IRS revokes a civic organization's exemption after it operated a public bar

Plain-English summary

The IRS revoked an organization's tax exemption under section 501(c)(4). The organization operated a bar for its members and the general public, and the IRS concluded that this activity was not primarily the promotion of social welfare. The IRS also concluded that the organization did not qualify under sections 501(c)(7) or 501(c)(19), because it served the public through its liquor license and did not satisfy the relevant membership requirements. The organization was instructed to file Form 1120 for the required years.

Ruling snapshot

• Question: Did the organization continue to qualify for tax-exempt status after operating a bar open to the general public?
• Outcome: Revocation
• Key authorities: IRC §§ 501(c)(4), 501(c)(7), 501(c)(19), and 6110(k)(3); Treas. Reg. §§ 1.501(c)(4)-1 and 1.501(c)(7)-1(b)

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TE/GE — EO Mandatory Review
1100 Commerce Street, MC 4920-DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES October 30, 2007

DIVISION

Release Number: 201323032
Release Date: 6/7/2013

Employer Identification Number:
Person to Contact:

LEGEND UIL: 501.04-01

ORG + Name Org

Contact Telephone Number:

In Reply Refer To:
TE/GE Review Staff

Date = xx

Dear —:

This is a Final Adverse Determination as to your exempt status under section 501(c)(4)
of the Internal Revenue Code.

Our adverse determination was made for the following reasons:

ORG failed to establish that they meet the requirement for exemption under IRC
501(c)(4). Section 1.501(c)(4)-1(a)(1) and (2) of the Treasury Regulations reads in
part, "(a) Civic organizations (1) In general. —A civic league or organization may be
exempt as an organization described in section 501(c)(4) if: (i) It is not organized or
operated for profit; and (ii) It is operated exclusively for the promotion of social
welfare. (2) Promotion of social welfare (i) In general. —An organization is operated
exclusively for the promotion of social welfare if it is primarily engaged in promoting
in some way the common good and general welfare of the people of the community.
An organization embraced within this section is one which is operated primarily for
the purpose of bringing about civic betterments and social improvements.

As a result of our recent audit of your organization's activities for the period ended
December 31, 19xx, it was determined that your organization operates a bar for its
members, as well as for the general public. An organization is not organized and
operated primarily for the promotion of social welfare, if its primary activity is operating a
social club for the benefit, pleasure, or recreation of its members, or is carrying on a
business with the general public in a manner similar to organizations which are
operated for profit. Therefore, we are revoking your organization's exemption from

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Federal income tax under section 501(c)(4) of the Internal Revenue Code effective
January 1, 19xx.

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, 2000. Form 1120 must be filed by the 15th 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 are
required to file Form 1120 with the appropriate Internal Revenue Campus.

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
1-877-777-4778 and ask for Taxpayer Advocate assistance. Or you can contact the
Taxpayer Advocate from the site where the tax deficiency was determined by writing
to: Internal Revenue Service,

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,

Marsha A. Ramirez
Director, EO Examinations

DEPARTMENT OF THE TREASURY
Internal Revenue Service
TEGE:EO Examinations

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION June 30, 2005

Taxpayer Identification Number:
LEGEND:

ORG= Name of ORG Form:

Date = xx Tax Year(s) Ended:

Person to Contact/ID Number:
Contact Numbers:

ORG Telephone:

Fax:

Address = Name of Address

ADDRESS

CERTIFIED MAIL — RETURN RECEIPT REQUESTED

Dear

We have enclosed a copy of our report of examination explaining why we believe an
adjustment 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 (04-2002)
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 modifying or revoking
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.

Letter 3610 (04-2002)
Catalog Number 34801V

Thank you for your cooperation.

Sincerely,

R. C. Johnson
Director, EO Examinations

Enclosures:

Publication 892

Publication 3498

Form 6018-R
Report of Examination
Envelope

Letter 3610 (04-2002)
Catalog Number 34801V

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

Name of Taxpayer
ORG

LEGEND:
ORG = Name of ORG
DATE = xx

As a result of our examination of your Form 990 filed for the period ended December 31, 19xx, we are
proposing a revocation of your organization's exempt status.

Our records show that in November of 19xx, you were granted exempt status under section 501(c)(4) of the Internal
Revenue Code. Section 501(c)(4) applies to an organization which has a purpose and activities that promote the
common good and betterment of members of the community.

Your organization operates a post for war veterans of military service in foreign campaign. You conduct
charitable activities, including fundraising events, such as poppy sales and raffles. The proceeds are donated to
charitable organizations. You also conduct patriotic and community activities. Your organization operates a bar for
its members, as well as for the general public. You hold a Class B liquor license, which entitles you to be open for
public patronage.

Section 1.501(c)(4)-1 of the Income Tax Regulations provides that a civic league or social welfare organization may
be exempt as an organization described in section 501(c)(4), if it is not organized for profit, and it is operated
exclusively for the promotion of social welfare. An organization is not organized and operated primarily for the
promotion of social welfare, if its primary activity is operating a social club for the benefit, pleasure, or recreation of
its members, or is carrying on a business with the general public in a manner similar to organizations which are
operated for profit.

In view of the foregoing, it is held that your organization no longer qualifies for exempt status under
IRC Section 501(c)(4) as a social welfare organization. Therefore, we are proposing a revocation of your
organization's exempt status.

We considered whether you would qualify for exempt status under section 501(c)(7) of the Internal Revenue Code.
Section 501(c)(7) applies to a social club which is organized and operated exclusively for the pleasure, recreation,
and other nonprofitable purposes of its members. Section 1.501(c)(7)-1(b) of the Income Tax Regulations states that
"a club which engages in business, such as making its social and recreational facilities available to the general
public, or by selling real estate, timber, or other products, is not organized and operated exclusively for pleasure,
recreation, and other nonprofitable purposes, and is not exempt under section 501(a)."

As your organization has converted to a Class B liquor license, entitling you to serve the general public at large,
you do not qualify for exempt status under section 501(c)(7) of the Internal Revenue Code.

We considered whether you would qualify for exempt status under section 501(c)(19) of the Internal Revenue Code.
Section 501(c)(19) applies to a War Veterans' organization of which at least 90% of the members are war veterans.
Substantially all of the other members must be either veterans, cadets, or spouses, widows, or widowers of war
veterans, or cadets. "War veterans" are defined as persons who have served in the United States Armed
Forces during a period of war.

As your organization does not satisfy these membership requirements, you do not qualify for exempt status under
IRC section 501(c)(19).

As you do not qualify for exempt status under any other section of the Internal Revenue Code, we are
proposing a revocation of your current exempt status, effective January 1, 19xx.

Please note that this is not a final report. This report is subject to review by our Mandatory Review staff,
who may modify the report.

4 Form 886-A

Department of the Treasury- Internal Revenue Service
Explanation of Items

Schedule No. or
Exhibit

Name of Taxpayer
org

Page 2 of 2

Whereas your organization appears to be carrying on a business with the general public in a manner which is
similar to organizations which are operated for profit, your income is considered as taxable in its entirety.

In the event that the proposed revocation of your exempt status is not upheld by our Mandatory Review Staff, and
you continue to be exempt, tax adjustments to your filed Forms 990-T may be proposed for all open years. If you
owe any taxes, after allowable expense deductions are applied, then you may receive a bill from our service center
for any taxes owed.

Form 886-A
(__Rev. 4-68)

Department of the Treasury - Internal Revenue Service

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