IRS revokes exemption of a veterans organization operating public gaming activities

Plain-English summary

The IRS revoked a veterans organization's exemption under IRC § 501(c)(19). The organization operated gaming activities with the general public, received most of its income from those activities, and did not present activities furthering its exempt purposes. The organization agreed to the revocation and had completed Form 1120 for specified prior tax years. The IRS stated that the revocation was effective January 1 of the redacted year and that the organization would need to file federal income tax returns for future periods if the revocation stood.

Ruling snapshot

• Question: Does the organization continue to qualify for exemption under IRC § 501(c)(19) when most of its income comes from gaming activities with nonmembers?
• Outcome: Revocation.
• Key authorities: IRC § 501(c)(19); IRC § 4946(a); Treas. Reg. § 1.501(c)(19)-1

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
1100 Commerce Street
Dallas, Texas 75242
501.19-00

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

November 2, 2010

LEGEND
ORG = Organization name
XX = Date
Address = address

Taxpayer Identification Number:
Form:

Number: 201104046
Release Date: 1/28/2011

ORG
Tax Year(s) Ended:
ADDRESS
Person to Contact/ID Number
Contact Numbers:
Telephone

Fax:

CERTIFIED MAIL - RETURN RECEIPT REQUESTED

Dear:

In a determination letter dated June 19XX, you were held to be exempt from Federal income tax under section 501(c)(19) of the Internal Revenue Code (Code1986).

Based on recent information received, we have determined you have not operated in accordance with the provisions of section 501(c)(19) of the Code. Accordingly, your exemption from Federal income tax is revoked effective January 1, 20XX. This is a final adverse determination letter with regard to your status under section 501(c)(19) of the Code.

We previously provided you a report of examination explaining why we believe revocation of your exempt status is necessary. At that time, we informed you of your right to contact the Taxpayer Advocate, as well as your appeal rights. On December 9, 20XX, you signed Form 6018-A, Consent to Proposed Action, agreeing to the revocation of your exempt status under section 501(c)(19) of the Code.

You are required to file Federal income tax returns for the tax periods shown above. If you have not yet filed these returns, please file them with the Ogden Service Center within 60 days from the date of this letter, unless a request for an extension of time is granted, or unless an examiner’s report for income tax liability was issued to you with other instructions. File returns for later tax years with the appropriate service center indicated in the in the instructions for those returns.

You have the right to contact the Office of the Taxpayer Advocate. Taxpayer Advocate assistance is not a substitute for established IRS procedures, such as the formal Appeals process. The Taxpayer Advocate cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a petition in a United States 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. You may call toll-free, 1-877-777-4778, and ask for Taxpayer Advocate Assistance. If you prefer, you may contact your local Taxpayer Advocate at:

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

Sincerely,

Nanette M. Downing
Director, EO Examinations

Internal Revenue Service
Department of the Treasury
Tax Exempt & Government Entities Division

1100 Commerce Street
Dallas, Texas 75242

Taxpayer Identification Number:

Date: November 17, 2009

Form:

ORG

ADDRESS
Tax Year(s) Ended:

Person to Contact/ID Number:

Contact Numbers:
Telephone:

Fax:

CERTIFIED MAIL - RETURN RECEIPT REQUESTED

Dear:

We have enclosed a copy of our report of examination explaining why we believe revocation of your organization's exempt status is necessary.

If you do not agree with our position you may appeal your case. The enclosed Publication 3498, The Examination Process, explains how to appeal an Internal Revenue Service (IRS) decision. Publication 3498 also includes information on your rights as a taxpayer and the IRS collection process.

If you request a conference, we will forward your written statement of protest to the Appeals Office and they will contact you. For your convenience, an envelope is enclosed.

If you and Appeals do not agree on some or all of the issues after your Appeals conference, or if you do not request an Appeals conference, you may file suit in United States Tax Court, the United States Court of Federal Claims, or United States District Court, after satisfying procedural and jurisdictional requirements as described in Publication 3498.

Letter 3610 (Rev. 11-2003)
Catalog Number: 34801V

You may also request that we refer this matter for technical advice as explained in Publication 892, Exempt Organization Appeal Procedures for Unagreed Issues. If a determination letter is issued to you based on technical advice, no further administrative appeal is available to you within the IRS on the issue that was the subject of the technical advice.

If you accept our findings, please sign and return the enclosed Form 6018, Consent to Proposed Adverse Action. We will then send you a final letter revoking your exempt status. If we do not hear from you within 30 days from the date of this letter, we will process your case on the basis of the recommendations shown in the report of examination and this letter will become final. In that event, you will be required to file Federal income tax returns for the tax period(s) shown above. File these returns with the Ogden Service Center within 60 days from the date of this letter, unless a request for an extension of time is granted. File returns for later tax years with the appropriate service center indicated in the instructions for those returns.

You have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate assistance is not a substitute for established IRS procedures, such as the formal appeals process. The Taxpayer Advocate cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a petition in a United States 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. You may call toll-free 1-877-777-4778 and ask for Taxpayer Advocate Assistance. If you prefer, you may contact your local Taxpayer Advocate at:

If you have any questions, please call the contact person at the telephone number shown in the heading of this letter. If you write, please provide a telephone number and the most convenient time to call if we need to contact you.

Thank you for your cooperation.

Sincerely,

Sunita Lough
Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Form 6018
Report of Examination
Envelope

Letter 3610 (Rev. 11-2003)
Catalog Number: 34801V

Form 886-A Department of the Treasury - Internal Revenue Service Explanation of Items Schedule No. or Exhibit

Name of Taxpayer
Year/Period Ended
December 31,
ORG EIN: EIN 20XX
December 31,
20XX

LEGEND
ORG = Organization name
XX - Date
State - state
Service - service
Motto - motto

ISSUE:

Does ORG continue to qualify for exemption under IRC 501(c)(19) given that the majority of their income is from gaming activities with nonmembers?

FACTS:

ORG is tax-exempt under section 501(c)(19). Your exempt purpose is to improve the relationship between military and civilian populations; and to maintain liaison with active personnel of the SERVICE.

ORG (ORG) was founded in 19XX by two men retired from the SERVICE. The two dedicated retirees realized that they and their fellow enlisted retirees had no voice in the corridors of power to stand up for their hard-earned rights and promised benefits. Today, ORG has grown to become the most influential organization working to protect and ensure the health and welfare of all military personnel, especially retirees. Your organization is the 47 Chapter of ORG. You were incorporated in the State of State on July 6th, 19XX and recognized by the Internal Revenue Service as a Veterans Organization, exempt under section 501(c)(19) of the Code, on June 29, 19XX.

Your specific and primary purposes, per your Articles of Incorporation are to: a) improve the relationship between military and civilian populations b) maintain liaison with active personnel of the SERVICE.

The organization’s current activities include conducting gaming (Motto) activities with nonmembers (general public) and fund charitable causes. The organization is conducting gaming activities with the general public and not with members (past or present members of the SERVICE) of your organization. The organization conducts Motto at a public facility, twice a week, which is open to the general public.

No activities were presented to further the organization’s exempt purpose. The members rarely meet due to members are located throughout the United States. The majority of income received comes from gaming activities which is open to the general public, which suggest you are operating a commercial activity unrelated to your exempt purposes.

LAW:

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

Form 886-A Department of the Treasury - Internal Revenue Service Explanation of Items Schedule No. or Exhibit

Name of Taxpayer
Year/Period Ended
December 31,
ORG EIN: EIN 20XX
December 31,
20XX

Section 501(c)(19) of the Internal Revenue Code describes a post or organization of past or present members of the SERVICE of the United States, or an auxiliary unit or society of, or a trust or foundation for, any such post or 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 SERVICE of the United States and substantially all of the other members of which are individuals who are cadets or are spouses, widows, widowers, ancestors, or lineal descendants of past or present members of the SERVICE 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(a) In general:

(1) states that for taxable years beginning after December 31, 1969 a veterans post or organization which is organized in the United States or any of its possessions may be exempt as an organization described in section 501(c)(19) if the requirements of paragraphs (b) and (c) of this section are met and if no part of its net earnings inures to the benefit of any private shareholder or individual. Paragraph (b) of this section contains the membership requirements such a post or organization must meet in order to qualify under section 501(c)(19). Paragraph (c) of this section outlines the purposes, at least one of which such a post or organization must have in order to so qualify.

(2) In addition, an auxiliary unit or society described in paragraph (d) of this section of such a veterans post or organization and a trust or foundation described in paragraph (e) of this section for such post or organization may be exempt as an organization described in section 501(c)(19).

Federal Tax Regulation section 1.501(c)(19)-1(b) Membership requirements:

(1) In order to be described in section 501(c)(19) under paragraph (a)(1) of this section, an organization must meet the membership requirements of section 501(c)(19)(B) and this paragraph. There are two requirements that must be met under this paragraph. The first requirement is that at least 75 percent of the members of the organization must be war veterans. For purposes of this section the term “war veterans” means persons, whether or not present members of the United States SERVICE who have served in the SERVICE of the United States during a period of war (including the Korean and Vietnam conflicts).

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

Form 886-A Department of the Treasury - Internal Revenue Service Explanation of Items Schedule No. or Exhibit

Name of Taxpayer
Year/Period Ended
December 31,
ORG EIN: EIN 20XX
December 31,
20XX

(2) The second requirement of this paragraph is that at least 97.5 percent of all members of the organization must be described in one or more of the following categories:

(i) War Veterans

(ii) Present or former members of the United States SERVICE,

(iii) Cadets (including only students in college or university ROTC programs or at Armed Services academies), or

(iv) Spouses, widows, widowers of individuals referred to in paragraph (b)(2)(i), (ii) or (iii) of this section.

Federal Tax Regulation section 1.501(c)(19)-1(c) Exempt Purposes: In addition to the requirements of paragraphs (a)(1) and (b) of this section, 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) To promote the social welfare of the community as defined in section 1.501(c)(4)-1(a)(2),

(2) To assist disabled and needy war veterans and members of the United States SERVICE 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 SERVICE of the United States,

(4) To carry on programs to perpetuate the memory of deceased veterans or members of the SERVICE and to comfort their survivors,

(5) To conduct programs for religious, charitable, scientific, literary, 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, or

(8) To provide social and recreational activities for their members.

Substantially unrelated activities may prohibit exemption. The following are examples of unrelated activities that may affect exemption:

• Rents out its facilities to the general public;

• Facilities, such as bar and dining facilities, open to the general public;

• Sells liquor and/or food to members and/or the public for
consumption off the premises.

• Gaming activities with nonmembers

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

Form 886-A Department of the Treasury - Internal Revenue Service Explanation of Items Schedule No. or Exhibit

Name of Taxpayer
Year/Period Ended
December 31,
ORG EIN: EIN 20XX
December 31,
20XX

GOVERNMENT POSITION:

As a result of our examination of your Form 990 and 990-T for period ending December 31, 20XX and December 31, 20XX we have determined that your organization no longer qualifies as an exempt Veteran Organization described in the Internal Revenue Code section 501(c)(19). Since your organization conducted gaming activities (Motto) with the general public, your organization is not in furtherance of your exempt purpose. The majority of income received was from the general public.

Based on the above, we are proposing revocation of your exempt status under section 501(c)(19) of the Internal Revenue Code effective January 1, 20XX.

TAXPAYER’S POSITION:

The organization agrees with the revocation and completed Form 1120 for tax year ending December 31, 20XX, December 31, 20XX, and December 31, 20XX. Agent sent Form 6018-A for signature on November 17, 20XX for an officer signature. The organization declined to have a closing conference.

CONCLUSION:

As a result of the 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 organizations primary activity was the operation of conducting gaming (Motto) with the general public.

The organization does not continue to qualify for exemption as an organization described in section 501(c)(19) of the Internal Revenue Code. Consequently, the exempt status of the organization is being revoked effective January 1, 20XX.

Should this revocation be upheld you are required to file Form 1120 for all future periods, whether or not you have taxable income.

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