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Tuesday October 22, 2019

Private Letter Ruling

Organization Providing Death Benefits Not Exempt

GiftLaw Note:
Organization requested exempt status under Sec. 501(c)(3) by submitting Form 1023-EZ. Organization’s organizing document limits its purposes to one or more exempt purposes under Sec. 501(c)(3). Organization states that it will not engage in activities prohibited under Sec. 501(c)(3), including supporting or opposing political candidates, allowing net earnings to inure for the benefit of private shareholders or individuals, furthering nonexempt purposes, conducting an unrelated trade or business, devoting an insubstantial part of its activities to influence legislation or providing commercial-type insurance as a substantial part of its activities. Organization was formed to provide death benefits to its members’ beneficiaries.

To be exempt under Sec. 501(c)(3), an organization must be organized and operated exclusively for an exempt purpose. Reg. 1.501(c)(3)-1(a)(1). The organization must engage primarily in one or more exempt purposes in order to pass the operational test. Reg. 1.501(c)(3)-1(c)(1). An organization is not organized or operated exclusively for an exempt purpose if it serves a private rather than a public interest. Reg. 1.501(c)(3)-1(d)(1)(ii). In Rev. Rul. 69-175, the Service determined that an association of private school parents providing bus transportation to and from school served a private interest rather than a public interest. In Police Benevolent Association of Richmond v. U.S., 661 F. Supp. 765 (E.D. Va. 1987), organization’s sole purpose was to provide supplemental pension benefits to retired active members. There, the court held that the organization was not organized and operated for a charitable purpose. Here, the Service determined that Organization was similar to those in Rev. Rul. 69-175 and Police Benevolent Association of Richmond and is therefore not organized and operated for an exempt purpose.
PLR 201941027 Organization Providing Death Benefits Not Exempt

10/11/2019 (7/18/2019)

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 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 Y, in the state of Z. 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 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 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

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

During review of your Form 1023-EZ, detailed information was requested supplemental to the above attestations. You are governed by your Bylaws. You were formed to provide death benefits to the beneficiaries of members, active and retired, who die from any cause. You contact the * * * in your area to make them aware of your death benefits, and each * * * that participates furnishes you the names of their participants. * * * board members conduct all your activities at your office address. These include mailings, invoicing, receipts of payments, and processing payments. Fees are based on the number of * * * participants. When a member dies, you assess each member a dollar.

Law


Section 501(c)(3) of the Code 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 Section 501(c)(3) of the Code, 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. Sec. 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 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.

Treas. Reg. Sec. 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated exclusively for one or more of the purposes specified in Section 501(c)(3) 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.

Rev. Rul. 69-175, 1969-1 C.B. 149, describes an organization formed by the parents of pupils attending a private school which provides bus transportation to and from the school for their children. Parents must pay an initial family fee and an additional annual charge for each child. The organization's income approximately equals the expenses involved in its operations. Treas. Reg. Sec. 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated exclusively for any exempt purpose set forth in Section 501(c)(3) of the Code unless it serves a public rather than a private interest. 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, under the circumstances described, the organization serves a private rather than a public interest. Accordingly, it is not exempt from Federal income tax under Section 501(c)(3) of the Code.

In Police Benevolent Association of Richmond v. U.S., 661 F. Supp. 765 (E.D. Va. 1987) the association alleged that, in tax year 1982, it was tax-exempt under Section 501(c)(4) until it restated its articles of incorporation, and thereafter was exempt under section 501(c)(3). The government argued that, under the facts alleged, the association was not entitled to tax-exempt status under either provision of the statute. The association's restated articles provided that its sole purpose was to provide supplemental pension benefits to retired active members of the corporation. As such the court found that the association was not organized to serve the charitable public interest in lessening government burdens, and any such incidental benefit to the government was not significant. The court held that as a matter of law, the association could not establish that it was organized and operated for a charitable purpose under any set of facts consistent with its allegations. Because a substantial purpose of the association and its activities were intended to serve the pecuniary interests of its members, a non-exempt purpose, the court held that the association could not qualify as an organization operated exclusively for the promotion of social welfare.

Application of law


You are not described in Section 501(c)(3) of the Code because you do not meet the operational test as required by Treas. Reg. Sec. 1.501(c)(3)-1(a)(1). You do not meet the operational test because you are not, as Treas. Reg. Sec. 1.501(c)(3)-1(c)(1) requires, operated exclusively for one or more exempt purposes. You are not organized or operated exclusively for exempt purposes because you do not serve a public rather than a private interest, as Treas. Reg. Sec. 1.501(c)(3)-1(d)(1)(ii) demands.

Your activities consist of paying death benefits to active and retired members who have died from any cause, assessing a fee of members whenever one dies. By paying the benefits to survivors of members you are serving private interests rather than a public interest, like the Police Benevolent Association of Richmond, and the transportation cooperative of Rev. Rul. 69-175.

Conclusion


For the reason stated, you are not operated exclusively for exempt purposes within the meaning of Section 501(c)(3) of the Code and the related income tax regulations, and in consequence 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.

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 Decision 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:

Internal Revenue Service
EO Determinations Quality Assurance
Mail Stop 6403
P.O. Box 2508
Cincinnati, OH 45201

Street address for delivery service:

Internal Revenue Service
EO Determinations Quality Assurance
550 Main Street, Mail Stop 6403
Cincinnati, OH 45202

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

Published October 18, 2019
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