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The Korean-American Senior Mutual Association, Inc. v. Commissioner (T.C. Memo. 2020-129)

On September 9, 2020, the Tax Court issued a Memorandum Opinion in the case of The Korean-American Senior Mutual Assoc., Inc. v. Commissioner (T.C. Memo. 2020-129). The primary issue before the court in Korean-American was whether The Korean-American Senior Mutual Association, Inc. (KASMA) was operated exclusively for one or more exempt purposes as set forth in IRC § 501(c)(3).

Background

The Korean-American Senior Mutual Association, Inc. (KASMA) was founded in 1996 informed for four purposes: (1) to provide burial benefits and assistance to the surviving families of deceased; (2) to provide information to senior citizens in regard to their burial concerns and general welfare; (3) to provide organized activities for senior citizens to enhance their effective use of free time and friendship; and (4) to provide annual scholarships to needy, promising students. In August 1998, the IRS sent a determination letter to KASMA recognizing it as an IRC § 501(c)(3) organization.

The IRS Examination

KASMA’s 2013 Form 990 (Return of Organization Exempt from Federal Tax) was selected for examination.  The return stated that the organization had $536,000 in cash reserves and $180,000 in net accounts receivable. Of the total revenue for the year ($2.14m), $1.93m was from “other contributions, gifts, grants, and other amounts” and only $200,000 was from membership dues.  Further, in 2008 KASMA purchased an office condominium in NY for cash and listed the value at $817,000 on its 2013 Form 990.

KASMA’s Operations During 2013

In 2013, KASMA operated as a membership organization open to anyone who was 55 to 90 years old residing in the New York City metropolitan area and charged a $150 membership application fee to anyone 55 years or older who applied to join the organization. Upon the death of a member all remaining members were charged $10. When a member died, KASMA paid a certain amount to the funeral home towards the member’s funeral expenses.

The amount paid to the funeral home was determined on the basis of the length of time the deceased individual was a member of KASMA. KASMA paid a separate amount directly to the family of the deceased individual according to a Korean tradition. According to this tradition people who attend a funeral donate money to the bereaved family in an envelope. For example, KASMA paid $11,000 to the funeral home for the funeral bill and $3,210 to the deceased’s family in accordance with the Korean tradition upon the death of a member who had been a member of KASMA for more than four years.

KASMA did not report any activities with respect to its services for seniors or its scholarship awards to needy students on the Form 990 for 2013.

The IRS’ Final Adverse Determination

In November 2015, the IRS sent a letter to KASMA proposing to revoke its tax-exempt status under IRC § 501(c)(3) because KASMA was not operated exclusively for one or more tax-exempt purposes. In September 2017, the IRS issued a final adverse determination determining that KASMA did not qualify as exempt from Federal income tax under IRC § 501(c)(3) because the primary activity of KASMA was the provision of funds to defray or pay for the funeral costs of its members, which was not an exempt activity.

Declaration regarding Determination of Qualification

IRC § 7428(a)(1)(A) confers jurisdiction on the Tax Court to make a declaration in a case of actual controversy involving a determination by the IRS with respect to the qualification of an organization as one described in IRC § 501(c)(3). Petitioner bears the burden of establishing that respondent’s determination

is erroneous. See Rule 142(a); Partners in Charity, Inc. v. Commissioner, 141 T.C. 151, 162 (2013).

IRC § 501(c)(3) describes a qualifying organization in relevant part to include corporations organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes. The standard for tax-exempt status prescribed in IRC § 501(c)(3) requires that an organization be “operated exclusively” for an exempt purpose. 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 § 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. § 1.501(c)(3)-1(c)(1).

the presence of a single substantial purpose that is not described in IRC § 501(c)(3) precludes exemption from tax under IRC § 501(a) regardless of the number or the importance of the purposes that are present and described in IRC § 501(c)(3). See Better Bus. Bureau v. United States, 326 U.S. 279, 283 (1945). The purpose towards which an organization’s activities are directed, and not the nature of the activities themselves, is ultimately dispositive of the organization’s right to be classified as an IRC § 501(c)(3) organization exempt from tax under IRC § 501(a). B.S.W. Grp., Inc. v. Commissioner, 70 T.C. 352, 356-357 (1978). Activities may be wholesome and commendable; but they will not support tax-exempt status unless they are undertaken to further an exempt purpose. Partners in Charity, 141 T.C. at 164.

KASMA Did Not Operate to Serve a Charitable Class

Because KASMA did not provide burial benefits to the elderly without regard to their ability to pay their funeral expenses or establish that the membership application fee of $150 and the other annual fees of $300 to $350 constituted nominal charges, KASMA did not operate to serve the recognized charitable class of the elderly. An organization serves a charitable purpose when it provides for the special needs of the elderly were elements of relief of distress and community benefit are present. See El Paso Del Aguila Elderly v. Commissioner, T.C. Memo. 1992-441; Rev. Rul. 79-18; Rev. Rul. 77-246.

KASMA’s primary activity was not directed towards meeting the special needs of the charitable class, the elderly, by relieving distress or providing a community benefit. KASMA provided burial benefits only to its members who paid dues, not to non-dues-paying seniors in the community. Additionally, the amount of the burial benefit paid was calculated on the basis of the number of years the deceased member had paid the other fees rather than the inability of the deceased member to pay burial expenses. See Retired Teachers Legal Def. Fund, Inc. v. Commissioner, 78 T.C. 280, 290 (1982).

Operation in a Commercial Manner

KASMA operated in a fee-for-service manner. When an organization conducts a business in a commercial manner, that fact weighs heavily against exemption. Living Faith, Inc. v. Commissioner, 950 F.2d 365, 373 (7th Cir. 1991), aff’g T.C. Memo. 1990-484. When an organization engages in a substantial fee-for-service or other business activity and the activity does not further the organization’s exempt purpose, the organization is not operated exclusively for an exempt purpose. Treas. Reg. § 1.501(c)(3)-1(c)(1); see Partners in Charity, 141 T.C. at 168-169.

No Public Interest Served

An organization is not operated for an exempt purpose unless it serves a public rather than private interest. Redlands Surgical Servs. v. Commissioner, 113 T.C. 47 (1999), aff’d, 242 F.3d 904 (9th Cir. 2001). The Court has consistently recognized that while the prohibitions against private inurement and private benefits share common and often overlapping elements, the two are distinct requirements which must be satisfied independently. Am. Campaign Acad. v. Commissioner, 92 T.C. 1053, 1068 (1989). The Tax Court has held that the absence of private inurement of earnings to the benefit of a private shareholder or individual does not, however, establish that the organization is operated exclusively for exempt purposes. Therefore, while the private inurement prohibition may arguably be subsumed within the private benefit analysis of the operational test, the reverse is not true. Id. at 1068-1069.

Because KASMA did not provide other services for nonmember seniors or scholarship awards to needy students, its primary activity conferred a private benefit. Therefore, the IRS was justified in revoking the organization’s IRC § 501(c)(3) status.

(T.C. Memo. 2020-129) Korean-American Senior Mutual Association, Inc. v. Commissioner

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