.C.M. (CCH) 1750 (1981); The Korean-American Senior Mutual Association, Inc. v. Commissioner, T.C. Memo 2020-129 (2020).

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service 11/14/2025
IRS Tax Exempt and Government Entities Employer ID number:

Form you must file:

Tax years:

Release Number: 202606005
Release Date: 2/6/2026 Name contact,
UIL Code: 501.03-00, 501.33-00 ID number:

Telephone:

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
Redacted Letter 4038

Letter 4038 (Rev. 11-2021)
Catalog Number 476325

Department of the Treasury
Internal Revenue Service

Date:
09/26/2025

Employer ID number:

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

Legend: UIL:

M = Date 501.03-00
N = State 501.33-00
O = Name

p dollars = Dollar

q dollars = Dollar

rt dollars = Dollar

S = Number

t dollars = Dollar

U = Number

V = Number

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 an unincorporated association on M in the state of N. 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).

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

2

You attest that you are organized and operated exclusively to further charitable and 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:

e Refrain from supporting or opposing candidates in political campaigns in any way

e Ensure that your net earnings do not inure in whole or in part to the benefit of private shareholders or
individuals

e 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 that you are formed to aid your membership with medical expenses arising from sickness, injury, or
family emergency, and to promote community and social health for your membership. Detailed information was
requested supplemental to the above attestations.

You state that you organize social events such as annual retirement parties, holiday parties, and summer BBQ
for your members. Your membership is open to any full-time and permanent employees of O that have
completed their probationary period and have completed their payroll deduction form for dues. Members pay
dues of p dollars every other week. You reimburse members for uncovered medical expenses up to a maximum
of q dollars annually and ar dollars life insurance benefit per member. You currently have S members. You also
donate to local charities and community members.

You maintain a program to reimburse medical expenses for any members that are out of work sick or injured
without the benefit of sick leave. Members submit a request for financial assistance, your board investigates and
votes to decide whether or not to give aid. If aid is given, it will not be more than half of the recipient's gross
biweekly pay and will be paid on or about each payday for a duration of time set by your board. You also
provide up to t dollars annually for members who are confined to a hospital to pay hospital bills not covered by
the member's insurance.

Members are eligible to receive life insurance benefit either upon death or retirement after U years of service as
an active member, or if they retire due to a job-related medical disability. If a member retires with at least V
years of membership then they can petition your board to cash in their life insurance benefit for half of its value
on a pro-rated scale. If a member chooses not to cash out life insurance benefit they can pay the difference in

dues between their current membership length, and the U year requirement, and they will then be eligible for the
full r dollars benefit.

You also organize fundraising events for your members to help with medical expenses. You have hosted a
fundraiser for an individual member whose spouse suffered a prolonged medical event, a member who suffered
an on the job injury and was forced to retire medically, and for a member whose child suffered a tragic incident.

Law

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

3

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)(i) 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.

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.

In Policemen's Benevolent Association of Westchester County, Inc. v. Commissioner, 42 T.C.M. (CCH) 1750
(T.C. 1981) the court held that the association's payment of retirement benefits to its members was a substantial

activity of the association, which primarily served a private purpose. No one other than the association's
members, even other county policemen, was eligible for the retirement benefits. Also, the payment of benefits
was in no way based on need. Thus, the association was operating a publicly funded, non-qualified pension
plan, and any intended benefit to the public was merely incidental.

In The Korean-American Senior Mutual Association, Inc. v. Commissioner, T.C. Memo 2020-129 (2020), the
Tax Court held that a membership organization, which collected dues and additional fees to pay out burial
benefits to the families of its deceased members, was operating in a fee-for-service manner and, therefore, failed
to qualify for exemption under IRC Section 501(c)(3), as its activities served private rather than public interests;
it operated in a commercial manner; and it did not serve a charitable class.

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 the operational test, 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

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

4

activities is devoted to the non-exempt private purpose of providing retirement benefits to your dues paying
members. Members join, pay dues, and receive retirement benefits after they reach at least V years of
membership. 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.

Similar to the organization described in Policemen's Benevolent Association, you maintain a retirement benefits
program that serves a substantial private purpose. As held in Better Business Bureau, a single non-exempt
purpose, if substantial, will preclude tax exemption under IRC Section 501(c)(3). By providing retirement
benefits exclusively to your dues paying members or their families, without regard to financial hardship, you are
operating similarly to the organization described in The Korean-American Senior Mutual Association. Although
a portion of your activities involve charitable donations and covering medical expenses for those in need, a
substantial portion of your activities are dedicated to serving the private interests of your members, which will
preclude exemption under Section 501(c)(3).

Conclusion
You do not qualify for exemption under IRC Section 501(c)(3). You fail the operational test because you are
serving the private interests of your dues paying members rather than public interest.

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

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

5

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