Both groups provide death benefits only for their own members.
(Credit: Allison
Bell/ALM)
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
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.
Allison Bell,
ThinkAdvisor's insurance editor, previously was LifeHealthPro's health
insurance editor. She has a bachelor's degree in economics from Washington
University in St. Louis and a master's degree in journalism from the Medill
School of Journalism at Northwestern University. She can be reached at
abell@alm.com or on Twitter at @Think_Allison.
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