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

T.C. Memo. 2020-129UNITED STATES TAX COURT
THE KOREAN-AMERICAN SENIOR MUTUAL ASSOCIATION, INC.,
Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21829-17X. Filed September 9, 2020.
Samuel S. Weissman, for petitioner.
Catherine R. Chastanet and Mark L. Hulse, for respondent.
MEMORANDUM OPINION
LEYDEN, Special Trial Judge: After examining the activities of petitioner,
The Korean-American Senior Mutual Association, Inc. (KASMA), the Internal
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[*2] Revenue Service (IRS)1 issued a final adverse determination letter dated
September 6, 2017, revoking KASMA’s tax-exempt status as of that date. The
IRS determined that KASMA was not operated exclusively for one or more
exempt purposes as set forth in section 501(c)(3).2 KASMA exhausted its
administrative remedies, see sec. 7428(b)(2); Rule 210(c)(4), and challenged the
IRS’ determination by timely filing a petition with the Court for a declaratory
judgment, see sec. 7428(a), (b)(3). The sole issue for determination is whether
KASMA was operated exclusively for one or more exempt purposes as set forth in
section 501(c)(3). The Court concludes it was not.
Background
The parties filed with the Court the entire administrative record and
submitted this case for decision without trial in accordance with Rule 217(b)(1)
and (2). See also Rule 122. For purposes of this proceeding, the facts and
1
The Court uses the term “IRS” to refer to administrative actions taken
outside of these proceedings. The Court uses the term “respondent” to refer to the
Commissioner of Internal Revenue, who is the head of the IRS and is respondent
in this case, and to refer to actions taken in connection with this case.
2
Unless otherwise indicated, all section references are to the Internal
Revenue Code, as amended, in effect at all relevant times, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
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[*3] representations contained in the administrative record are accepted as true,
see Rule 217(b)(1), and are incorporated herein by this reference.3
KASMA is a New York nonprofit organization with its principal place of
business in New York, New York, when its petition was filed with the Court.
I. KASMA’s Organization
KASMA was organized as a nonprofit corporation under the laws of New
York on May 28, 1996. According to KASMA’s certificate of incorporation,
signed on May 22, 1996, and amended on May 18, 1998, KASMA “is organized
exclusively for charitable and educational purposes, as specified in Section
501(c)(3) of the Internal Revenue Code of 1986” and formed for the following
four purposes:
a) To provide burial benefits and assistance to the surviving families
of deceased;
b) To provide information to senior citizens in regard to their burial
concerns and general welfare;
3
Respondent in his opening brief states that the IRS revoked KASMA’s tax-
exempt status because it was neither organized nor operated exclusively for one or
more exempt purposes. However, the final adverse determination letter states the
reason for revoking KASMA’s tax-exempt status is that KASMA was not operated
exclusively for one or more exempt purposes as set forth in sec. 501(c)(3).
Therefore, the Court does not address respondent’s argument that KASMA was
not organized exclusively for one or more exempt purposes.
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[*4] c) To provide organized activities for senior citizens to enhance their
effective use of free time and friendship; and
d) To provide annual scholarships to needy, promising students.
II. KASMA’s Application for Recognition of Tax-Exempt Status
On February 18, 1998, KASMA submitted to the IRS a Form 1023,
Application for Recognition of Exemption Under Section 501(c)(3) of the Internal
Revenue Code. On the Form 1023 KASMA indicated that:
(1) KASMA is organized as a membership organization open to seniors ages
55 to 90 residing in the New York metropolitan area who pay its membership dues
and support KASMA’s purposes; and
(2) To become a member a senior must submit an application for
membership and pay the following membership dues: a $100 application fee for
seniors ages 55 to 70 or a $150 application fee for seniors ages 71 to 90; a $30
annual fee; and a $10 fee every time a member dies.
KASMA’s board of directors could reject an application for membership for
cause and could terminate a membership if a member failed to pay the required
membership dues for 90 days after receiving a written notice requesting payment.
KASMA listed three major planned activities: burial benefits, services for
seniors, and scholarships for students.
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[*5] A. Burial Benefits
KASMA members received the following “benefits” in exchange for their
payment of dues: (1) KASMA paid a burial benefit to the surviving family and
encouraged other members to attend the funeral services and (2) members received
a discount on funeral expenses and received information on burial plots and
funeral arrangements.
KASMA described its burial benefits activity as follows:
1) Providing Burial grants & assistances
- This program is intended to lift financial burdens off
the back of the surviving families of decedent members
by providing a lump-sum grant for the burial expenses.
If no surviving families, the organization will take care
of the funeral service.
- The organization’s officers carry out the program for
people in the metropolitan NY area.
KASMA indicated that the burial benefits were limited to “[m]embers and
members’ surviving families” but noted that “exceptions will be made for those
needy, poor seniors”.
B. Services for Seniors
KASMA described its services for seniors as follows:
2) Services for Seniors
- Provides * * * on-going information regarding burial
services, sites, costs, etc.
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[*6] - Provides referal [sic] services to seniors who needs [sic]
various assistance from government agencies. Help is provided
over telephone or at office.
- Organize cultural and recreational actives [sic] for seniors.
One cultural program was held for poor seniors at a Korean
Restaurant in Flushing on 1/23/97.
C. Scholarships for Students
KASMA stated that it would provide scholarship awards for needy students
when KASMA “accumulates the necessary fund[s] for the awards.” On Schedule
H, Organizations Providing Scholarship Benefits, Student Aid, Etc., to
Individuals, of the Form 1023, KASMA reported:
[The] [s]cholarship award plan is still in the process of being
developed with the following guidelines:
1) $1,000 annual scholarship will be given to selected students as a
gift at * * * KASMA’s annual meeting;
2) A scholarship committee of five will make the selections; &
3) Application[s] for the award will be solicited by public notice in
advance.
III. IRS Recognition of KASMA as Tax Exempt
By letter dated April 27, 1998, Philip A. Millet, IRS exempt organization
specialist, notified KASMA that the IRS was reviewing the Form 1023 and
requested additional information to support its request to be recognized as a tax-
exempt organization.
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[*7] Specifically, Mr. Millet requested that KASMA provide a detailed
description of its past, present, and proposed activities as well as the percentage of
time and funds devoted to those activities. He also requested that KASMA amend
its articles of incorporation to state that the purpose of the corporation is to
provide burial benefits and assistance to the surviving families of deceased
“seniors”. Mr. Millet indicated that the initial language in the articles of
incorporation did not meet the requirements of section 501(c)(3) because it did not
limit KASMA’s purposes to those specified in section 501(c)(3) and informed
KASMA that if its purposes did not limit burial benefits and assistance to the
surviving families of deceased seniors, the organization’s charitable purpose
would not be to benefit the aged and/or underprivileged.
KASMA responded to Mr. Millet’s request by letter dated June 24, 1998,
and described its activities as follows:
I. Description of Activities
(1) Providing lump-sum burial grants and assistance to the surviving
family members of the deceased seniors.
(a) Burial grant is given to the surviving family
relative[s] of the deceased seniors, 55-90 years, who
reside in the NY metropolitan area and who are members
of * * * [KASMA]. If there is no surviving family
members, then * * * [KASMA] will arrange the burial
ceremony for the deceased[.] Members must fill out an
application form and pay membership dues. Each
member also pays $30 toward the burial assistance
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[*8] whenever a member passes away. As of the application
date, 13 burial grants ($1,400-3,000) were made to the
surviving family members to assist with the burial
expenses.
(b) % of time devoted to this activity .....70%
(c) % of funds devoted to this activity .....60%
In the future, as reserve funds increase, * * * [KASMA] plans
to expand it [sic] coverage of benefits to those non-member
seniors who have no surviving family members. Information
will be made available to the community through news media.
(2) Services for Seniors
(a) This service is provided to members and non-
members * * * alike. Services often provided are
information concerning burial sites, costs and funeral
homes; SSI, medicaid, foodstamp [sic]; and recreational
activities for the seniors such as free dinner[s] and
cultural shows, short trips to countryside sight-seeing.
(b) % of time devoted to this activity .....25%
(c) % of funds devoted to this activity .....25%
In [the] future, * * * [KASMA] plan[s] to hire a full-time staff who
will coordinate this service.
(3) Scholarship Award to Needy Students
(a) $1,000 scholarship will be given out to selected
students in the New York Metropolitan area who are
attending College or Graduate School who need financial
aid. (See Schedule H [Form 1023]) Availability of
scholarship will be announced in the new[s] media.
(b) % of time devoted to this activity .....5%
(c) % of funds devoted to this activity .....5%
In the future, as reserve funds increase, * * * [KASMA] plans to
allocate more money for scholarships.
In the letter KASMA stated that it had “no formal contracts with funeral
homes” except “a verbal understanding with a funeral home that it will * * * [give]
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[*9] about 10% discount in the burial expenses if the deceased senior was a
member of * * * [KASMA].” KASMA noted that its “officers and directors are
not directly related to the funeral home in question.”
KASMA also complied with Mr. Millet’s request and submitted an amended
certificate of incorporation which in pertinent part stated that KASMA is formed
“[t]o provide burial benefits and assistance to the surviving families of deceased
seniors”.
KASMA’s attorney sent another letter to Mr. Millet dated July 29, 1998,
which stated the following:
1) In the future, as reserve funds increase * * * [KASMA] will
expand * * * [its] coverage of burial assistance to those non-member
seniors over 60 years who have no surviving family members, and
who left little money to cover his/her burial expenses. * * *
[KASMA] will provide the necessary burial ceremony and burial
arrangements for such persons.
2) If enough * * * [funds are] available in the future, * * * [KASMA]
will also expand * * * [its] burial assistance to those non-member
seniors over 60 years who left surviving family members but who are
too poor to pay for the burial expenses.
* * * * * * *
5) If * * * [KASMA’s] reserve funds increase, * * * [it] will also
expand * * * [its] awards of scholarships for college students who are
in need of financial assistance.
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[*10] After a telephone conversation with Mr. Millet, KASMA’s representative
sent a letter dated July 31, 1998, indicating that KASMA agreed to change its
operating procedures so that all payments for the funeral expenses of its deceased
members and nonmembers alike would be paid directly to the funeral homes or
other service providers.
On August 10, 1998, the IRS issued a determination letter stating that on the
basis of the information supplied and assuming its operations would be as stated in
the application for recognition of exemption, the IRS determined KASMA was
exempt from Federal income tax under section 501(a) as an organization described
in section 501(c)(3).
IV. IRS Final Determination Letter Dated February 19, 2004
KASMA received a final determination letter regarding its private
foundation classification on February 19, 2004. The IRS previously had
determined that KASMA was an organization described in section 509(a)(2).
However, in the final determination letter the IRS modified KASMA’s foundation
status to that of a public charity described in sections 509(a)(1) and
170(b)(1)(A)(vi), effective for years beginning May 1, 2001. The letter also stated
that KASMA’s tax-exempt status under section 501(c)(3) was not affected.
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[*11] V. IRS Examination of KASMA
KASMA filed its annual return, Form 990, Return of Organization Exempt
From Income Tax, dated September 6, 2013, for its taxable year starting on May 1,
2012, and ending on April 30, 2013 (TYE April 30, 2013). On the Form 990
KASMA reported total revenue for TYE April 30, 2013, of $2,135,774 consisting
of “membership dues” of $203,740 and unexplained “other contributions, gifts,
grants, and similar amounts” of $1,932,034. KASMA also reported total expenses
of $2,083,507, of which $1,990,574 related to providing burial benefits. For TYE
April 30, 2013, KASMA did not report any revenue from fundraising. KASMA
also reported that it (1) provided burial benefits to 140 families during TYE April
30, 2013, and (2) had $536,014 in cash and $179,660 of net accounts receivable.
KASMA purchased a new office condominium in Flushing, New York, on
February 24, 2008, and paid the full price without a mortgage. On its Form 990
KASMA listed the book value of this condominium as $817,362.
By letter dated November 3, 2014, the IRS informed KASMA that it had
been selected for an examination of its Form 990 for TYE April 30, 2013. In that
letter the IRS requested that KASMA submit certain documents so that the IRS
could: (1) ascertain whether it still met the organizational test, (2) verify that its
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[*12] activities were exempt activities, and (3) determine that it had properly
completed the Form 990 for TYE April 30, 2013.
VI. KASMA’s Operations During TYE April 30, 2013
During TYE April 30, 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,4 and charged a $150 membership application fee5 to
anyone 55 years or older who applied to join the organization. Upon the death of
a member all remaining members were charged $10.6
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
4
Despite its name, The Korean-American Senior Mutual Association, there
is not anything in the record that indicates that membership was limited to Korean-
American seniors.
5
The membership application fee collected during TYE April 30, 2013, was
different than what KASMA reported on the Form 1023. On that form KASMA
stated that the membership application fee varied depending on the age of the
person applying for membership--ranging $100 to $150.
6
In its protest letter dated November 27, 2015, KASMA stated that it
assessed each member other fees every three months for the funeral costs incurred
in the previous three months and that at that time each member was assessed
approximately $300 to $350 per year.
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[*13] 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 on the Form 990 for TYE April 30, 2013, any
activities with respect to its services for seniors or its scholarship awards to needy
students. However, on its calendar year annual report for 2013 KASMA indicated
that during September through December 2013 it had provided free legal
consulting for 20 persons, “Social Work service” for 55 persons, voter registration
assistance for 17 persons, and “Home Country visiting program” for 12 persons.
VII. The IRS’ Final Adverse Determination
On November 4, 2015, the IRS sent a letter to KASMA proposing to revoke
its tax-exempt status under section 501(c)(3) because KASMA was not operated
exclusively for one or more tax-exempt purposes. KASMA submitted a written
protest to the IRS Appeals Office disputing the proposed revocation of its tax-
exempt status.
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[*14] The IRS Appeals Office issued a final adverse determination dated
September 6, 2017, and determined that KASMA does not qualify as exempt from
Federal income tax under section 501(c)(3) because “[t]he primary activity of
* * * [KASMA] is the provision of funds to defray or pay for the funeral costs of
its members”, which is not an exempt activity; therefore, KASMA is “not operated
exclusively for one or more exempt purposes” under section 501(c)(3). The IRS
granted KASMA’s request for relief pursuant to section 7805(b) and revoked its
tax-exempt status prospectively beginning on September 6, 2017.
Discussion
Section 7428(a)(1)(A) confers jurisdiction on the Court to make a
declaration in a case of actual controversy involving a determination by the
Secretary with respect to the initial qualification or continuing qualification of an
organization as an organization described in section 501(c)(3) which is exempt
from tax under section 501(a). The flush text of section 7428(a) provides in
pertinent part that “a determination with respect to a continuing qualification * * *
includes any revocation of or other change in a qualification”.
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). The parties submitted this case without a trial under Rule 122,
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[*15] and thus the evidentiary record consists solely of the administrative record.
See Rule 217(b)(2).
Section 501(a) generally exempts from taxation an organization described in
subsection (c). Section 501(c)(3) describes a qualifying organization in relevant
part to include “[c]orporations * * * organized and operated exclusively for
religious, charitable,[7] scientific, testing for public safety, literary, or educational
purposes”. An organization that qualifies under section 501(c)(3) not only is
exempt from Federal income tax but also may solicit and accept donations which
are normally deductible by the donor against his or her Federal tax. See sec.
170(a), (c)(2).
The IRS determined that KASMA did not operate exclusively for exempt
purposes (operational test). Respondent maintains that “[t]he primary activity of
* * * [KASMA] is the provision of funds to defray or pay for the funeral costs of
its members.”
The standard for tax-exempt status prescribed in section 501(c)(3) requires
that an organization be “operated exclusively” for an exempt purpose. Section
1.501(c)(3)-1(c)(1), Income Tax Regs., describes the operational test as follows:
7
In applying sec. 501(c)(3), the term “charitable” is used in its generally
accepted legal sense and is not limited by the enumerated list in that section. Sec.
1.501(c)(3)-1(d)(2), Income Tax Regs.
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[*16] (c) Operational test--(1) Primary activities.--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). An
organization will not be so regarded if more than an insubstantial part
of its activities is not in furtherance of an exempt purpose.
In this regard the presence of a single substantial purpose that is not described in
section 501(c)(3) precludes exemption from tax under section 501(a) regardless of
the number or the importance of the purposes that are present and described in
section 501(c)(3). See Better Bus. Bureau v. United States, 326 U.S. 279, 283
(1945).
“Under the operational test, 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 a section 501(c)(3)
organization exempt from tax under section 501(a).” B.S.W. Grp., Inc. v.
Commissioner, 70 T.C. 352, 356-357 (1978). As the Court noted in Partners in
Charity, Inc. v. Commissioner, 141 T.C. at 164: “Even in a commercial, profit-
motivated context, such activities may be wholesome and commendable; but they
will not support tax-exempt status unless they are undertaken to further an exempt
purpose.”
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[*17] I. KASMA Makes Two Arguments.
KASMA argues that respondent erred in revoking its tax-exempt status
because it serves a public interest and its activities accomplish one or more of the
exempt purposes specified in section 501(c)(3). Alternatively, KASMA argues
that respondent is equitably estopped from revoking its tax-exempt status because
such revocation would be against the principles of equity jurisprudence.
For reasons more fully discussed below the Court concludes that
(1) KASMA has not proven that respondent erred in determining that it was not
operated exclusively for an exempt purpose and (2) respondent is not equitably
estopped from revoking KASMA’s tax-exempt status.
II. KASMA Is Not Operated Exclusively for an Exempt Purpose.
As part of the application process, KASMA represented that its proposed
activities were to provide (1) burial benefits for deceased members, which would
be paid directly to the funeral home; (2) services for seniors, consisting of referral
services, distributing burial information, and organizing cultural and recreational
activities; and (3) scholarship awards for needy students. KASMA also
represented that it planned to expand its burial benefits to nonmember seniors with
or without surviving family members and who left little money to cover their
burial expenses. However, KASMA operated differently from its proposed
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[*18] activities stated in the Form 1023 and the letter dated July 31, 1998, in
significant ways.
On the basis of the administrative record the Court concludes that KASMA
was not operated exclusively for an exempt purpose because (1) it was not
operated to serve a charitable class, (2) it operated in a commercial manner, and
(3) its activities served a private rather than public interest.
A. KASMA Did Not Operate To Serve a Charitable Class.
KASMA argues that it serves a recognized charitable class: the elderly.
However, 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.
Upon the death of a member, KASMA would pay an amount towards the
funeral expenses directly to the funeral home. The amount paid was calculated on
the basis of the number of years the deceased had been a member. KASMA also
would pay to the surviving family of the deceased member an additional amount
according to a Korean tradition. KASMA did not pay these burial benefits to
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[*19] nonmember seniors with or without surviving family members who had little
money to cover burial expenses.
Respondent has recognized that an organization serves a charitable purpose
when it provides for the special needs of the elderly where the elements of relief of
distress and community benefit are present. See El Paso Del Aguila Elderly v.
Commissioner, T.C. Memo. 1992-441, 1992 Tax Ct. Memo LEXIS 464, at *9-
*10.8 Respondent has ruled that an organization provides for the special needs of
the elderly by relieving distress when it provides goods or services to the elderly at
substantially below cost or without regard to an individual’s ability to pay. See
Rev. Rul. 79-18, 1979-1 C.B. 194 (determining that an organization was operated
exclusively for charitable purposes when it provided specially designed housing to
elderly persons at the lowest cost feasible and allowed tenants to remain in the
housing if they became unable to pay the monthly fee); Rev. Rul. 77-246, 1977-2
C.B. 190 (determining that an organization was operated exclusively for a
charitable purpose when it provided low cost transportation to senior citizens and
8
While revenue rulings are not binding on the Court, the Court has held that
the Commissioner is bound by longstanding and clearly articulated administrative
positions set forth in revenue rulings. Rauenhorst v. Commissioner, 119 T.C. 157,
171 (2002). Respondent has recognized that in citing to the revenue rulings
discussed he indicates that he agrees with those rulings. Respondent, however,
argues that the positions articulated in those rulings are premised on facts that are
different from how KASMA operates.
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[*20] handicapped persons, an activity that was directed towards meeting the
special needs of these charitable classes of individuals); Rev. Rul. 76-244, 1976-1
C.B. 155 (determining that an organization was operated exclusively for a
charitable purpose when it provided home delivery of meals to the elderly and
handicapped for a fee approximating the cost of the meals but reduced charges for
those unable to pay the full amount and did not discontinue the service if a person
became unable to pay); Rev. Rul. 75-385, 1975-2 C.B. 205 (determining that an
organization was operated exclusively for a charitable purpose when it operated a
rural rest home and admitted poor elderly individuals for two week stays for a
nominal fee); Rev. Rul. 75-198, 1975-1 C.B. 157 (determining that an
organization was operated exclusively for a charitable purpose when it established
a senior center that provided information, referral, and counseling services relating
to health, housing, finances, education, and employment, and specialized
recreational services to senior citizens who did not have to be members to access
the senior center and its services); Rev. Rul. 61-72, 1961-1 C.B. 188 (determining
that an organization was operated exclusively for a charitable purpose when it
provided a home for the aged at rates substantially less than the cost of the
services furnished).
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[*21] Unlike the organizations described in the revenue rulings, 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. If a member failed to pay the
required membership dues for 90 days after receiving a written notice requesting
payment, KASMA’s board of directors could terminate the membership and its
obligation to pay any burial benefits.
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)
(“[A]lthough all of the beneficiaries of * * * [the taxpayer’s] purposes are elderly
individuals, aid to pensioners without regard to need, has been held not a
charitable purpose.”). Further, there is not any evidence in the administrative
record that the membership dues and the other annual fees that members were
charged were nominal amounts.9
9
Petitioner in its opening brief cited Rev. Rul. 72-124, 1972-1 C.B. 145, and
Rev. Rul. 79-17, 1979-1 C.B. 193, in support of its assertion that it served a
(continued...)
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[*22] KASMA did not operate to provide burial benefits for elderly persons who
were not members and who could not afford funeral expenses. KASMA
represented in correspondence, in connection with its application for tax-exempt
status, that it would use reserve funds to provide burial benefits for elderly persons
9
(...continued)
charitable class. As indicated, revenue rulings are not binding on the Court. See
supra note 8. Nevertheless, the facts in those revenue rulings are distinguishable
from how KASMA operated. In Rev. Rul. 72-124, supra, the organization was
formed by leaders of a church congregation to operate a home for the aged. The
organization charged a fee to residents in the home; but once a person was
admitted to the home, if they became unable to pay the monthly charges the
organization would pay the monthly fees out of its reserves or seek support from
local and Federal welfare programs, members of the church congregation, or
general public. Id. The administrative record in this case indicates that if a
member stopped paying dues, the member’s membership was terminated. Thus
when that person died, he or she was no longer eligible to receive a member’s
burial benefit. Further, the administrative record does not show that KASMA used
its surplus funds to pay burial benefits for nonmembers who could not afford to
pay them.
In Rev. Rul. 79-17, supra, the organization, a nonprofit hospice, was
operated to provide both inpatient and outpatient assistance to patients of all ages
who had been advised by a physician they were terminally ill. The organization’s
funds were derived from a reasonable fee charged for its services and donations by
the public. The IRS ruled that by alleviating the mental and physical distress of
persons terminally ill, the organization relieved the distressed within the meaning
of sec. 1.501(c)(3)-1(d)(2), Income Tax Regs. KASMA does not alleviate the
mental or physical distress of its members. KASMA does not provide any
assistance to members who are terminally ill. Rather, through the collection of
membership dues and other fees KASMA offers monetary assistance: the payment
of a member’s burial benefits calculated on the basis of the membership dues and
other fees paid by that member during his or her membership.
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[*23] who were not members and who could not afford funeral expenses, but it did
not operate in accordance with that representation.
KASMA set its member fee structure in a way to cover its operating
expenses and to accumulate substantial reserve funds. KASMA did not use the
accumulated funds to provide burial benefits for elderly nonmembers who could
not afford funeral expenses or members who were unable to pay all of their
membership dues. See El Paso Del Aguila Elderly v. Commissioner, 1992 Tax Ct.
Memo LEXIS 464, at *11-*12 (upholding a determination denying tax-exempt
status to an organization which had been organized to provide a burial plan to the
elderly at low cost because it operated to pay the burial plan only to its members
who paid premiums). Instead, KASMA used a portion of the accumulated funds
to purchase an office condominium with cash in 2008.
Additionally, KASMA did not serve the poor, another recognized charitable
class. “Charitable” for purposes of section 501(c)(3) includes relief of the poor
and distressed or of the underprivileged. Sec. 1.501(c)(3)-1(d)(2), Income Tax
Regs. Although KASMA mentioned a goal of providing burial benefits to poor
nonmembers, it did not. KASMA also represented that when it had accumulated
sufficient funds it would provide scholarships to needy students. It did not. Mere
statements of intent are insufficient to meet KASMA’s burden of proving it
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[*24] operated exclusively for charitable purposes. See El Paso Del Aguila
Elderly v. Commissioner, 1992 Tax Ct. Memo LEXIS 464, at *12.
B. KASMA Operated 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. “The particular manner in which an
organization’s activities are conducted, the commercial hue of those activities,
competition with commercial firms, and the existence and amount of annual or
accumulated profits, are all relevant evidence in determining whether an
organization has a substantial nonexempt purpose.” Id. at 372. 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. Sec. 1.501(c)(3)-1(c)(1), Income
Tax Regs.; see Partners in Charity, Inc. v. Commissioner, 141 T.C. at 168-169.
KASMA’s burial benefits activity was conducted by collecting membership
dues and additional fees when members died and paying out burial benefits to
families of deceased members correlated with the number of years the member had
paid. For TYE April 30, 2013, KASMA reported that it had paid burial benefits of
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[*25] $1,990,574 to140 families, or an average of $14,218 per family. KASMA
operated in a commercial manner by providing burial benefits on the basis of
payments over time by its members of membership dues and other fees.
C. KASMA Did Not Serve a Public Interest.
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).
KASMA points to Passaic United Hebrew Burial Ass’n v. United States,
216 F. Supp. 500 (D.N.J. 1963), to support its argument that it did not operate for
a “private benefit”, or more specifically, that no part of its net earnings inured to
the benefit of the private individuals who were members because no benefit to
KASMA’s members flowed until death. KASMA misconstrues the overlapping
characteristics of the private benefit and private inurement prohibitions.
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 absence
of private inurement of earnings to the benefit of a private shareholder or
individual does not, however, establish that the organization is operated
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[*26] 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.
If the Court concludes that no prohibited inurement of earnings exists, it
cannot stop there but must inquire further and determine whether a prohibited
private benefit is conferred. See id. at 1069.
Therefore, assuming without deciding that none of KASMA’s earnings
inured to the benefit of a private shareholder or individual, the Court must still
determine if it conferred a private benefit. KASMA paid burial benefits of
deceased members. The administrative record does not reflect that KASMA
provided other services for nonmember seniors or scholarship awards to needy
students. Therefore, KASMA’s primary activity conferred a private benefit. See
Retired Teachers Legal Def. Fund, Inc. v. Commissioner, 78 T.C. 280 (deciding
that an organization organized to preserve the financial stability of the New York
City Teachers Retirement System and the contributions and pensions of retiree
members of the system served the private interest of its members).
KASMA argues that its membership was open to “all seniors from the age
of 55 to 90 years old, residing in the metropolitan New York area, who support the
purposes of * * * [KASMA]” and that its organization is like the organization in
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[*27] Sound Health Ass’n v. Commissioner, 71 T.C. 158, 185 (1978), which was
granted tax-exempt status when the “class of possible members of the Association
is, for all practical purposes, the class of members of the community itself.”
However, the organization in Sound Health Ass’n is distinguishable from
KASMA because as a provider of medical services, it served the charitable
purpose of promoting health in the communities it served. Sound Health
Association operated to benefit the community by providing some health services
for nonmembers on a fee-for-service basis, operating a subsidized dues program,
running an emergency care facility that treated members and nonmembers
regardless of their ability to pay, and offering educational programs to the public.
Id. at 184-185. In contrast, KASMA did not provide burial benefits to
nonmembers of the community and did not provide a subsidized dues program.
KASMA has not established that it primarily benefited the community, and
therefore it did not serve a public benefit.
The Court concludes that KASMA did not operate exclusively for one or
more exempt purposes within the meaning of section 501(c)(3). Accordingly,
KASMA has not met its burden of proving that respondent’s determination to
revoke its tax-exempt status effective September 6, 2017, and prospectively was
erroneous.
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[*28] III. Respondent Is Not Equitably Estopped From Revoking KASMA’s
Tax-Exempt Status.
KASMA asserts that respondent should be equitably estopped from
revoking its tax-exempt status because the IRS (1) requested KASMA to amend its
articles of incorporation to reflect a charitable purpose, which it did, (2) granted
KASMA tax-exempt status in 1998, and (3) affirmed KASMA’s tax-exempt status
in 2004. KASMA argues that it will suffer a detriment from the loss of the exempt
status because it will lose exemptions from New York State and City sales tax and
it will likely “lose some of the goodwill it has built up among its members and the
local community”.
Equitable estoppel is a judicial doctrine that “precludes a party from
denying his own acts or representations which induced another to act to his
detriment.” Graff v. Commissioner, 74 T.C. 743, 761 (1980), aff’d, 673 F.2d 784(5th Cir. 1982); see Megibow v. Commissioner, T.C. Memo. 2004-41, 2004 Tax
Ct. Memo LEXIS 43, at *23. “The doctrine of [equitable] estoppel is based upon
the grounds of public policy, fair dealing, good faith, and justice and is designed
to aid the law in the administration of justice where without its aid injustice might
result.” Graff v. Commissioner, 74 T.C. at 761.
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[*29] “[T]he Government may not be estopped on the same terms as any other
litigant.” Heckler v. Cmty. Health Servs. of Crawford Cty., Inc., 467 U.S. 51, 60
(1984); see OPM v. Richmond, 496 U.S. 414, 419 (1990). The general rule is that
the Government is neither bound nor estopped by the acts of its officers and agents
in entering into an agreement or arrangement to do or cause to be done what the
law does not permit or sanction. Graff v. Commissioner, 74 T.C. at 762.
Equitable estoppel has been applied against the Government only where justice
and fair play require it. Id. at 761.
Invoking the doctrine of equitable estoppel against the Government “must
be treated with the utmost caution, since its sanction in any case would result in
having individual tax liability depend, not upon the factors and measures
prescribed by Congress as applicable to all, but upon the statements and conduct
of a particular Government officer in respect of each individual.” Couzens v.
Commissioner, 11 B.T.A. 1040, 1148 (1928). Thus the doctrine of equitable
estoppel is applied against the Commissioner only with utmost caution and
restraint. Schuster v. Commissioner, 312 F.2d 311, 317 (9th Cir. 1962), aff’g 32
T.C. 998 (1959), and rev’g 32 T.C. 1017 (1959); McCorkle v. Commissioner, 124
T.C. 56, 68 (2005); Hofstetter v. Commissioner, 98 T.C. 695, 700 (1992); Graff v.
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[*30] Commissioner, 74 T.C. at 761; Estate of Emerson v. Commissioner, 67 T.C.
612, 617 (1977).
The essential elements of estoppel are: “(1) [t]here must be a false
representation or wrongful misleading silence; (2) the error must be in a statement
of fact and not in an opinion or a statement of law; (3) the person claiming the
benefits of estoppel must be ignorant of the true facts; and (4) he must be
adversely affected by the acts or statements of the person against whom an
estoppel is claimed.” Estate of Emerson v. Commissioner, 67 T.C. at 617-618.
The difference between mistakes of fact and mistakes of law is fundamental when
dealing with the doctrine of equitable estoppel. See, e.g., Ginsberg v.
Commissioner, 24 T.C. 273, 278 (1955).
The IRS’ decision to grant KASMA tax-exempt status in 1998 was a
mistake of law by the IRS, not a mistake of fact. Equitable estoppel does not bar
or prevent the IRS from correcting a mistake of law. Auto. Club of Mich. v.
Commissioner, 353 U.S. 180, 183-184 (1957); Schuster v. Commissioner, 312
F.2d at 317; see Wilkins v. Commissioner, 120 T.C. 109, 113 (2003).
To qualify as an exempt organization described in section 501(c)(3), a
corporation must demonstrate that it is organized and operated exclusively for
religious, charitable, scientific, educational, or other specified exempt purposes.
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[*31] KASMA was not operated exclusively for any of the purposes indicated in
section 501(c)(3) because KASMA was a membership organization whose main
purpose was to provide burial grants for the private benefit of its members.
Therefore, the law does not permit KASMA to qualify as an exempt organization
described in section 501(c)(3).
By granting KASMA tax-exempt status the IRS incorrectly applied the law
requiring that a corporation operate exclusively for tax-exempt purposes. The IRS
may correct mistakes of law “even where a taxpayer may have relied to his
detriment on the * * * [IRS’] mistake.” Dixon v. United States, 381 U.S. 68, 73
(1965); see Greenfeld v. Commissioner, T.C. Memo. 1966-83, 1966 Tax Ct.
Memo LEXIS 201, at *5 (holding the IRS was not estopped from disallowing net
losses after failing to make such changes during audits of prior year tax returns).
The IRS has the power to correct mistakes of law because an IRS employee by
neglect or otherwise cannot bind the IRS to an erroneous interpretation of law.
Graff v. Commissioner, 74 T.C. at 762.
Thus, the IRS is not estopped from correcting the mistake of law.
Accordingly, the Court concludes that equitable estoppel is not applicable and
respondent is not estopped from determining that KASMA is not an organization
described in section 501(c)(3).
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[*32] The Court has considered all of the arguments made by the parties and, to
the extent they are not addressed herein, the Court finds them to be moot,
irrelevant, or without merit.
Decision will be entered for
respondent.