Determination 1323036: IRS revokes exemption from a public-facing employee association store

Plain-English summary

The IRS revoked an employee association's exemption under IRC § 501(c)(4). The association operated a public-facing store selling public safety apparel and equipment, and the IRS found that store operations dominated its work and finances. The association had also opened membership to the general public, provided life insurance and legal consultation benefits, and made only de minimis charitable contributions while discontinuing most recreational activities. The IRS concluded that the association no longer met the requirements for a local association of employees and required it to file Form 1120 returns.

Ruling snapshot

• Question: Did the association continue to qualify for exemption under IRC § 501(c)(4)?
• Outcome: Revocation, effective January 1, 20XX as stated in the redacted release.
• Key authorities: IRC § 501(c)(4); Treas. Reg. §§ 1.501(c)(4)-1, 1.501(c)(12)-1, and 1.501(c)(3)-1; Rev. Ruls. 66-59 and 66-180.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE
Attn: Mandatory Review, MC 4920 DAL 501-04.00
1100 Commerce St.
TAX EXEMPT AND Dallas, TX 75242
GOVERNMENT ENTITIES
DIVISION
Release Number: 201323036
Release Date: 6/7/2013 Date:
ORG Employer Identification Number:
ADDRESS Person to Contact / ID Number:
Contact Numbers:
Voice:
Fax:

CERTIFIED MAIL — RETURN RECEIPT REQUESTED
Dear '

In a determination letter dated September 24, 19XX, you were held to be exempt from Federal
income tax under section 501(c)(4) of the Internal Revenue Code (the Code).

Based on recent information received, we have determined that you have not operated in
accordance with the provisions of section 501(c)(4) of the Code. Accordingly, your exemption
from Federal income tax is revoked effective January 1, 20XX. This is a final adverse
determination letter in regard to your status under section 501(c)(4) 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 February 24, 20XX, you signed Form
6018-A. Consent to Proposed Action, agreeing to the revocation of your exempt status under
section 501(c)(4) of the Code.

You have filed taxable returns on Form 1120, U.S. Corporation Income Tax Return, for the
year(s) ended December 31, 20XX and December 31, 20XX with us. For future periods, you are
required to file Form 1120 with the appropriate service center indicated in the instructions for the
return.

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 have not 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 fiave 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

Form 8 86 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended

ORG, EIN EIN 12/31/20XX

LEGEND
ORG - Organizationname EIN-EIN XX-Date City-city County-county State -
state Motto-motto CO-1,CO-2 & CO-3 - 1%, 24 & 3° COMPANIES

Issue:

Whether the ORG (ORG) was operated exclusively for exempt purposes described
per Internal Revenue Code (IRC) section 501(c)(4):

a. Was the ORG engaged primarily in activities that accomplish an exempt purpose
and the net earnings of which are devoted exclusively to charitable, educational,
or recreational purposes?

b. Was the membership of the ORG properly limited to the employees of a
designated person or persons in a particular municipality?

c. Were benefits provided to the members in excess of the benefits permissible per
IRC section 501(c)(4)?

Facts:
Background of ORG:
ORG’s Articles of Incorporation:

The ORG (ORG) was initially incorporated in the State of State on February 6,
19XX. The ORG is currently tax exempt under IRC section 501(c)(4) as a local
association of employees. Per the Articles of Incorporation, the purpose of the
organization was to:

e Do all things necessary to advance the welfare, training, and effectiveness of the
members of the corporation by the establishment and maintenance of training
courses, Classes, and schools for instruction in police science, detection,
psychology, public relations, and any other subjects considered desirable for
Motto

e Purchase and acquire books, apparatus, or equipment for the maintenance of
training facilities and a Motto’ library for the use of its members and such other
persons as may be admitted to the use thereof by the Board of Directors

e To promote, organize, and encourage target practice, both formal and informal,
with all types of firearms used by Motto; to hold and encourage organized
shooting matches and meets, both intra-departmental and inter-departmental,
with such weapons

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

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

Name of Taxpayer Year/Period Ended

ORG, EIN EIN 12/31/20XX

e To promote citizenship and high standards of conduct for the youth of the County
by supervising, financing, or assisting individuals, rifle clubs, traffic patrols, and
other organizations among minors of the County

e To fix and collect dies and assessments from its members, and to enforce the
payment of the same by forfeiture of membership for non-payment, under such
conditions are specified in the by-laws

e To provide material for personnel for the giving of educational talks for service
clubs and other organizations in the interest of better relations between Motto
and the citizens

The organization performed the aforementioned activities throughout the first twenty
years of its existence. Per the Articles of Incorporation, the association focused on
training and increasing the effectiveness of its Motto membership, who were located in
the County in State. The organization also promoted the citizenship and high standards
of conduct of its youth per social programs administered by the corporation.

Form 1024- Application for Tax Exempt Status:

ORG submitted Form 1024, Application for Recognition of Exemption under Section
501(c) (4) of the Internal Revenue Code, to the Internal Revenue Service (IRS) on
August 30, 19XX. The activities of the corporation as performed in 19XX were detailed
on Form 1024.

Per Form 1024, the purpose of the ORG in 19XX was to promote the welfare,
education, training, and recreation of its members, which is consistent with the exempt
purpose as defined per IRC section 501(c)(4) for a local association of employees.
Specifically, Form 1024 defined the following changes in activities from the initial
Articles of Incorporation filed with the State of State:

e The primary fundraising activity is an annual fundraising dance
e The association operates a small store which sells work-related equipment to its
members’

Furthermore, Form 1024 detailed the nature of the activities that were performed in
19XX by the ORG and were intended to be carried on in the future by the association.
The activities performed by the association as described via Form 1024 and approved
for tax exempt status by the IRS were as follows:

k kek &k &

"' Revenue Agent conducted an interview with the ORG’s Executive Director during the examination. The Executive
Director informed the agent that the small store mentioned on Form 1024 used to be located within the facility and
was less accessible to the public.

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

Form 8 86 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended

ORG, EIN EIN 12/31/20XX

Conducting Motto advanced, beginning, and refresher-training classes
Operation of a retail store which sells work-related equipment
Membership dinner meetings

Operation of a junior rifle club

Member life insurance

Publication of a monthly newsletter

Per Form 1024, the ORG stated that its funds would be expended for the following
purposes:

Quarterly membership dinner meetings
Operation of a junior rifle club

Life insurance for some members
Annual association ball

Publication of a monthly newsletter

Form 1024 defines the eligibility of membership requirement as anyone employed
as a Motto within the County in the State of State. For the purpose of membership,
Form 1024 defines a Motto per section 830 of the Penal Code of the State of State. In
September 19XX, the Internal Revenue Service (Service) issued a determination letter
to ORG as IRC section 501(c)(4).

Activities Performed During the Year Under Examination (20XX):

Subsequent to the IRS granting tax exempt status to ORG in September 19XX, its
activities evolved over time. In September 20XX, the Service conducted an
examination of the ORG for the 20XX calendar year. During the examination, the
Agent noted the following changes regarding ORG’s activities from its AOI and Form
1024:

Membership Policy:

The Agent discovered that ORG’s membership requirement were materially different
than the requirement set forth in its Form 1024. According to Form 1024, a member of
the ORG must be a Motto in the County in the State of State.

Per the interview conducted with the Executive Director of the ORG and review of
the association's bylaws, the Agent noted that the organization expanded its
membership requirement to include the general public. General public members enjoy
the same benefits as any Motto member, which includes the % general store
discount. General public members do not have the right to vote.

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

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

Name of Taxpayer Year/Period Ended

ORG, EIN EIN 12/31/20XX

Activities Performed:

In addition to the change of membership requirement, the Agent noted that ORG
performed the following activities in 20XX, which were materially different from the
activities stated on its Form 1024. In 20XX, ORG conducted the following activities:

1. Operation and management of a larger retail store specializing in the sale of
   public safety apparel and goods

2. Provide benefits to its members:
   o Life insurance benefit
   o Legal consultation benefit
   o % discount on all products sold in the store (excluding weapon sales)
   o Tax deductible annual dues (ORG has erroneously notified its members
   on its website that their annual dues are tax deductible)

3. Charitable donations, including cash and equipment, to local charities and police
   organizations

4. Sponsorship of training classes for Motto (Agent noted that ORG did not sponsor
   any training classes in 20XX).

During the time span from 19XX to 20XX, the ORG eliminated the following exempt
activities consistent with a 501(c)(4) organization as detailed below:
Membership dinner meetings
Operation of a junior rifle club
Annual association ball
Publication of a monthly newsletter

ORG’s Retail Store:

Based on interviews conducted, a tour of the facility, review of the financial
statements, and review of the meeting minutes, the Agent discovered that ORG's
management and employees had performed a substantial amount of their time and
labor operating the retail store. The Agent determined that ORG only spent an
insubstantial amount of time (e.g., less than %) to its charitable functions, such as
providing charitable contributions to other organizations. It is important to note that the
organization did not sponsor any officer training courses during the year under
examination.

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

Page: -4-

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

Name of Taxpayer Year/Period Ended

ORG, EIN EIN 12/31/20XX

The goods offered for sale by the ORG were defined as public safety apparel or
public safety training materials. The Agent noted that most goods offered for sale were
goods that could be used by Motto during their work related duties. Goods included
armor, guns, pepper spray, handcuffs, cleaning supplies, and other equipment. In
addition to these goods, the store sold items such as books, gloves, flashlights, gear
bags, briefcases, safety glasses, tee-shirts, mugs, hats, and knives. With the exception
of certain weapons (e.g., guns and high intensity pepper spray), all goods were
available to the public.

The ORG store’s sales of goods and apparel were open to the public in addition to
their membership. Based on review of ORG’s financial statements, the Agent noticed
that ORG has expanded its retail store to nonmembers. Per review of the store’s
Quickbooks Point of Sale accounting system, the Agent discovered the nonmember
public sales were nearly % of its overall store sales. Member sales consisted of
approximately % of the total store sales. Member sales include both law enforcement
member sales and general public member sales.

According to ORG’s 20XX financial statements prepared by CO-1, its average gross
margin on goods and services for sale was %, subsequent the reduction of the % price
reduction for members. However, for public sales, the average gross margin was % to
% according to the Executive Director's interview. From its financial data, ORG received
approximately % of its total revenues from store sales. At the same time, ORG incurred
approximately % of its total expenses for store related expenses, such as cost of goods
sold and salaries”.

The Agent reviewed the Board of Director meeting minutes to provide additional
detail. regarding the operation of the store. Per the Agent’s review of the meeting
minutes dated August 11, 20XX, the Agent noted that the Executive Director of the
ORG stated that store sales and department orders had decreased due to sales at
other similar public safety stores, such as CO-2, which is a national public safety
apparel retailer. The Agent performed research and determined that CO-2 is a
subsidiary of the CO-3, which is a for-profit entity. The Agent reviewed CO-2 store
website and noticed that CO-2 sells similar public safety merchandise to law
enforcement personnel and the general public.

Benefits Provided to its Membership:

Based on annual membership dues of $ ORG members receive the following
benefits:

kk kn *

2 Please see attached income and expense analyses documents for additional details

Form 886-A cev.4-68) Department of the Treasury - Internal Revenue Service
Page: -5-

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

Name of Taxpayer Year/Period Ended

ORG, EIN EIN 12/31/20XX

« Life insurance benefit
o $ Total Cash Benefit
« Legal consultation benefit
o Each member is allowed a free annual consultation with the
Association attorney
« % discount on all products sold in the store (excluding weapon sales)
= Tax deductible annual dues of $

The ORG spent approximately % of its total operating budget on member benefits.
Charitable Donations:

ORG donated cash and equipment to local charities and police organizations. In
20XX, ORG donated approximately $ in cash to various local charities and police
organizations which were about % of its total expenses. ORG donated approximately $
worth of gym equipment to the City Police Department to increase the effectiveness of
its police force in 20XX which was about % of its total expenses.

In aggregate, the ORG donated approximately % of its total expenses to charitable
entities or local police organizations. Relative to its total expenses of $ the ORG’s
charitable contributions were de minimis.

In addition to the relatively low amount of charitable spending, the ORG did not
spend any money to further the recreational activities of its members. According to
ORG'’s Executive Director, the recreational events such as dinners or dances were
phased out subsequent ORG'’s inception.

Motto Training Classes:

ORG owns a firing range and classroom training facility for cadets and seasoned
officers. According to ORG’s Executive Director, ORG typically sponsors one or two
training classes for officers per year. For the facility owned by ORG, the Agent
obtained a copy of the quitclaim deed. Per the Quitclaim deed dated October 15,
19XX, the agreement between ORG and the County Sheriff Department was to allow
City Sheriff Department to manage and supervise the firing range and the classroom
facilities. The Agent noted that in 20XX, the ORG did not perform any duties or
functions related to the shooting range and did not conduct any training classes at or
outside uf the classroom facilities.

Law:

Section 501(a) of the Internal Revenue Code (Code) states the exemption from
taxation of an organization described in subsection (c) or (d) or section 401(a) shall be

Form 886-A cev.4-68) Department of the Treasury - Internal Revenue Service
Page: -6-

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

Name of Taxpayer Year/Petriod Ended

ORG, EIN EIN 12/31/20XX

exempt from taxation under this subtitle unless such exemption is denied under section
502 or 503.

Section 501(c)(4)(A) of the Code states, Civic leagues or organizations not
organized for profit but operated exclusively for the promotion of social welfare, or local
associations of employees, the membership of which is limited to the employees of a
designated person or persons in a particular municipality, and the net earnings of which
are devoted exclusively to charitable, educational, or recreational purposes.

Section 501(c)(4)(B) of the Code States Subparagraph (A) shall not apply to an
entity unless no part of the net earnings of such entity inures to the benefit of any
private shareholder or individual.

Treasury Regulation 1.501(c)(4)-1 of the income tax regulations states this civic league
or organization may be exempt a of:

(i) it is not operated for-profit; and
(ii) is operated exclusively for the promoting of social welfare.

(b) Local associations of employees. Local associations of employees described in
section 501(c)(4) are expressly entitled to exemption under section 501(a). As
conditions to exemption, it is required (1) that the membership of such an association
be limited to the employees of a designated person or persons in a particular
municipality, and (2) that the net earnings of the association be devoted exclusively to
charitable, educational, or recreational purposes. The word local is defined in
paragraph (b) of § 1.501(c)(12)-1. See paragraph (d)(2) and (3) of § 1.501(c)(3)-1 with
reference to the meaning of charitable and educational as used in this section.

Treasury Regulation §1.501(c)(12)-1

(b) The phrase “of a purely local character” applies to benevolent life insurance
associations, and not to the other organizations specified in section 501(c)(12). It also
applies to any organization seeking exemption on the ground that it is an organization
similar to a benevolent life insurance association. An organization of a purely local
character is one whose business activities are confined to a particular community,
place, or district, irrespective, however, of political subdivisions. If the activities of an
organization are limited only by the borders of a State it cannot be considered to be
purely local in character.

Treasury Regulation §1.501(c)(3)-1., Organizations organized and operated for
religious, charitable, scientific, testing for public safety, literary, or educational purposes,
or for the prevention of cruelty to children or animals

Form 886-Arev.4-68) Department of the Treasury - Internal Revenue Service
Page: -7-

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

Name of Taxpayer Year/Period Ended

ORG, EIN EIN 12/31/20XX

(2) Charitable defined. —The term “charitable” is used in section 501(c)(3) in its
generally accepted legal sense and is, therefore, not to be construed as limited by
the separate enumeration in section 501(c)(3) of other tax-exempt purposes which
may fall within the broad outlines of “charity” as developed by judicial decisions. Such
term includes: relief of the poor and distressed or of the underprivileged;
advancement of religion; advancement of education or science; erection or
maintenance of public buildings, monuments, or works; lessening of the burdens of
Government; and promotion of social welfare by organizations designed to
accomplish any of the above purposes, or (i) to lessen neighborhood tensions; (ii) to
eliminate prejudice and discrimination; (iii) to defend human and civil rights secured .
by law; or (iv) to combat community deterioration and juvenile delinquency. The fact
that an organization which is organized and operated for the relief of indigent persons
may receive voluntary contributions from the persons intended to be relieved will not
necessarily prevent such organization from being exempt as an organization
organized and operated exclusively for charitable purposes. The fact that an
organization, in carrying out its primary purpose, advocates social or civic changes or
presents opinion on controversial issues with the intention of molding public opinion
or creating public sentiment to an acceptance of its views does not preclude such
organization from qualifying under section 501(c)(3) so long as it is not an “action”
organization of any one of the types described in paragraph (c)(3) of this section.

(3) Educational defined
(i) In general. —The term “educational”, as used in section 501(c)(3), relates to —

(a) The instruction or training of the individual for the purpose of improving or
developing his capabilities; or

(b) The instruction of the public on subjects useful to the individual and beneficial to
the community.

Hearings before house ways and means committee on revenue revision of 1924, 68"
congress, 1*' sess. pp. 5-12; 65 cong record pt 3 pp. 2905-2906 (1924) held that a
501(c)(4) organization may not provide life, sick, or accident benefits to its members.

Rev. Rul. 66-59, 1966-1 C.B. 142 describes an organization of employees whose
purpose is to pay lump sum retirement benefits to its eligible members or death benefit
to their survivors does not qualify for exemption from Federal income tax under
§501(c)(4) of the Internal Revenue Code of 1954 as a local association of employees.

Rev. Rul. 66-180, 1966-1 CB 144, Described a local association of employees
organized exclusively for recreational purposes operates a gasoline station on property
owned by the employer of its members to provide funds in addition to dues income for

Form 886-A rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -8-

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

Name of Taxpayer Yeat/Period Ended

ORG, EIN EIN 12/31/20XX

its recreational activities. Sales are limited to its members and to the employer, and
income is used exclusively for members’ recreation. Held, neither the operation of the
gasoline station, nor the selling of gasoline and oil to the employer company adversely
affects its qualification for exemption since all of its income is used for recreational
purposes, and income from sales to the employer of its members is considered a form
of empivyer support of the association. The organization is therefore exempt as a local
association of employees described in section 501(c)(4) of the Internal Revenue Code
of 1954.

Advice has been requested whether an employees’ association organized
exclusively for recreational purposes which operates a gasoline station to supplement
its dues income under the circumstances described below may qualify for exemption
from Federal income tax as an organization described in section 501(c)(4) of the
Internal Revenue Code of 1954.

The organization was incorporated as a nonprofit corporation, for recreational
purposes, with membership limited to persons who are employees or former employees
(pensioners) of a company in a particular locality. Its activities consist of providing
recreation through the sponsorship of a basketball league, bowling league, bridge club,
golf tournaments, square dancing, holiday parties, etc., for its members. It also
maintains and operates a gasoline station, located on property leased from the
company.

Sales are limited to members and the company. The organization’s income is
derived from membership dues, ticket sales to various recreational functions, and
gasoline and oil sales. Expenditures are for recreational activities and for the operation
of the gasoline station. Approximately 50 percent of the income from gasoline and oil
sales is derived from sales to the employer company. All of the net earnings of the
organization are required to be used for its recreational activities; no part is to be
distributed to individual members.

Section 501(c)(4) of the Code exempts from Federal income tax local associations
of employees, the membership of which is limited to the employees of a designated
person or persons in a particular municipality, and the net earnings of which are
devoted exclusively to charitable, educational, or recreational purposes.

In determining this organization’s qualification for exemption from tax under the
foregoing provision, two factors to be considered are (1) whether the organization may
engage in a “service station” type of operation, a business ordinarily carried on for
profit; and (2) whether the realization by the organization of a substantial portion of its
income from the sale of oil and gasoline to the employer of its members would
adversely affect its qualification for exemption.

Form 886-A rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -9-

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

Name of Taxpayer Year/Period Ended

ORG, EIN EIN 12/31/20XX

With respect to factor number (1) a local association of employees may qualify for
exemption under section 501(c)(4) of the Code notwithstanding that it engages in a
business of a type ordinarily carried on for profit if, as in this case, such business is with
its members, and the net earnings of the business enterprise are used exclusively for
charitable, educational, or recreational purposes.

As for factor number (2) an employer may make contributions to an association of
its employees to enable the organization to carry on its activities. Where it is found
that, as in this case, an association of employees derives a substantial portion of its
income from doing business with the employer of its members, exemption will not be
denied since profits derived from doing business with the employer may be regarded as
a form of employer support of the organization.

United States Court of Appeals Second Circuit. 331 F.2d 923, 13 A.F.T.R.2d 1319, 64-1
USTC P 9441 PEOPLE'S EDUCATIONAL CAMP SOCIETY, INC., Petitioner, v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

Proceeding on petition to review a decision of the Tax Court, 39 T.C. 756, denying
petitioner an exemption from income tax. The Court of Appeals, Waterman, Circuit
Judge, held that the ‘destination of income’ test did not afford income tax exemption to
corporation which devoted much of its revenues to improving its ability to compete
commercially through accumulation of large surpluses and expansion of its income
producing facilities. Court affirmed the ruling.

Taxpayer’s Position:

ORG’s position has not been determined.

Government’s Position:

The Service contends the ORG is primarily engaged in activities through its ORG
public safety apparel and goods store that:

Does not further an exempt function purpose per IRC section 501(c)(4)
Are organized for profit

e Sales are substantially comprised of public and non-law enforcement officer
member sales

e Earnings are not devoted exclusively to charitable, educational, or
recreational purposes.

Section 501(c)(4)(A) of the Code states organizations that are not organized for
profit but operated exclusively for the local associations of employees, the membership

Form 886-Acrev.4-68) Department of the Treasury - Internal Revenue Service
Page: -10-

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

Name of Taxpayer Year/Period Ended

ORG, EIN EIN 12/31/20XX

of which is limited to the employees of a designated person or persons in a particular
municipality, and the net earnings of which are not devoted exclusively to charitable,
educational, or recreational purposes are tax exempt.

Store Operated Similar to a For-profit Entity:

ORG’s management and labor focused their efforts on the operation and profitability
of the ORG range store. The focus of management and labor on the operation and
profitability of the public safety range store illustrated that the association is operating
similar to other for-profit range stores, such as CO-2, which sell similar public safety
merchandise. Furthermore, the healthy gross margin of items sold by the ORG (e.g.,
greater than 20% subsequent member discounts) provide additional evidence that the
association is operated like a for profit entity.

Based on the financial statements provided by the ORG, the Agent noted that the
association did not spend any funds to further the recreational activities of its members.
The ORG did expend funds to charitable entities; however, the total expenditures
represented less than 1% of the association’s operating budget. ORG’s major
expenditures were on merchandise for the store and salaries for individuals who
operate the store on a daily basis.

In the Peoples Educational Camp Society, versus the Commissioner of Internal
Revenue, the court held that the ‘destination of income’ test for a 501(c)(4) organization
did not afford income tax exemption to a corporation which devoted much of its
revenues to improving its ability to compete commercially. Based on the analysis
performed of the financial records, the Agent determined that the ORG’s primary focus
was to operate a retail store for its members and general public use in a for-profit
manner. Based on management's focus operating the ORG range store ina
commercial manner, the Agent determined the EO does not qualify for exemption under
IRC section 501(c)(4).

Rey. Rul. 66-180, 1966-1 CB 144, stated a local association of employees
organized exclusively for recreational purposes was held to be exempt although it
operated a gasoline station on property owned by the employer of its members to
provide funds in addition to dues income for its recreational activities for the following
reasons:

1) A local association of employees may qualify for exemption under section
501(c)(4) of the Code notwithstanding that it engages in a business of a type ordinarily
carried on for profit if, as in this case, such business is with its members, and the net
earnings of the business enterprise are used exclusively for charitable, educational, or
recreational purposes.

Form 886-A rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -11-

Form 8 86 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended

ORG, EIN EIN 12/31/20XX

2) An employer may make contributions to an association of its employees to enable
the organization to carry on its activities. Where it is found that, as in this case, an
association of employees derives a substantial portion of its income from doing
business with the employer of its members, exemption will not be denied since profits
derived from doing business with the employer may be regarded as a forrn of employer
support of the organization.

In the case of the ORG, however, sales from the public safety store were not limited
to its members and a common employer. The general public was also able to purchase
a substantial amount of goods from the store. Furthermore, the ORG’s membership
includes non—law enforcement officers. Based on the evidence provided regarding the
operation of the range store, the ORG does not meet the requirements per Revenue
Ruling 66-180, 1966-1 CB 144 and does not qualify for exemption under 501(c)(4).

Open Membership Requirements:

The Service contends that the organization is not properly limiting its membership
according to Section 501(c)(4) requirements. Section 501(c)(4)(A) of the Code states
that the membership of which is limited to the employees of a designated person or
persons in a particular municipality.

The ORG initially limited the membership of the local association of employees to
law enforcement officers in the County in 19XX per Form 1024. Based on the
information provided during the course of examination, ORG did not limit membership
to employees of a designated person or persons in a particular municipality during and
subsequent 20XX. ORG also readily admits new members to their association that are
not law enforcement officers employed within the County in State.

Improper Benefits Provided to its Membership:

Based on the annual membership dues of $ ORG provides life insurance and legal
consultation benefits to its members. These benefits are not exempt activities that are
permissible for a IRC 501(c)(4) organizations. The Service contends that these
benefits as provided to members of ORG were improper. As stated in Rev. Rul. 66-59,
1966-1 C.B. 142, an organization exempt under IRC §501(c)(4)’s purpose does not
include paying lump sum retirement benefits to its eligible members or death benefits to
their survivors. Furthermore, the hearings before house ways and means committee on
revenue revision of 1924, 68"" congress, 1° sess. pp. 5-12; 65 cong record pt 3 pp.
2905-2906 (1924), held that a 501(c)(4) organization may not provide life, sick, or
accident benefits to its members.

De Minimis Exempt Activities Performed:

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
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Form 886 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended

ORG, EIN EIN 12/31/20XX

In aggregate, the ORG donated approximately $ (%) of its total expenses to
charitable entities or local police organizations. Relative to its total expenses of $ the
ORG’s charitable contributions were de minimis. Furthermore, the ORG did not
facilitate or sponsor any officer training courses in 20XX.

In addition to the relatively low amount of charitable spending, the ORG did not
spend any money to further the recreational activities of its members. According to
ORG’s Executive Director, the recreational events such as dinners or dances were
phased out subsequent ORG’s inception.

Conclusion:

In summary, ORG has not established that it is operated for a tax exempt purpose
under IRC 501(c)(4) since it did not engage primarily in activities that accomplish that .
purpose. Based on the examination performed, the Agent concludes that ORG did not:

a. Engage primarily in activities that accomplish an exempt purpose and
expend the net earnings exclusively to charitable, educational, or
recreational purposes.

b. Properly limit to the employees of a designated person or persons in a
particular municipality.

c. Provide permissible benefits to members per 501(c)(4).

Accordingly, the Service has determined that the ORG is not an organization
exempt from Federal income taxes described in section 501(c)(4) effective January 1,
20XX. Based on the net loss incurred by the ORG for the 20XX and 20XX tax years,
the total estimated tax due for these years is $. The ORG is required to file Form 1120,
U.S. Corporation Income Tax Return, to report the income, gains losses, deductions,
credits, and to figure the income tax liability of a corporation.

Form 886-A ev.4-68) Department of the Treasury - Internal Revenue Service

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