Determination 200850037: with no member records kept, all of the bar and hall income counted as business with the public

Plain-English summary

Exempt Organizations Examinations in Dallas signed this letter on August 27 2008 and the Service released it on December 12 2008. It opens "This is a Final Adverse Determination as to your exempt status under section 501(c)(19) of the" Code and ends the exemption of a veterans post "effective January 1, 20XX". Vicki L. Hansen signed as "Acting Director, EO Examinations" over a "Dallas, TX 75242" letterhead marked "TE/GE Review Staff", sent "CERTIFIED MAIL — RETURN RECEIPT REQUESTED". The post agreed: the letter records "You have executed the Form 6018-A". Going forward, "You are required to file Form 1120, U.S. Corporation Income Tax Return."

The interesting thing about this revocation is that it rests on an absence of records rather than on any measured amount of outside business. The report finds the post "does not maintain separate records of income from members and income from non-members", that it "does not maintain records for the hall rentals to members and non-members", and that "no member log was maintained by the" post. With nothing on hand to tell the two apart, the whole of the bar, vending and hall-rental income is treated as business done with the public. The examiner never had to establish what share of the trade came from outsiders. The post's inability to show that any of it came from members did the work by itself.

The activities the report describes are ordinary post activities. It says "The activities include operating a bar that is open to the public, selling motto, holding" other events, and separately that "The motto vending machine is located inside the bar". The post held an "on premise liquor license from the State of XYZ". A signed statement from the treasurer concedes the point directly: that "all activities are open to the public", "such as Corn Beef Dinner for St. Patrick’s Day, the bar is open to the public and" "the building is rented out to the public for parties and weddings. The bar has been open" "to the public for about four years." One activity, identified only by the redaction legend, is noted as "Motto was discontinued in" an unstated period.

The final letter states the grounds compactly: "your organization opens its bar to the public and" "conducts gaming activities with non-members". Then it draws the conclusion that carries the case: "These activities give the appearance that the organization is conducting business with the general public like a for-profit business".

On the law, the report reads section 501(c)(19) as a membership test rather than a purpose test. It says "IRC Section 501(C)(19) requires that an organization created under this subsection" "must be supported through member dues and restricted from conducting business with the general public", and that the section "recognizes as exempt from Federal income tax, a post or" organization of past or present members of the Armed Forces. It notes that "For taxable years after September 3, 19XX" the section requires "at least 75 percent of the" membership to meet the statutory description. It quotes the eight purposes in the regulation, including to "promote the social welfare of the community", and then quotes the regulation's own limit: "It is not necessary that the organization's purposes or activities include all of the listed" purposes, "but they cannot have purposes of a substantial nature that are" "not listed and retain IRC Section 501(c)(19) status." The unrelated business provisions are set out alongside, with section 512(a)(1) defining income "organization form any unrelated trade or business" and the regulation under section 513 turning on "causal relationships to the achievement of exempt" purposes. The recordkeeping sections 6001 and 6033 and the regulations under 1.6001-1 close the discussion.

Two absences are worth naming because the corpus usually shows the opposite. The letter sets no Tax Court petition deadline and never mentions section 7428 at all, so there is no declaratory judgment route offered here. What survives is the boilerplate promise that the Taxpayer Advocate cannot "extend the time fixed by law that you have to file a petition in the" court, a deadline the letter itself declines to name. The late-filing penalty paragraph is equally spare: a return must be "filed by the 15" day of the third month after the end of your annual" accounting period, "A penalty of $20 a day is charged when a return is filed late", and "the maximum penalty charged cannot exceed $10,000" or "5 percent of your gross receipts for the year, whichever is less".

The redaction engine left this report with no numbers at all. Its single quantity survives as "roughly $ annually", where the figure has been removed and the qualifier left modifying nothing. The same engine substitutes the legend token "motto" for a word it deleted, which is why the report reads as selling and vending an abstraction. Elsewhere the post is described as having been "The ORG was charted on September 10, 19XX" and recognized under "the Internal Revenue Code of 19XX under Section 501(C)(19)", with every date reduced to placeholders.

An earlier letter is bound in behind the final one, and it comes from a different office. It is dated "May 3, 2007", carries a "100 South Clinton Street" address in "Syracuse, NY 13260", is signed by "Kathleen Sopchak" as "Revenue Agent", and says "Enclosed are three forms of Form 6018-A for revocation of exempt status." Roughly sixteen months separate that proposal from the Dallas final letter. The report's taxpayer-position section reflects the gap in participation: "The taxpayer only provided a signed 6018-A" and "The organization failed to provide any" substantiation, and the post "was not exemption as a veteran’s organization" in the examiner's conclusion, a sentence whose grammar the scan preserves as released.

One OCR correction was applied to this text. The citation printed as "Regs. 1.501(c)(1 9)-1(c)" was closed up to "Regs. 1.501(c)(19)-1(c)", a spacing defect in a citation that the same report prints correctly as "1.501(c)(19)-1(c)" elsewhere. Nothing else was changed.

Several defects were flagged and deliberately left as released. The ordinal in "15" day" lost its superscript letters. The masthead bands are garbled in three different ways across the report, printing as "Saya 886A", "Form 886-A ceev.4-68)" and "‘layaaal 886A" where other pages print the form number cleanly. The Form 886-A column header reads "Name of Taxpayet". The redaction legend band prints as "Co-1 & Co-2 = 1°" "& 2°¢ companies" with its ordinals collapsed. The statute number is capitalized as "501(C)(19)" on four occasions against sixteen printings of the lowercase form, which is a capitalization habit rather than a character misread. And two apparent word substitutions are left alone because they may be typos in the source rather than scanner errors: the section 512 quotation reads "organization form any unrelated trade or business", and the list of exempt purposes reads "scientific, literacy, or educational" where the statute reads literary. None of these were repaired, because each is either a judgment call about the source or a defect a correction could not make honestly.

Because the case-law tool available to this corpus is currently unavailable, no citation in this document was independently confirmed. Every authority above is reproduced exactly as the release prints it.

Ruling snapshot

• Question: Does a veterans post keep its exemption under section 501(c)(19) when it cannot separate member income from non-member income in its bar, vending and hall-rental receipts, and when it opens its bar and its gaming to the public?
• Outcome: No. Exemption revoked effective January 1 of a redacted year, on a Form 6018-A the post had already signed, with Forms 1120 required going forward. The letter offers no Tax Court deadline and cites no section 7428.
• Key authorities: IRC 501(c)(19) and the eight purposes in Treas. Reg. 1.501(c)(19)-1(c); IRC 512(a)(1) and 513(a) with Treas. Reg. 1.513-1(d)(2); recordkeeping under IRC 6001 and 6033 with Treas. Reg. 1.6001-1(a), (c) and (e).

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
1100 Commerce Street
MS:4920:DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Release Number: 200850037
Release Date: 12/12/08
Date: 8/27/08

LEGEND UIL: 501.19-00

ORG = Organization name XX = Date Address = address
ORG Person to Contact:
ADDRESS Identification Number

Contact Telephone Number:
In Reply Refer to: TE/GE Review Staff
EIN:

CERTIFIED MAIL — RETURN RECEIPT REQUESTED

Dear

This is a Final Adverse Determination as to your exempt status under section 501(c)(19) of the
Internal Revenue Code.

Our adverse determination was made for the following reasons:

As a result of a recent examination of your organization’s activities and Form 990 for the period
ended December 31, 20XX, and December 31, 20XX, it was determined that your organization
does not maintain separate records of income from members and income from non-members. As
a result, the Service considers all of your income from bar sales, sales, and hall rentals to
derive from non-members. In addition, your organization opens its bar to the public and
conducts gaming activities with non-members. These activities give the appearance that the
organization is conducting business with the general public like a for-profit business. The
organization fails to meet the requirements for exemption under 501(c)(19).

Veterans organizations, whether organized before or after the amendment of IRC 501(c)(19),
must be operated for one or more of the eight purposes listed in Regs. 1.501(c)(19)-1(c).
Accordingly, you cannot have purposes of a substantial nature that are not listed in this section
and retain IRC 501(c)(19) status. For taxable years after September 3, 19XX, IRC 501(c)(19)
grants exemption to a post or organization of past or present members of the armed forces of the
United States, or an auxiliary unit or society of, or a trust or foundation for, any such post or
organization — organized in the United States or any of its possessions, at least 75 percent of the
members of which are past or present members of the armed forces of the United States and
substantially all of the other members of which are individuals who are cadets, spouses, widows,

or widowers of past or present members of the armed forces of the United States or of cadets, and
no part of which inures to the benefit of any private shareholder or individual.

Based on the above, we are revoking your organization's exemption from Federal Income Tax
under section 501(c)(19) of the Internal Revenue Code effective January 1, 20XX.

You are required to file Form 1120, U.S. Corporation Income Tax Return. These returns

should be filed with the appropriate Service Center for all years beginning after December 31,
20XX. You have executed the Form 6018-A, agreeing to the revocation of exemption under IRC
Section 501 (c)(19).

Form 1120 must be filed by the 15" day of the third month after the end of your annual
accounting period. A penalty of $20 a day is charged when a return is filed late, unless there is
reasonable cause for the delay. However, the maximum penalty charged cannot exceed $10,000
or 5 percent of your gross receipts for the year, whichever is less. This penalty may also be
charged if a return is not complete, so please be sure your return is complete before you file it.

You have the right to contact the office of the Taxpayer Advocate. However, you should first
contact the person whose name and telephone number are shown above since this person can
access your tax information and can help you get answers. You can call and ask for Taxpayer
Advocate assistance. Or you can contact the Taxpayer Advocate from the site where the tax
deficiency was determined by calling or writing to:

Taxpayer Advocate assistance cannot be used as a substitute for established IRS procedures,
formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or technically
correct tax determinations, nor extend the time fixed by law that you have to file a petition in the
United States Tax Court. The Taxpayer Advocate can however, see that a tax matter that may
not have been resolved through normal channels, gets prompt and proper handling.

If you have any questions, please contact the person whose name and telephone number
are shown in the heading of this letter.

Sincerely yours,

Vicki L. Hansen
Acting Director, EO Examinations

Form 88 6 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Year/Period Ended

Name of Taxpayer

ORG 20XX12 and
20KX12
LEGEND
ORG = Organization name XX = Date motto = motto Co-1 & Co-2 = 1°

& 2°¢ companies
Issues:

1. Under the circumstances described, does the ORG meet the requirements for
continued recognition of exemption under section 501(c)(19) of the Internal
Revenue Code?

Facts:

The ORG was charted on September 10, 19XX. The organization is under the group
exemption number of the ORG. The ORG was recognized as tax-exempt under
the Internal Revenue Code of 19XX under Section 501(C)(19).

The activities include operating a bar that is open to the public, selling motto, holding
membership meetings, contributing funds to charitable organizations and conducting
charitable activities. The organization receives the majority of its income from rental of
the hall, bar sales and motto sales through its vending machine. The organization also
receives income from membership dues and motto. Motto was discontinued in
November of 20XX. The organization paid for advertisement in the CO-1 as a place in
CO-2 listing. On the website, it listed the organization’s name, address, phone number
and product and services offered. The product and services listed are banquet rooms,
facility rental and party planning services and miscellaneous personal services. On
website: the organization’s name, address and phone number are listed. On the
website, the organization’s name, address, phone number and business type is listed
under banquet halls.

The organization has an on premise liquor license from the State of XYZ (exhibit 1) the
definition for an on premise liquor license states, “

The motto vending machine is located inside the bar and anyone is allowed to purchase
motto from it. The organization does not maintain records to show the amounts of bar
and motto sales from members and from non-members. The organization does not
maintain records for the hall rentals to members and non-members.

The Treasurer stated in a signed statement (exhibit 2), “that all activities are open to the
public, such as Corn Beef Dinner for St. Patrick’s Day, the bar is open to the public and

Form 886-A rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -1-

Saya 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX12 and
20XX12

the building is rented out to the public for parties and weddings. The bar has been open
to the public for about four years.”

Law:

IRC Section 501(C)(19) requires that an organization created under this subsection
must be supported through member dues and restricted from conducting business with
the general public.

IRC Section 501(C)(19) recognizes as exempt from Federal income tax, a post or
organization of past or present members of the Armed Forces of the United States, or
an auxiliary unit or society of, or a trust or foundation for, any such post organization

(A) organized in the United States or any of its possessions,

(B) at least 75 percent of the members of which are past or present members of the
Armed Forces of the United States and substantially all of the other members of
which are individuals who are cadets or are spouses, widows or widowers of
past or present members of the Armed Forces of the United States or of cadets
and

(C) no part of the net earnings of which inures to the benefit of any private
shareholder or individual.

Federal Tax Regulation section 1.501(c)(19)-1(c) states that in order to be described in
section 501(c)(19) under paragraph (a)(1) of this section an organization must be
operated exclusively for one or more of the following purposes:
(1) promote the social welfare of the community
(2) to assist disabled and needy war veterans and members of the United States
Armed Forces and their dependents, and the widows and orphans of deceased
veterans
(3) to provide entertainment, care, and assistance to hospitalized veterans or
members of the Armed Forces of the United States
(4) to carry on programs to perpetuate the memory of deceased veterans and
members of the Armed Forces and to comfort their survivors
(5) to conduct programs for religious, charitable, scientific, literacy, or educational
purposes
(6) to sponsor or participate in activities of a patriotic nature
(7) to provide insurance benefits for their members or dependents of their members
or both
(8) to provide social and recreational activities for their members

IRC Section 512(a)(1) defines the term “Unrelated business taxable income” as follows”
“unrelated business taxable income” means the gross income derived by any
organization form any unrelated trade or business (as defined in section 513) regularly
carried on by it, less the deductions allowed by this chapter which are directly

Form 886-A ceev.4-68) Department of the Treasury - Internal Revenue Service
Page: -2-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayet Year/Period Ended
ORG 20XX12 and
20XX12

connected with the carrying on of such trade or business, both computed with the
modifications provided in subsection (b).

IRC Section 513(a) provides that the term “unrelated trade or business” means any
trade or business the conduct of which is not substantially related (aside from the need
of such organization for income or funds or the use it makes of the profits derived) to
the exercise or performance by such organization of its charitable, educational, or other
purpose or function constituting the basis for its exemption under section 501. The term
does not include any trade or business in which substantially all the work in carrying on
such trade or business is performed for the organization without compensation.

Federal Tax Regulation 1.513-1(d)(2) of the regulations provides that a trade or
business is related to exempt purposes, in the relevant sense, only where the conduct
of the business activities has a causal relationships to the achievement of exempt
purposes (other than through the production of income); and that it is substantially
related, for purposes of section 513 of the Code, only if the causal relationship is a
substantial one. Thus, for the conduct of trade or business to be substantially related to
purposes for which exemption is granted, the production or distribution of the goods or
the performance of the service from which the gross income is derived must contribute
importantly to the accomplishment of those purposes. Whether the activities productive
of gross income contribute importantly to the accomplishment of any purpose for which
an organization is granted exemption depends in each case upon the facts and
circumstances involved.

Section 6001 of the Code provides that every person liable for any tax imposed by the
code, or for the collection thereof, shall keep adequate records as the Secretary of the
Treasury or his delegate may from time to time prescribe.

Section 1.6001-1(a) of the regulations in conjunction with section 1.6001-1(c) provides
that every organization exempt from tax under section 501(a) of the Code and subject
to the tax imposed by section 511 of its unrelated business income must keep such
permanent books or accounts or records, including inventories, as are sufficient to
establish the amount of gross income, deduction, credits or other matters required to be
shown by such person in any return of such tax. Such organization shall also keep such
books and records as are required to substantiate the information required by section
6033.

Section 1.6001-1(e) of the regulations state that the books or records required by this
section shall be kept at all times available for inspection by authorized internal revenue
officers or employees, and shall be retained so long as the contents thereof may
become material in the administration of any internal revenue law.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -3-

‘layaaal 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 20XX12 and
20XX12

Taxpayer's Position:

The agent spoke with the Treasurer and stated why the organization was not exemption
as a veteran’s organization under section 501(c)(19) of the Code. The agent mailed the
report and the Form 6018-A to the taxpayer. The agent explained to the Treasurer that
if the organization agrees with the findings that Form 6018-A would need to be signed
and sent back to the agent. The agent also explained that the Form 1120 would need to
be completed for the years ending December 31, 20XX and December 31, 20XX. The
completed Forms 1120 would need to be sent back with the Form 6018-A before the
case would be closed. The taxpayer only provided a signed 6018-A agreeing to the
organizations exempt status being revoked. The organization failed to provide any
1120 returns.

Government's Position:

Based on the facts from the examination, no member log was maintained by the
organization to show the amount of bar and motto sales and hall rentals from members
and non-members. As a result, all of the income from bar sales, motto sales and hall
rental income is deemed to be from non-members. The organization’s bar sales, motto
sales and hall rental income to the public produce the majority of its gross revenue
(roughly $ annually). Opening the bar to the public and conducting gaming activities
with non-members are not considered exempt purposes of an organization described
under IRC Section 501(c)(19). These activities are being conducted as a trade or
business with the public. As stated in Treasury Regulation Section 1.501(c)(19)-1(c), “It
is not necessary that the organization's purposes or activities include all of the listed
purposes to be exempt, but they cannot have purposes of a substantial nature that are
not listed and retain IRC Section 501(c)(19) status.” Therefore, the organization no
longer qualifies for exemption under IRC Section 501(c)(19).

Conclusion:

Based on foregoing reasons, the organization no longer qualifies for exemption under
IRC Section 501(c)(19) due to its extensive non-exempt activities. Therefore, revocation
of the organization’s tax exemption under IRC Section 501(c)(19) is warranted.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -4-

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
100 South Clinton Street
Syracuse, NY 13260

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

LEGEND
ORG = Organization name XX = Date Address = address

May 3, 2007

ORG
ADDRESS

Dear

During the course of the audit, it was determined that the organization does not qualify
for exemption as an organization described under section 501(C)(19) of the Internal
Revenue Code.

Enclosed are three forms of Form 6018-A for revocation of exempt status. Please sign
and return two of the forms, Form 6018-A, if your organization agrees with the findings.

If you have any additional questions, please feel free to contact me at.
Thank you for your time and cooperation in this matter.
Sincerely,

Kathleen Sopchak
Revenue Agent

Enclosed:
Form 6018-A
Form 886-A