IRS Rejects 2 Death Benefits Groups' Requests for Tax-Exempt Status

A fragment of a screenshot of an IRS letter ruling rejecting an applicant's application for tax-exempt status.

The Internal Revenue Services (IRS) has refused to classify two member-owned organizations that provide death benefits for the members as tax-exempt organizations.

Stephen Martin, director for exempt organizations in the IRS Rulings and Agreements office, has delivered the news to the organizations in letter rulings that were issued in January and posted on the web today.

One of the organizations described itself as a community organization that would provide financial and counseling services for members who lose loved ones. That group was going to require members to contribute a certain amount of cash when another member died, then pay a specified amount of the cash to the bereaved member. The group was also going to offer members free seminars on topics such as Medicare and Social Security.

That organization applied for tax-exempt status under Internal Revenue Code Section 501(c)(4), which governs nonprofit civic leagues and other nonprofit social welfare organizations.

The other applicant described itself as a cooperative that was started by close friends and is closed to the general public. Members of the cooperative pay membership fees, and the cooperative uses the money to support any member affected by a "qualified death in the family," such as the death of a spouse or a biological child.

The death benefits cooperative applied for tax-exempt status under IRC Section 501(c)(7), which applies to nonprofit recreational clubs.

Resources

A copy of the IRC Section 501(c)(4) status rejection private letter ruling is available here.
A copy of the IRC Section 501(c)(7) status rejection private letter ruling is available here.
An article about letter rulings is available here.

Martin concluded in the letter rulings that neither organization qualifies for IRS recognition of tax-exempt status.

Martin told the organization that applied for recognition as a Section 501(c)(4) social welfare organization that it does not qualify because it does not benefit the community as a whole. "Rather," he wrote, "your activities serve only the interests of your members and their beneficiaries."

Martin told the death benefits cooperative that it does not qualify for tax-exempt status under Section 501(c)(7) because it simply provides death benefits and "does not further pleasure, recreation, or other non-profitable purposes."

"You also do not offer any commingling programs for your members, which is a key criterion to be considered under Section 501(c)(7)," Martin wrote.

A private letter ruling shows what the IRS told a particular taxpayer or tax advisor. Other people can use the private letter rulings to see what IRS officials are thinking, but other taxpayers are not supposed to rely on the private letter rulings.

Taxpayers or tax advisors who disagree with private letter rulings can send protest letters to the IRS and ask the IRS to reconsider the rulings.

— Read IRS to Fraternals: If You Want a Tax Break, Get Some Regalia, on ThinkAdvisor.

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