Private Letter Rulings - Death Benefits Organization Denied Exemption
GiftLaw Note:
Organization was formed as a tax-exempt Sec. 501(c)(3). Organization exists to serve members of the W community, whose country of origin is W. To that end, Organization provides counseling support to needy W and W Americans, sponsors cultural events and organizes activities to support W members in dire need. Organization also spends 25% of its time and resources on providing assistance to individuals at a time of loss. If W members are in good standing and have lost a family member, Organization will provide funds to them and child care. To be members of Organization, members pay an annual membership fee of $100. Organization’s Form 1023-EZ was randomly selected by the Service for examination.
In order to be tax exempt under Sec. 501(c)(3), an organization must be both organized and operated exclusively for exempt purposes. If an organization engages in a single, nonexempt purpose that is substantial in nature, the organization does not qualify for exempt status. In Rev. Rul. 67-367, the Service denied exemption to an organization whose sole activity was the operation of a scholarship plan making payments to pre-selected, specifically named individuals once they began college. The Service ruled that such an activity served its members and not the public. Here, the Service found that Organization is engaging in a similar activity when a member has a death in the family. Specifically, Organization will make payments to members in the event of a family death, regardless of members’ needs for the funds. In essence, the payments are automatic to members when a family member dies. This serves Organization’s members and not the public. Because Organization’s death benefit activity is substantial in nature and does not serve an exempt purpose, the Service denied Organization’s application for exempt status.
In order to be tax exempt under Sec. 501(c)(3), an organization must be both organized and operated exclusively for exempt purposes. If an organization engages in a single, nonexempt purpose that is substantial in nature, the organization does not qualify for exempt status. In Rev. Rul. 67-367, the Service denied exemption to an organization whose sole activity was the operation of a scholarship plan making payments to pre-selected, specifically named individuals once they began college. The Service ruled that such an activity served its members and not the public. Here, the Service found that Organization is engaging in a similar activity when a member has a death in the family. Specifically, Organization will make payments to members in the event of a family death, regardless of members’ needs for the funds. In essence, the payments are automatic to members when a family member dies. This serves Organization’s members and not the public. Because Organization’s death benefit activity is substantial in nature and does not serve an exempt purpose, the Service denied Organization’s application for exempt status.
4/1/2016/2016 (1/4/2016)
Dear * * *:
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We considered your application for recognition of exemption from federal income tax under Section 501(a) of the Internal Revenue Code (the Code). Based on the information provided, we determined that you don't qualify for exemption under Section 501(c)(3) of the Code. This letter explains the basis for our conclusion. Please keep it for your records.
ISSUES
Do you qualify for exemption under section 501(c)(3) of the Code? 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 on X.
You attest that you were incorporated on Yin Z. You also 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 section 501(c)(3), that your organizing document does not expressly empower you to engage, otherwise than as an insubstantial part of your activities that in themselves are not in furtherance of one or more exempt purposes, that your organizing document contains the dissolution provision required under section 501(c)(3), and that your organizing document contains the provisions required by section 508(e) or that your organizing document does not need to include the provisions required by section 508(e) because you rely on the operation of state law in your particular state to meet the requirements of section 508(e).
You attest that you are organized and operated exclusively to further charitable purposes and that you have not conducted and will not conduct prohibited activities under section 501(c)(3).
Specifically, 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
Your Form 1023-EZ was randomly selected for a pre-determination review, and detailed information was requested supplemental to the above attestations. This information indicated that one of your activities was to provide counseling support to needy W and W Americans. Counseling is provided to assist individuals with the challenges that arise from living away from their country of origin and to cope with cultural differences. Counseling support is also provided to individuals who have lost a family member or other have another distress in their family.
You organize cultural events for youth, your members, and the W community to promote understanding of their cultural heritage, history, and roots. Events may include invited speakers and/or festivities, including music, food, and drink. Nominal entrance fees are collected to cover the cost of conducting the activity. You currently organize one cultural event per year.
You organize activities to support Wand W Americans in dire need. You provide financial assistance toW immigrants as well as support to children, the elderly and homeless individuals in W. You provide support to children in the United States who are pursuing their education.
Approximately 25% of your time and resources are devoted to providing assistance to individuals at a time of loss. Specifically, you provide funds to members in good standing who have lost a family member, you provide care for underage children who have lost their families, and you provide support to individuals gathering to mourn by contributing food and drinks. Funds to members are intended to be used for the high costs of funeral services and related charges. These activities are conducted when a death occurs in the W community.
Your members, their families, and members of the W community participate in your activities. Members pay an annual membership fee of approximately $100. While you submitted a total of your expenses for each of the last three years, you did not indicate specifically how much was distributed for the above described member death benefit.
LAW
Section 501(c)(3) of the Code provides, in part, for the exemption from federal income tax of organizations organized and operated exclusively for charitable, religious or educational purposes, no part of the net earnings of which inures to the benefit of any private shareholder or individual.
Section 1.501(c)(3)-1(a)(1) of the Regulations states that in order to qualify under section 501(c)(3) of the Code, an organization must be both organized and operated exclusively for one or more exempt purposes. If an organization fails to meet either the organizational or operational test, it is not exempt.
Section 1.501(c)(3)-1(c)(1) of the Regulations states 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 section 501(c)(3) of the Code. An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.
Section 1.501(c)(3)-1(d)(1)(ii) of the Regulations 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, describes an organization whose sole activity was the operation of a scholarship plan for making payments to pre-selected, specifically named individuals. The organization established a plan whereby it entered into agreements with subscribers. The subscribers deposited a certain amount of money with a designated bank. The subscriber also named a specific child to be the recipient of the scholarship money. The recipient received the scholarship around the time he or she were to begin college. The organization did not qualify for exemption under section 501(c)(3) of the Code because it was serving the private interests of its subscribers rather than serve public charitable and educational interests.
Revenue Ruling 69-175, 1969-1 C.B. 149, describes an organization which was formed by parents of pupils attending a private school. The organization provided bus transportation to and from the school for those children whose parents belong to the organization. The organization did not qualify for exemption under section 501(c)(3) of the Code because it served a private rather than public interest.
Revenue Ruling 76-205, 1976-1 C.B. 226, describes an organization formed to aid immigrants in overcoming social, cultural, and economic problems by providing personal counseling, referrals to helpful agencies, social and recreational activities, instruction in English, and distributing a newsletter containing information on attaining citizenship, securing housing, and obtaining medical care is operated exclusively for charitable and educational purposes and qualifies for exemption under section 501(c)(3) of the Code.
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 section 501(c)(3) regardless of the number or importance of any other exempt purposes.
APPLICATION OF LAW
Section 1.501(c)(3)-1(a)(1) of the regulations provides that in order to be exempt as an organization described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. You conduct an activity that provides direct benefits to members and private individuals that is more than insubstantial in nature. For this reason you are not operating exclusively for exempt purposes (Section 1.501(c)(3)-1(c)(1) of the Regulations). As a result you do not satisfy the operational test requirement to be recognized as exempt under section 501(c)(3) of the Code, and are not as described in section 501(c)(3) of the Code.
You are similar to the organization described in Revenue Ruling 67-367. Like that organization, your activities serve to benefit your members rather than benefit the public. The organization in this revenue ruling made predetermined payments to preselected individuals at a predetermined time. You are providing a set aside amount of funds payable, much like an insurance policy, to your members in the event of a family death. There is not charitable intent to the payments, qualification or review to determine need -- the payments are automatic if the member is in good standing. The payment of these types of benefits to pre-selected, specifically named individuals serves a private interest rather than a public interest. Section 1.501(c)(3)-1(d)(1)(ii) of the Regulations states that an organization is not operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest.
The group of parents in Revenue Ruling 67-175 provided a cooperative service for themselves and thus served their own private interests. Like that organization, you were formed to provide benefits to your members. In your case, a substantial portion of your activities consists of providing death benefits to members. The payment of these benefits serves private rather than a public interest. Section 1.501(c)(3)-1(d)(1)(ii) of the Regulations states that an organization is not operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest.
You are distinguished from the organization described in Revenue Ruling 76-205 because you are not operated exclusively exempt purposes. Although you conduct a number of charitable and educational activities, more than an insubstantial part of your activities consist of providing death benefits to your members. The payment of these benefits serves private, rather than a public interest and are not in furtherance of one or more exempt purposes.
The Supreme Court held in Better Business Bureau of Washington, D.C. v. United States that a single nonexempt purpose, if substantial in nature, would preclude an organization from qualifying under section 501(c)(3) no matter the number or importance of truly exempt purposes. Despite the other qualifying activities that you conduct, the activity of providing benefits to your members in the event of a family death is serving private, non-exempt purposes.
CONCLUSION
Based on the above facts and analysis, you do not qualify for exemption under section 501(c)(3) of the Code. You are not operated exclusively for a 501(c)(3) purpose. You further the interests of your members which serves private interests. Therefore, you do not qualify for exemption under section 501(c)(3) of the Code.
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Jeffrey I. Cooper
Director, Exempt Organizations
Rulings and Agreements